General

Taskforce on Nature-related Financial Disclosures

Nature-related Risk & Opportunity Management and Disclosure Framework - TNFD publishes consultation - 28 June 2022

The Taskforce on Nature-related Financial Disclosures (TNFD) has published for consultation the beta version 0.2 of its framework on nature-related risk and opportunity management and disclosure. The framework seeks to help market participants tackle the risk of nature loss, incorporating nature-related risk and opportunity analysis into the heart of corporate and financial decision making. This follows the TNFD’s observation that half of the world’s GDP is moderately or highly dependent on nature and its services, which means that financial institutions and businesses can no longer afford to overlook nature in strategy, risk management and capital allocation decision-making.

The consultation on beta version 0.2 follows the TNFD’s March 2022 consultation on beta version 0.1, to which the TNFD received an overwhelmingly positive response from market participants. Its draft disclosure recommendations, core concepts and the LEAP (locate, evaluate, assess, prepare) assessment approach have not, therefore, been significantly changed in the beta version 0.2, although a number of enhancements and further elements have been added, including:

• a draft architecture for metrics and targets, and an illustrative set of assessment metrics to support pilot testers;
• further guidance on how to undertake dependency and impact evaluation, as well as the identification of priority locations as part of the LEAP approach;
• an overview of the TNFD’s approach to the future development of additional guidance for market participants, including sector classification aligned with the approach taken by the International Sustainability Standards Board (ISSB), the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD);
• enhancements to the LEAP approach for financial institutions; and
• additional practical guidance for market participants interested in starting to pilot test the beta version 0.2 framework from 1 July 2022 to 1 June 2023.

A further two iterations of the beta framework are planned for release in October 2022 and February 2023, culminating in the final release of the TNFD’s recommendations, which is planned for September 2023.

The TNFD Nature-related Risk & Opportunity Management and Disclosure Framework: Beta v0.2

Summary

Webpage

Press release

European Commission

Greenwashing and sustainable finance policies - European Commission issues Request for Input to ESAs - 30 June 2022

The European Commission (the Commission) has issued a call for input (CFI) to the European Supervisory Authorities (ESAs) (comprising the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) relating to greenwashing risks and the supervision of sustainable finance policies. The CFI follows the ‘Strategy on Financing the Transition to a Sustainable Economy’, adopted by the Commission in July 2021 and which outlines steps to monitor greenwashing risks and assesses whether supervisory mandates and powers are effective in addressing these risks.

The ESAs are requested to provide input on the following:

• greenwashing and greenwashing risks. Where possible, the ESAs should collect information on the most frequent greenwashing occurrences and complaints;
• supervisory practices, experience and capacities. The Commission is looking for an overview and assessment of the most relevant supervisory practices and tools competent authorities are developing, or have developed, to define, capture and address greenwashing cases and greenwashing risks within their remit;
• the current status of implementation of sustainable finance policies and supervisory convergence;
• supervisory measures and enforcement;
• assessment of supervisory obligations and powers; and
• proposals for improvement of the regulatory framework. The Commission is interested in areas of improvement for the current regulatory framework based on observed and experienced potential shortcomings.

The Commission requests each of the ESAs, individually but in a co-ordinated manner, to provide their input by means of a progress report and a final report. The progress reports should take stock of the work undertaken to date. They should focus on how greenwashing is understood and where it may materialise, actions taken and tools developed to ensure adequate monitoring of greenwashing risks and early supervisory challenges in monitoring the application and enforcing new policies.

The final reports should build on the findings of the progress reports. This could be done by, for example, providing examples of greenwashing cases and assessing their impact on the financial market, by assessing supervisory measures, supervisory obligations and powers related to fighting greenwashing cases and addressing greenwashing risks. The ESAs should also assess the implementation of policies aiming at preventing greenwashing and addressing greenwashing risks.

The Commission requests the progress reports in May 2023 and the final reports in May 2024. The Commission will assess and monitor greenwashing risks in the financial market while the implementation of key policies is ongoing, and will consider whether further steps are necessary for effective supervision and enforcement regarding greenwashing and its associated risks, and to ensure consistent outcomes for European consumers and investors. The Commission will also consider potential amendments to the existing rulebook if needed.

European Commission Request for input to the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) related to greenwashing risks and supervision of sustainable finance policies

Letter from John Berrigan to ESAs: Call for input to ESMA, EIOPA and the EBA regarding greenwashing monitoring and supervision (Ares(2022)3682962)

European Parliament

EU digital finance package - European Parliament updates procedure files on proposed Regulation and Directive on digital operational resilience - 28 June 2022

The European Parliament has updated the procedure files on the proposed Digital Operational Resilience Act (DORA) (2020/0266(COD)) and the related proposal for a Directive that clarifies and amends certain existing EU financial services Directives to align them with DORA (2020/0268(COD)), to show an indicative plenary sitting date of 17 October 2022 for both. The European Parliament and the Council of the EU reached political agreement on DORA in May 2022.

DORA aims to establish a comprehensive regulatory framework on digital operational resilience with a view to ensuring that all firms within its scope can withstand information and communication technology- (ICT-) related disruptions and threats. DORA forms part of the Commission’s digital finance package, published on 24 September 2020, as previously reported in this Bulletin. Under the provisional agreement, banks, stock exchanges, clearinghouses and other financial firms will be required to comply with strict standards to prevent and limit the impact of ICT-related incidents. The agreement also introduces an oversight framework on service providers that provide critical services such as cloud computing to financial institutions.

Procedure file: Digital finance: Digital Operational Resilience Act (DORA) (2020/0266(COD))

Procedure file: Digital finance: Amending Directive regarding Digital Operational Resilience requirements (2020/0268(COD))

European Securities and Markets Authority

ESG rating providers - ESMA publishes outcome of Call for Evidence - 27 June 2022

The European Securities and Markets Authority (ESMA) has published a letter, dated 24 June 2022, (ESMA22-328-603) to the European Commission (the Commission) detailing the outcome of its February 2022 Call for Evidence (ESMA80-416-250) on the ‘market characteristics’ for EU ESG rating providers. In January 2021, ESMA wrote to the Commission to express concerns about the unregulated nature of ESG ratings and data assessments, and the potential risks posed to investor protection (ESMA30-379-423). The Commission subsequently published, in July 2021, its ‘Strategy for financing the transition to a sustainable economy’, in which it committed to taking action to improve the reliability, comparability and transparency of ESG ratings.

ESMA has identified the number of ESG rating providers currently active in the EU to be 59. This figure is derived from a combination of information provided by ESG rating providers, users and entities covered by ESG rating providers. ESMA considers this number to be a reliable indicator for the size of the EU market.

Key findings from the Call for Evidence include:

• the structure of the market among providers is split between a small number of very large non-EU entities and a large number of significantly smaller EU entities. While the legal entities of respondents are spread out across almost half of the EU member states, a large number of these are clustered in a small number of Member States;
• the majority of users of ESG ratings are contracting for these products from several providers simultaneously. Their reasons are to increase coverage, either by asset class or geographically, or to receive different types of ESG assessments. A majority of users contract with a small number of the same rating providers, indicating a degree of concentration in the market. The most common shortcomings identified by users were a lack of coverage of a specific industry or a type of entity, and insufficient granularity of data. Complexity and lack of transparency in relation to methodologies are also cited as issues; and
• entities covered by ESG ratings are required to dedicate at least some level of resourcing to their interactions with ESG rating providers, although the amount is largely dependent on the size of the rated entity itself. Most respondents highlight some shortcomings in their interactions with rating providers, most notably in relation to the level of transparency on the basis for the rating, the timing of feedback and the correction of errors.

ESMA concludes that the ESG rating market is immature but growing, and has seen the emergence of a small number of large non-EU headquartered providers following a number of years of consolidation. ESMA notes that this market structure bears some resemblance to that which currently exists for credit ratings - there are a large number of smaller more specialised EU entities co-existing with larger non-EU entities that provide a more comprehensive suite of services.

ESMA will continue supporting the Commission in its ongoing assessment on the need for the introduction of regulatory safeguards for ESG rating products.

ESMA letter to European Commission: Outcome of ESMA Call for Evidence on Market Characteristics of ESG Rating and Data Providers in the EU (ESMA22-328-603)

Press release

Prudential Regulation Authority

PRA regulated fees and levies - PRA publishes Policy Statement - 30 June 2022 - The PRA has published Policy Statement PS5/22, which provides feedback to responses to its Consultation Paper CP4/22 ‘Regulated fees and levies: rates proposals 2022/23’ and its final policy on fee rates to meet the PRA’s 2022/23 annual funding requirement (AFR) for 1 March 2022 to 28 February 2023.

The Consultation Paper made proposals on:

• fee rates to meet the AFR for 2022/23,
• fees applicable to temporary regimes,
• changes to internal model applications fees and the model maintenance fee,
• changes to the special project fees, and
• the PRA’s intended use of a surplus from the 2021/22 AFR and its retained penalties for 2021/22.

The responses the PRA received were on the minimum fee; the PRA’s cost control and staffing levels; fee block allocations; and, barriers to entry for new insurance firms. The PRA made no changes to the proposals in the Consultation Paper having considered the responses it received.

The implementation date for the PRA’s final policy is 1 July 2022. Firms can calculate their fees for the forthcoming year using the FCA’s online fees calculator and applying the PRA rates. The updated fees calculator for 2022/23 fees is available from 30 June 2022.

PRA Policy Statement: Regulated fees and levies: Rates proposals 2022/23 (PS5/22)

PRA Rulebook: PRA Fees Amendment (No 1) Instrument 2022 (PRA2022/4)

Financial Conduct Authority

Climate Financial Risk Forum - FCA updates webpage with information new climate scenario analysis narrative tool - 23 June 2022

The FCA has updated its webpage on the Climate Financial Risk Forum (CFRF) to include information on the online climate scenario analysis narrative tool (the Tool). During Session 2 of the CFRF, its Scenario Analysis Working Group started developing the Tool to support smaller firms and on 23 June 2022 published a beta version of it.

The FCA explains that the Tool generates a summary narrative description of climate-related risks and opportunities for a firm based on its business activities models, products and risks. The narratives draw on data from scenarios developed by the Central Banks and Supervisors Network for Greening the Financial System as at June 2021.

The FCA cautions that the narrative descriptions in the Tool do not constitute financial or other professional advice and should not be relied on as such. It also notes that, while it has convened and facilitated CFRF discussions, the FCA and the PRA do not accept liability for the views expressed in the further guides produced in Session 2. These do not necessarily represent the regulators’ views and do not constitute regulatory guidance. Instead, they are based on current good practice, which will continue to evolve.

Updated webpage

Regulated fees and levies 2022/23 - FCA publishes Policy Statement (PS22/7) - 28 June 2022

The FCA has published its Policy Statement (PS22/7) setting out final rules for the 2022/23 periodic regulatory fees and levies for the FCA, the Financial Ombudsman Service, the Money and Pensions Service, the Devolved Authorities, and HM Treasury’s expenses in funding the teams that tackle illegal money lending. The Policy Statement follows the FCA’s April 2022 Consultation Paper (CP22/7) on the draft fees and levies rules.

Firms can use the FCA’s online fees calculator to calculate their individual fees based on the final rules in the Policy Statement. The FCA will invoice fee payers from July 2022 onwards for their 2022/23 periodic fees and levies.

FCA Policy Statement: FCA regulated fees and levies 2022/23: with feedback on CP22/07 and ‘made rules’ (PS22/7)

Periodic Fees (2022/2023) and Other Fees Instrument 2022 (FCA 2022/27)

Webpage

ESG integration in UK capital markets - FCA publishes Feedback Statement (FS22/4) and Primary Market Bulletin No. 41 - 29 June 2022

The FCA has published a Feedback Statement (FS22/4) on the discussion chapter (Chapter 4) in its June 2021 Consultation Paper (CP21/18) on ESG integration in UK capital markets. The Feedback Statement sets out the key policy actions the FCA is taking and signals its potential future direction regarding ESG-labelled debt markets, and ESG data and rating providers. The FCA has also published Primary Market Bulletin No. 41 (PMB 41), which elaborates on the FCA’s response to the stakeholder feedback and clarifies its expectations of issuers of ESG-labelled debt instruments.

The FCA notes that market participants must be able to trust the claims made by issuers regarding the sustainability characteristics of green and other ESG-labelled financial instruments, and rely on them to perform as they expect. The FCA sees a clear rationale for regulatory oversight of certain ESG data and rating providers, and for a globally consistent regulatory approach informed by the recommendations on ESG data and ratings developed by the International Organization of Securities Commission (IOSCO) in November 2021. The FCA therefore supports the government’s consideration of bringing ESG data and rating providers within the FCA’s regulatory perimeter, as set out in the government’s October 2021 paper on ‘Greening Finance’.

Overall, respondents to Chapter 4 of CP21/18 did not support additional measures by the government or the FCA to strengthen the terms related to use of proceeds required to be disclosed in a prospectus. The FCA notes that views were also mixed on developing a ‘UK Green Bond Standard’, but showed support for some form of recognition or encouragement by the FCA for issuers and their advisors to adhere to existing regulatory principles for ESG-labelled debt instruments. The FCA also notes that most respondents supported increased regulatory oversight of ESG rating providers.

Following the feedback received to Chapter 4 of CP21/18, the FCA explains that it is taking a measured approach to ESG-labelled debt instruments, and aims to set clear guard-rails as the market continues to develop. PMB 41 sets out the FCA’s approach in further detail, as follows:

• the FCA reminds issuers, their advisors and other relevant market participants of their obligation to ensure any advertisement is not inaccurate or misleading, and is consistent with the information contained in the prospectus; and
• the FCA encourages issuers of ESG-levelled ‘use of proceeds’ (UoP) debt instruments to consider voluntarily applying or adopting relevant industry standards, such as ICMA’s ‘Principles and Guidelines’ for green, social and sustainability bonds ,when: (i) issuing ESG-labelled debt instruments; and (ii) selecting their ‘second party opinion’ (SPO) providers and verifiers. The FCA also encourages verifiers and SPO providers to consider voluntarily applying these guidelines; and
• the FCA encourages issuers and their advisors to consider verifiers’ and assurance providers’ expertise and professional standards, and to engage with SPO providers and verifiers that adhere to appropriate standards of professional conduct, such as the ICMA’s ‘Guidelines for External Reviewers’.

On its potential future direction, the FCA notes HM Treasury’s March 2022 publication of the outcome of its Prospectus Regime Review, which sets out proposals to reform the UK’s regime for public offers of securities and admissions to trading on capital markets. The FCA considers that the multi-year review proposed in the reforms may provide an opportunity for it to reconsider prospectus disclosure requirements. The FCA may also reassess in the future the case to develop an appropriate standard for UoP bonds, and the case for regulatory oversight of verifiers and SPO providers, in the future alongside HM Treasury.

The FCA also considers that, if the Treasury extends the FCA’s regulatory perimeter to ESG data and ratings providers, it will take necessary steps to develop and consult on a proportionate and effective regulatory regime, with a focus on the areas highlighted in IOSCO’s November 2021 recommendations. Given the potential lead time before any such regime could come into force, the FCA would, in the interim, work with the Treasury to encourage industry participants to develop and follow a voluntary code of conduct. This could also potentially continue to apply for ESG data and rating providers that fall outside the scope of any future regulatory regime.

FCA Feedback Statement: ESG integration in UK capital markets: Feedback to CP21/18 (FS22/4)

Webpage

Primary Market Bulletin No. 41

Updated webpage: Climate change and sustainable finance​​​​​​​

CryptoSprint - FCA publishes outputs - 29 June 2022

The FCA has updated its webpage detailing the outputs of its CryptoSprint events held in May and June 2022. Forming part of the FCA’s three year strategy to prepare financial services for the future, the CryptoSprint provided an opportunity to explore UK policy solutions for the crypto sector. It builds on the FCA’s established TechSprint approach and the Regulatory Sandbox.

Key themes highlighted during the CryptoSprint include:

• participants advocate for technology neutrality and a clear digital taxonomy, but note that existing rules and tools should be used where possible. In particular, the FCA’s CASS Sourcebook within the FCA Handbook should be used to build out a regulatory regime for custody of cryptoassets as a high priority;
• participants suggest that a self-regulatory organisation could be used to provide greater clarity for firms. They also note that regulators should prioritise key risks when developing potential standards and that regulation could be phased in over time to allow firms and consumers to adjust;
• participants suggest that cryptoassets should be categorised, and that disclosure requirements should be tailored to the characteristics of each cryptoasset type and the consumers in question;
• there is no clear consensus on whether exchange providers or the issuer should bear responsibility for providing information;
• there is no agreement on different disclosure requirements for retail and institutional investors;
• participants agreed that fundamental differences between centralised and decentralised finance (CeFi and DeFi respectively) cryptoassets require different regulatory and policy responses, but ones which achieve the same outcome of appropriate regulation. In determining the relevant entities and activities that should be regulated, participants highlight the need to understand the level of decentralisation in a cryptoasset proposition. They note that there is a spectrum between CeFi and DeFi cryptoassets, and very few protocols and/or firms at the moment are fully decentralised;
• participants disagree on whether current standards should be adapted to account for how digital assets differ from traditional finance, or whether a bespoke regime should be created; and
• participants highlight the challenge of evidencing ownership of a cryptoasset in the case of a firm’s insolvency, and note that in the case of insolvency investors’ rights are generally governed by contractual arrangements whereby they may be treated as unsecured creditors.

Overall, the FCA notes that there is an imbalance of information between consumers and service providers, creating challenges for consumers to fully understand the risks associated with investing in cryptoassets. The FCA is raising awareness and educating retail consumers through its InvestSmart campaign. The FCA has also set up workstreams to further understand what future crypto standards and requirements may mean for other areas such as: (i) operational resilience; (ii) market conduct; (iii) ESG considerations; (iv) redress; and (v) insolvency.

The FCA is working with HM Treasury, the Bank of England and the Payment Systems Regulator (PSR) to develop an appropriate regulatory regime, following HM Treasury’s April 2022 consultation response on stablecoins used for payments. This will include whether any FCA rules and guidance need to be adapted to support innovation while protecting consumers and the market.

Updated webpage

Financial Ombudsman Service

2021/22 complaints data - published by the FOS - 28 June 2022

The Financial Ombudsman Service (FOS) has published its annual complaints data for the 2021/22 financial year, with insight into common problems raised by consumers.

The 2021/22 annual complaints data shows that:

• the FOS received over 165,263 new complains relating to financial businesses, a decrease from over 278,033 complaints received in 2020/21;
• current accounts overtook payment protection insurance (PPI) as the most complained about product, with the FOS receiving nearly 25,000 new cases in 2021/22;
• complaints about ‘authorised’ fraud increased more than 20% to 9,370 in 2021/22, compared to 7,770 in the previous financial year, with the FOS upholding around three quarters of authorised scam complaints in consumers’ favour; and
• administration and customer service programmes topped the list of issues where customers had problems, with over 35,000 complaints being made to the FOS, including nearly 25,000 in the banking and credit sector.

FOS Annual complaints data and insight 2021/22

Press release