General

European Commission

Taxonomy Climate Delegated Act - adopted by the European Commission - 4 June 2021

The European Commission has adopted Commission Delegated Regulation supplementing the Taxonomy Regulation ((EU) 2020/852) on climate change mitigation and adaptation (Delegated Act). The Delegated Act contains a set of technical screening criteria that define the economic activities contributing to two of the six environmental objectives (climate change adaptation and mitigation) set out in the Taxonomy Regulation.

Political agreement on the text of the Delegated Act was reached in April 2021, as previously reported in this Bulletin.

The Delegated Act will apply from 1 January 2022.

Commission Delegated Regulation (EU) …/… supplementing Regulation (EU) 2020/852 by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives (C(2021) 2800 final)

Annex 1

Annex 2

Commission Staff Working Document Impact Assessment Report

Updated webpage: Sustainable finance taxonomy – Regulation (EU) 2020/852: Implementing and delegated acts

UK Parliament

Financial Services Act 2021 (Commencement No. 1) Regulations 2021 published - 7 June 2021

The Financial Services Act 2021 (Commencement No. 1) Regulations 2021 (SI 2021/671) have been published. They set out commencement dates for certain provisions of the Financial Services Act 2021 that relate to the prudential regulation of investment firms and credit institutions, as follows:

• Sections 3, 4 and 5 of Schedule 3 of the Act came into force on 9 June 2021. These sections grant HM Treasury the power to make regulations to revoke existing provisions of the UK Capital Requirements Regulation (575/2013/EU) (UK CRR). They also set out a framework for the PRA to make rules to implement certain Basel standards and to introduce a new Part 9D of the Financial Services and Markets Act 2000 (FSMA) on the prudential regulation of credit institutions;
• Section 7 and paragraph 12 of Schedule 4 will come into force on 26 June 2021 for the purpose of amending Article 500d of the UK CRR;
• Section 2 and Schedule 2 will come into force on 1 July 2021.  These provisions set out a legislative framework for the prudential regulation of investment firms, including a new Part 9C of FSMA, which the Financial Conduct Authority (FCA) and HM Treasury will use to establish the Investment Firms Prudential Regime for FCA investment firms; and
• Section 1, Schedule 1 and the remainder of Schedule 4 will come into force on 1 January 2022.  These provisions effectively end the application of the UK CRR to investment firms (other than PRA-designated firms) and reflect certain amendments to the EU CRR made by the CRR II Regulation ((EU) 2019/876).

The Financial Services Act 2021 (Commencement No. 1) Regulations 2021 (SI 2021/671)

Webpage

HM Treasury

Communique following G7 meeting - finance ministers and central bank governors discuss climate change and central bank digital currencies - 5 June 2021 

The G7 finance ministers and central bank governors have issued a communiqué following their meeting in London. Among other things, the communiqué refers to embedding climate change and biodiversity loss considerations into economic and financial decision-making and expresses support for mandatory climate-related financial disclosures based on the Task Force on Climate-related Financial Disclosures framework.

In addition, the communiqué considers the policy implications of central bank digital currencies and the importance of addressing relevant legal, regulatory and oversight requirements before the operation of any global stablecoin project.

See also item below for the Task Force on Climate-related Financial Disclosures’ consultation on new guidance on climate-related metrics, financial impacts, targets and transition plans.

G7 Finance Ministers and Central Bank Governors Communiqué

UK Green Taxonomy - HM Treasury establishes Green Technical Advisory Group - 9 June 2021

HM Treasury has announced the establishment of the Green Technical Advisory Group (GTAG), an expert group that will provide “independent, non-binding advice” to the government on the development and implementation of a UK Green Taxonomy. The GTAG will advise on the following issues, among others:

• the development of a Green Taxonomy that is usable and practicable for financial and non-financial firms;
• the rationale, implications and recommendations for any deviations from existing international frameworks or taxonomies; and
• the role of the Green Taxonomy in supporting the UK’s transition to “Net Zero” and in tracking green financial flows.

Membership of the GTAG is drawn from representatives of financial services and non-financial users of the Taxonomy, data experts, academia, subject matter experts (including the Environment Agency and the Committee on Climate Change) and certain non-governmental organisations. The group will be chaired by the Green Finance Institute and HM Treasury, while the FCA and the Bank of England will be observers. The government will also establish GTAG sub-groups where appropriate to provide specific technical expertise on a given sector (e.g. on energy). 

A series of issues papers are expected to be agreed after the inaugural meeting of the group in June 2021.  Initial recommendations will be made to the government in September 2021.

HM Treasury expects the GTAG to be convened initially for two years, after which its remit and membership will be reviewed. During the first year, GTAG will meet on a quarterly basis.

Press release: New independent group to help tackle ‘greenwashing’

Terms of Reference

Membership list

Webpage

Bank of England

Climate Biennial Exploratory Scenario 2021 - launched by the Bank of England - 8 June 2021

The BoE has launched its Climate Biennial Exploratory Scenario (CBES) for the largest UK banks, building societies, life insurers and general insurers. According to the press release, the objectives of the CBES exercise are to:

• “Size the financial exposures of individual firms and the financial system to their end-2020 balance sheets: this will shine a light on risks that are currently opaque;
• Understand business model challenges and likely responses to these risks: this will highlight where action may be needed and any implications for the provision of financial services; and
• Improve firms’ risk management and prompt a strategic view: this includes building capability, both amongst participants and within the [BoE]. The exercise will also encourage participants to engage their largest counterparties to understand their vulnerability to climate change.”

There are three scenarios of early, late and no action, built on a subset of the Network for Greening the Financial System (NGFS) scenarios and applied over a span of thirty years to reflect the longer-term nature of climate-related risks. The exercise includes a qualitative questionnaire to capture participants’ views on the risks they face and their approach to climate risk management as well as detailed counterparty-level analysis.  Firms will be expected to engage closely with their largest counterparties in order to gather the relevant data on their exposures. 

A variable paths spreadsheet has also been published, containing key variables for each of the scenarios, along with a guidance document.

Initial submissions are due by the middle of October 2021.  The BoE plans to publish the results of the CBES in May 2022. It also plans to release system-level results of the financial sector’s resilience to climate change, but it will not disclose the results of individual firms.

See also an item below on the publication of updated NGFS scenarios. 

Key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change

Guidance for participants of the 2021 Biennial Exploratory Scenario: Financial risks from climate change

Variable paths for the 2021 Biennial Exploratory Scenario: Financial risks from climate change

Press release

Updated webpage: stress testing

Financial Conduct Authority

Quarterly Consultation No.32 - FCA publishes consultation paper CP21/16 - 4 June 2021

The FCA has published its Quarterly Consultation no. 32 (CP21/16) inviting comments on proposed changes to a range of FCA provisions. In short:

• changes to CONC 6.7.4R: the FCA is proposing to amend CONC 6.7.4R to enable firms to offer instalment plans to credit card customers without requiring a rule modification. The changes are set out in the draft Consumer Credit (Fixed Instalment Plan Repayment Allocation) (Amendment) Instrument 2021. Comments can be made on the proposals until 2 August 2021;
• other minor changes to CONC: the FCA is consulting on minor consequential changes to CONC to reflect an update to the statutory information sheets that are sent to customers in arrears and default under the Consumer Credit Act 1974. The changes are set out in the draft Consumer Credit (High-Cost Short-Term Credit Refinancing and Peer-To-Peer Lending Information Sheets) Instrument 2021. Comments can be made on the proposals until 5 July 2021;
• changes to the Mortgage Lenders & Administrators Return (MLAR): the FCA proposes amend MLAR reporting instructions to reflect the cessation of LIBOR. There is no additional reporting burden on firms. The changes are set out in the draft Supervision Manual (Reporting No 16) Instrument 2021. Comments can be made on the proposals until 2 August 2021; and
• changes to the Decision Procedure and Penalties (DEPP) and Fees manuals: changes are proposed to both the DEPP and Fees manual as a result of the FCA’s new power in the Financial Services Act 2021 to cancel or vary firms’ Part 4A permissions where the regulator considers that firms are no longer carrying on regulated activities. The changes are set out in the draft Fees and Decision-Making (Cancellation of Permission) Instrument 2021. Comments can be made on the proposals until 5 July 2021.

The FCA also plans to consult separately, in due course, on associated amendments to other parts of its Handbook.

Quarterly consultation No.32 (CP21/16)

Webpage

Response form

Regulatory Decisions Committee and attitude to legal risk - FCA publishes minutes from Board meeting - 8 June 2021

The FCA has published the minutes of its Board meeting of 29 April 2021 at which it considered the findings of a review of the Regulatory Decisions Committee (RDC) and its own appetite for legal risk. The Board requested the development of an execution plan to capture a number of aspects of the review, including proposals to place a greater obligation on the executive to determine how regulatory decisions align with the FCA's strategic direction and its appetite for legal risk.

The Board also supported proposals to recalibrate the degree of legal risk the FCA is willing to take, how to implement this in practice and the inclusion of legal risk appetite in the FCA's own risk framework. It was noted that “a willingness to take legal risk, especially in situations where the law is unclear or FCA action is intended to prevent imminent consumer harm, was entirely appropriate.”

FCA Board Meeting Minutes

Regulatory sandbox - FCA announces successful applicants to seventh cohort - 10 June 2021

The FCA has published a new webpage providing details of the 13 firms that will begin testing in the seventh cohort of the regulatory sandbox. The FCA received 58 applications, primarily from firms looking to operate in the retail banking and lending sector.

The FCA explains that, in light of COVID-19, it was particularly interested in applications from firms that are developing businesses, products or services designed to detect fraud and scams, support the financial resilience of vulnerable consumers or improve access to finance for SMEs. The webpage refers to the Global Financial Innovation Network (chaired by the FCA with a network of 72 financial regulators and related organisations) and notes that it is working with a select group of firms to agree cross-border testing plans. 

Later in 2021 the FCA intends for the regulatory sandbox to be available throughout the year, as opposed to the current model of periodic application windows. The FCA also aims to expand and clarify the scope of qualifying propositions and will make further announcements about these changes in due course.

Webpage: Regulatory sandbox – Cohort 7

International Regulatory Strategy Group

Social standards and ESG - IRSG publishes report on global progress - 7 June 2021

The International Regulatory Strategy Group (IRSG), in conjunction with KPMG, has published a report on global progress on social standards as part of the environmental, social and governance (ESG) agenda. The report warns that, while social issues have become central to the reputation of companies across all sectors (including the financial services sector), a lack of consistency and comparability in approaches and data risks are impeding the direction of capital towards more sustainable investments.

The report encourages policymakers to secure a global consensus on an overarching set of social principles and accompanying metrics before the development of social standards to improve transparency and accountability. One possible framework outlined in the report is a “floor approach”, which would involve regulators agreeing on the application of minimum social standards.  The report notes that international banks and financial institutions “should act as a catalyst of change by applying consistent standards across all jurisdictions they operate in to raise social standards”.

To drive momentum, the report suggests that a single social principle could be championed and prioritised, with modern slavery being the most appropriate. Finally, it calls for regulation that creatively encourages voluntary efforts (including by the financial sector) by incentivising progressive improvement rather than relying on the addition of further criminal offences, many of which cannot be enforced in practice.

Report: Accelerating the S in ESG: a roadmap for global progress on social standards

Webpage

TheCityUK press release

Network for Greening the Financial System

Climate risk assessments - NGFS publishes revised set of climate scenarios and dedicated website - 7 June 2021

The Network for Greening the Financial System (NGFS) has published a second iteration of its climate scenarios, building on the first set of scenarios that were published in June 2020.  The document has been updated and refined to incorporate countries’ commitments to reach net-zero emissions as well as certain macroeconomic variables, among other things.  Each scenario explores a different set of assumptions for the evolution of climate policy, emissions and temperatures and acts as a common starting point for analysing climate risks to the economy and financial system. While developed primarily for use by central banks and supervisors, the scenarios may also be useful to the broader private sector, government and academia.  The NGFS has launched a dedicated website to host the scenarios and related NGFS publications and data.

According to the press release:

“the NGFS scenarios illustrate that reaching net zero CO2 emissions by 2050 on a global basis (a necessary condition to limit global warming to 1.5°C relative to pre-industrial levels) will require an ambitious transition across all sectors of the economy. In particular, significant investment flows would need to be directed towards clean energy and changes in land-use, so that by 2050, renewables (including biomass) deliver around 70% of global primary energy needs.”

The NGFS will continue to develop the scenarios and will work with industry ahead of COP26 in November 2021 to ensure that they are suitable for wider use.

NGFS Climate Scenarios for central banks and supervisors

Press release

Scenarios portal webpage

Task Force on Climate-related Financial Disclosures

Climate-related metrics, financial impacts, targets and transition plans - TCFD publishes consultation - 7 June 2021

The Task Force on Climate-related Financial Disclosures (TCFD) has published a consultation on its ‘Proposed Guidance on Climate-related Metrics, Targets and Transition Plans’.  As well as providing general guidance for firms, the document proposes several specific changes to the guidance that emerged from the TCFD’s 2017 Final Report.  The consultation closes on 7 July 2021.  The TCFD aims to finalise the guidance in autumn 2021.

The TCFD has also published a ‘Measuring Portfolio Alignment: Technical Supplement,’ following its October 2020 consultation on forward-looking climate metrics for financial firms. This new supplement is based on analysis conducted by the TCFD Portfolio Alignment Team, which was formed by the UN special envoy for climate and finance, Mark Carney. 

See above for the communiqué published following a meeting of G7 finance ministers and central bank governors which supports a move towards mandatory climate-related financial disclosures based on the TCFD framework.

Consultation: Proposed Guidance on Climate-related Metrics, Targets and Transition Plans

Measuring Portfolio Alignment: Technical Supplement

Response form