General

Financial Stability Board

COVID-19 and FSB 2022 priorities - speech by FSB Chair - 18 October 2021

The Financial Stability Board (FSB) has published a speech by its Chair, Randal K. Quarles, which considers key lessons learned during COVID-19 and how the FSB will address ongoing and future financial stability challenges. Key points made in the speech include:

• non-bank financial intermediation, and in particular money market funds (MMFs), is a key area for crisis management. The FSB published, in September 2021, a report setting out a framework for assessing vulnerabilities in MMFs and a policy toolkit to improve their resilience. The FSB, together with the International Organization of Securities Commissions (IOSCO), will review members’ progress in two years and then conduct a more thorough assessment across its members of the effectiveness of the measures in addressing financial stability risks
• the FSB must strike a balance between uncoordinated regulation, which creates gaps, fragmentation and opportunities for arbitrage, and excessively granular harmonisation, which can create regulation which does not fit with particular jurisdictions’ circumstances; an
• policy may fail to have the desired effect. For example, banks were hesitant to use their regulatory capital buffers to meet credit demand during COVID-19, although national supervisors stated that banks should do so in times of stress. More research into this reluctance is important so that the FSB can improve its macro and micro-prudential tools for the next time these are needed.

The speech also sets out the FSB’s key priorities for 2022, which include:

• the financial stability risks posed by climate-related financial risks. Progress on the FSB’s climate roadmap, published in July 2021, will depend on the collective efforts of the FSB, its membership and international organisations;
• close monitoring of crypto assets and stablecoins, and co-ordination of the regulation, supervision and oversight of global stablecoins following the FSB’s report, published in October 2021, on these aspects. The FSB’s regulatory and supervisory approach needs to address relevant risks while also preserving the benefits of innovation; and
• the FSB’s new forward-looking surveillance framework for monitoring and assessing vulnerabilities, which is intended to better account for resilience and the capacity to absorb shocks in order more effectively to identify new, emerging and cross-border vulnerabilities and identify any gaps.

Speech by Randal K. Quarles: Financial stability and coordination in times of crisis

 

Cyber incident reporting - FSB publishes report - 19 October 2021

The FSB has published a report on cyber incident reporting and next steps for broader convergence. The FSB notes increasing financial stability concerns relating to, among other things, the digitalisation of financial services and explores whether harmonisation in cyber incident reporting could be achieved.

Following a stocktake of national authorities’ cyber incident reporting regime, the FSB found that fragmentation exists across different sectors and jurisdictions in relation to the information required to be reported; the methodologies to measure the severity and impact of an incident; the timeframes for reporting cyber incidents; and how cyber incident information is used.

The FSB has identified three areas which it will progress to achieve greater convergence in cyber incident reporting:

• Developing best practices: the FSB intends to identify a minimum set of the types of information national authorities may require in relation to cyber incidents, which can then be used by them when developing their cyber incident reporting regimes;
• Identifying common types of information to be shared: the FSB intends to identify key information items that should be shared across sectors and jurisdictions, and consider any legal and operational impediments to sharing such information. It will be essential for FSB member jurisdictions to continue bilateral and regional efforts to reduce legal and operational barriers to information sharing; and
• Creating common terminologies for cyber incident reporting: in particular, the FSB intends to create a common definition of ‘cyber incident’ so that incidents that are that are not significant for a financial institution or for financial stability are not required to be reported.

The report concludes that greater harmonisation of regulatory reporting of cyber incidents should promote financial stability by: (i) building a common understanding, and the monitoring, of cyber incidents affecting financial institutions and the financial system; (ii) supporting effective supervision of cyber risks at financial institutions; and (iii) facilitating the co-ordination and information sharing amongst authorities across sectors and jurisdictions.

The FSB will develop a plan for taking these initiatives forward by the end of 2021.

Report: Cyber Incident Reporting: Existing Approaches and Next Steps for Broader Convergence

Webpage

Press release

European Commission

EC work programme – European Commission publishes its 2022 work programme alongside annexes and factsheets – 19 October 2021

The European Commission has published its 2022 work programme (COM(2021) 645 final), together with annexes and two factsheets.

Annex I sets out a full list of 43 new policy initiatives across six headline ambitions. Of relevance to financial services are the Commission’s:

• proposed initiative on instant payments to foster the full take up of such payments in the EU. A legislative proposal is expected in Q2 2022; and
• proposal for a Regulation on digital operational resilience for the EU financial sector.

Annex II refers to proposed initiatives under the European Commission’s regulatory fitness and performance programme. There are no proposals relating to financial services.

Annex III lists priority pending legislative files, a number of which relate to the financial services sector, including: a proposal for a regulation on a pilot regime for market infrastructure based on distributed ledger technology (DLT); proposals designed to strengthen and modernise the EU anti-money laundering (AML) and counter-terrorist financing (CTF) framework; and a proposal for a directive on consumer credit.

The Commission will now start discussions with the European Parliament and the Council to establish a list of joint priorities. 

European Commission 2022 work programme

Annexes to the work programme

Factsheet on the 2021 Commission work programme

Factsheet on new initiatives   

Webpage

Press release

European Supervisory Authorities

Supervisory independence - ESAs publish reports - 18 October 2021

The European Supervisory Authorities (ESAs), comprising the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), have published sectoral reports on the supervisory independence of national competent authorities (NCAs).

The reports are based on the self-assessment of, and information from, NCAs and focus on their operational, financial and personal independence, as well as accountability and transparency. They are intended to factually represent the arrangements and practices reported by NCAs without assessing the independence of any one individual NCA.

Overall, NCAs stated that they are operating independently on a day to day basis with sufficient financial and personal independence and an adequate framework for ensuring accountability and transparency. That said, there is frequent variation in those frameworks and the approaches taken in different jurisdictions:

• on operational independence: while the vast majority of NCAs are established as independent bodies, a few are established under the aegis of a ministry and a limited number are required to reply to requests made by certain public bodies, such as government ministers. Not all NCAs report being in a position to hire staff at the level needed for the fulfilment of their supervisory tasks;
• on financial independence: while almost all NCAs reported adequate funding, a variety of funding models are in operation, with some being subject to centralised government budget rules and a few allowing for the creation of reserves;
• on personal independence: while a framework is in place in most NCAs, there are differences on aspects such as terms of office and removal conditions for NCAs’ senior management and board members, management of conflicts of interest, cooling-off periods and legal protection for staff; and
• on transparency and accountability: NCAs typically ensure public transparency through the publication of documents such as annual reports or financial statements, disclosing supervisory measures taken, and through duties to report periodically on their activities to a government entity or democratic assembly. Some publish documents in English as a way to enhance transparency.

The reports provide the ESAs with valuable information that may be considered for future work on supervisory independence. The ESAs also consider that the reports can support NCAs in assessing whether they should seek any legislative or regulatory amendment to further improve the framework underpinning their independence. The European Commission may also use the reports as input for its own report on the independence of NCAs that it is currently preparing under the review clauses of the ESAs’ founding regulations.

EBA report
Annex 4 to the EBA report

EIOPA report

ESMA report

Press release

UK Parliament

Financial Services Act 2021 (Commencement No. 1) (Amendment) (Savings Provision) Regulations 2021 published - 19 October 2021

The Financial Services Act 2021 (Commencement No. 1) (Amendment) (Savings Provision) Regulations 2021 (SI 2021/1163) (the Amending Regulations) have been published. They amend the Financial Services Act 2001 (Commencement No. 1) Regulations 2021 (SI 2021/671) (the Regulations). The Regulations set out commencement dates for certain provisions of the Financial Services Act 2021 (FS Act) that relate to the prudential regulation of investment firms and credit institutions. This includes provisions revoking the FCA’s powers to make technical standards under the UK Capital Requirements Regulation (575/2013/EU) (UK CRR), which will come into force on 1 January 2022.

Only the FCA’s power to make, modify, amend or revoke technical standards is being removed. The technical standards themselves are not being revoked. The Amending Regulations also retain the FCA’s power to modify, amend or revoke technical standards made under UK CRR and in force before 1 January 2022.

The Amending Regulations come into force on 1 January 2022.

The Financial Services Act 2021 (Commencement No. 1) (Amendment) (Savings Provision) Regulations 2021 (SI 2021/1163)

 

Financial Services Act 2021 (Commencement No. 3) Regulations 2021 published - 21 October 2021

The Financial Services Act 2021 (Commencement No. 3) Regulations 2021 (SI 2021/1173) (the Regulations) have been published. The Regulations bring into force section 31 of the Financial Services Act 2021 (FS Act) from 1 November 2021. Section 31 of the FS Act amends section 61 of the Criminal Justice Act 1993 and section 92 of the Financial Services Act 2012 to increase the maximum penalty for insider dealing and financial services offences from seven to ten years. 

The Financial Services Act 2021 (Commencement No. 3) Regulations 2021 (SI 2021/1173)

HM Treasury

Greening the financial system - HM Treasury publishes policy paper - 19 October 2021

HM Treasury has published a policy paper setting out the government’s ambition to ‘green’ the financial system and align it with the UK’s net-zero commitment. It covers three key areas:

1.            Sustainable disclosure requirements

New Sustainable Disclosure Requirements (SDRs), which the Chancellor announced in his July 2021 Mansion House Speech, will be implemented through legislation and sector-specific requirements set out by relevant regulators.

The SDR framework will build on the UK’s implementation of the Task Force on Climate-Related Financial Disclosures (TCFD) and is intended to be a fully integrated regime that works smoothly across all sectors of the economy and is in line with international standards. It will require:

• corporates, including financial services firms, to make sustainability disclosures, report on their environmental impact using the UK Green Taxonomy (see point 2 below) and, initially for certain firms, publish transition plans that align with the government’s net zero commitment (or explain why they have not done so);
• asset managers and asset owners to disclose how they take sustainability into account; and
• creators of investment products to report on those products’ sustainability impact and their financial risks and opportunities, which will form the basis of a new sustainability investment labelling regime that the FCA will develop.

2.            UK Green Taxonomy    

The paper sets out details on the development and implementation of the UK Green Taxonomy, which will set out ‘clearly’ the criteria which specific economic activities must meet to be considered environmentally sustainable and, therefore, ‘Taxonomy aligned’.

The aim of the Taxonomy is to create clarity and consistency for investors without placing a disproportionate burden on businesses, improve understanding of companies’ environmental impact and provide companies with an informative performance target. It will take an objective and science-based approach, incorporate learning from other taxonomies globally and be suitable for the UK market.

3.            Expectations for the UK pensions and investment’ sectors

The report sets out a number of expectations for the UK pensions and investment sectors, including that they will take account of the information generated by the SDRs to help shift capital to align with a net-zero economy. The government will assess progress against its expectations in 2023.

 

Consultation and discussion papers

The report includes information on upcoming regulatory discussion and consultation papers, which include:

• in November 2021, FCA discussion papers on: (i) SDR disclosures for asset managers and asset owners; (ii) consumer-facing product-level SDR disclosures in relation to investment products; and (iii) the sustainable investment labelling regime; and
• in Q2 2022, consultations on climate change mitigation and adaptation under the Green Taxonomy.

The government also intends to update the Green Finance Strategy, launched in 2019, which will include setting out an indicative sectoral transition pathway to 2050 to achieve the alignment of the financial system to the UK’s net-zero commitment.

Policy paper: Greening Finance: A Roadmap to Sustainable Investing

Webpage

Press release

Financial Conduct Authority

FCA Chair - FCA publishes announcement - 15 October 2021

The FCA has published an announcement stating that Charles Randell will step down as FCA and PSR Chair in Spring 2022. It has also published a letter from Mr Randell to the Chancellor of the Exchequer, Rishi Sunak, requesting him to begin the process for appointing a successor and the Chancellor’s response, thanking him for his leadership and referencing the achievements of the FCA and the PSR during his tenor.

Letter from Charles Randell, FCAsand PSR Chair, to Rishi Sunak, Chancellor

Chancellor of the Exchequer response

Press release

 

Regulatory perimeter - FCA publishes 2020/21 report - 21 October 2021

The FCA has published its third annual report on the FCA regulatory perimeter. The regulatory perimeter determines which firms require authorisation and the level of protection consumers can expect in relation to the financial services and products that they purchase. The report is key to providing clarity on the FCA’s approach to its perimeter and to support regular dialogue on the adequacy of the present regime.

This year’s report covers a number of areas including potential consumer harm linked to the perimeter, firms’ business models and adopted structures, consumer investments, technological changes, lending and the wholesale market perimeter. Key areas of concern highlighted in the report include:

• financial promotions: the FCA calls again for amendment to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. Current exemptions under the Order, in particular those relating to high-risk products aimed at net worth and sophisticated investors, put ordinary investors at risk of receiving financial promotions which are not required to comply with FCA rules; and
• Senior Managers and Certification Regime: the report calls for the Regime to be extended to recognised investment exchanges (RIEs), credit rating agencies (CRAs) and payments and e-money firms. This will enhance individual accountability and governance with firms, ensure consistency of supervisory expectations of key individuals and strengthen the FCA’s ability to supervise such firms;
• Online Safety Bill 2021 (OSB): the duty to be imposed on internet companies should extend to paid-for advertising, as well as user-generated content. The OSB should also designate fraudulent content as a priority and require platforms to take monitoring and preventative action.

The FCA will formally discuss the report with the economic secretary to the Treasury, John Glen, later in the year. The minutes of that discussion will be published.

Perimeter Report 2020/21

Press release

Webpage

Network for Greening the Financial System

Climate-related risks - NGFS publishes progress report - 19 October 2021

The Network for Greening the Financial System (NGFS) has published a progress report on global supervisory and central bank climate scenario exercises. The report sets out how a growing number of NGFS members are using climate scenarios to identify, assess and understand climate risks in their economies and financial systems. It is part of the NGFS’ contribution to the 2021 United Nations Climate Change Conference (COP26) to be held in Glasgow in November 2021.

The report features 30 NGFS members' climate scenario exercises to date, notes that the NGFS scenarios are a foundational component in almost all of them and highlights a number of the challenges that need to be addressed in undertaking this work. The report provides insight into how central banks and supervisors have sought to address these challenges and is therefore a practical reference for those seeking to do climate scenario exercises in the future.

All exercises surveyed for the report cover the banking sector and about half of the exercises also involve insurers or other financial institutions. As climate scenario exercises develop, insights into the financial impacts from transition and physical risks will become increasingly comprehensive, based on a converging set of methodological practices and a growing body of data.

Going forward, the NGFS will continue to serve as a platform for knowledge sharing between central banks and supervisors, report on its findings as they emerge, and improve its scenarios with the aim of being as relevant as possible for economic and financial analyses. The NGFS and the FSB intend to publish a joint report on the main implications of possible future climate scenarios for the financial system in 2022.

Scenarios in Action: a progress report on global supervisory and central bank climate scenario exercises (NGFS Technical Document, October 2021)

Press release

Climate Financial Risk Forum

Climate Financial Risk Forum - CFRF publishes second set of guides on climate-related financial risks - 21 October 2021

The Climate Financial Risk forum (CFRF) has published its second set of guides to help the financial industry better address climate-related financial risks and opportunities. The new guides build on the CFRF’s first set of guides published in June 2020 and set out best industry practice in the following key areas:

• risk management: the CFRF’s Risk Management Working Group have published materials designed to help retail banks, corporate banks, insurers and asset managers produce and implement risk appetite statements that integrate climate-related financial risks;
• scenario analysis: the guides provide practical examples on how firms can incorporate sector-specific points when developing an effective approach to scenario analysis;
• disclosure: the CFRF’s Disclosure Working Group has produced guidance on managing the legal risks associated with publishing climate-related disclosures;
• innovation: the guides identify practical opportunities to mobilise financial capital and steward an economy-wide transition to meet climate targets; and
• climate data and metrics: the report on climate data and metrics highlights areas where climate-related areas could be employed and makes recommendations for their implementation.

CFRF Guides 2021

FCA press release

Bank of England press release