Regulatory Insights - October 2024

On 28 October 2024, the Financial Action Task Force (FATF) launched a consultation on proposed changes to its Standards to better support financial inclusion. The revisions primarily target Recommendation 1 and its Interpretive Note, along with updates to Recommendations 10 and 15 and relevant Glossary definitions. The aim of these proposed changes is to enhance financial inclusion by emphasising proportionality and simplifying measures within a risk-based approach, thereby providing countries, supervisors, and financial institutions with greater confidence in implementing these simplified measures.

The consultation is open until 12 December 2024.

On 17 October 2024, the FATF announced important changes to how it lists countries, aiming to relieve pressure on the least developed countries while targeting those that pose the greatest risks to the global financial system. The FATF works with countries that have weaknesses in their systems for preventing money laundering and terrorist financing.

The new criteria will better identify high-risk countries while still providing support for low-capacity nations. Countries will be prioritised for review if they are FATF members, on the World Bank's High-Income list (except for those with very small financial sectors), or have significant financial assets. Least developed countries will not be prioritised unless they present a serious risk of money laundering or terrorist financing, and if they are reviewed, they may have a longer period to make improvements. These changes will take effect in the next assessment round, and the FATF believes they could reduce the number of low-capacity countries on its lists by half.

Background on the FATF listing process: The grey list highlights countries with deficiencies in their systems for fighting money laundering and terrorist financing. Countries on this list work with experts to create a specific action plan to address their issues. This peer-led approach helps countries strengthen their defenses against financial crime, benefiting both the individual countries and the global financial system.

On 25 October 2024, the EU Commission's Delegated Regulation (EU) 2024/2759, which includes new regulatory technical standards (RTS) for European Long-Term Investment Funds (ELTIFs), was published in the EU's Official Journal.

Following a three-month review by the European Parliament and Council, this regulation takes effect on 26 October 2024.

These RTS build on the original ELTIF Regulation (2015/760), amended in 2023 (ELTIF 2.0), and introduce detailed requirements for liquidity, redemption, and management tools in ELTIFs.

Key Provisions:

• Redemption and liquidity management: while ELTIFs have traditionally been closed-ended, the RTS now allow limited redemption options if specific conditions are met. Articles 4 and 5 outline that ELTIF managers must submit detailed information to regulators, demonstrating that their redemption policies align with the fund's long-term investment strategy. Redemptions are permitted only after a minimum holding period, and the total amount redeemable is capped based on the ELTIF's eligible assets.
• Maximum redemption amounts: the RTS set limits on the percentage of liquid assets that can be used to fulfill redemption requests, depending on factors such as redemption frequency and minimum asset levels (outlined in Annexes I and II). For example: an ELTIF with quarterly redemptions and a 3-month notice period can allow redemptions up to 33.3% of its eligible assets on a redemption date. Another ELTIF with a quarterly redemption frequency must have at least 20% of assets as eligible and can allow redemptions up to 50% of eligible assets.
• Flexible redemption frequencies and notice periods: if an ELTIF allows redemptions more frequently than quarterly or has a notice period shorter than 3 months, it must justify this to regulators, showing that it fits the fund's strategy.
• Other requirements and criteria: the RTS and its annexes also provide:
  • Guidelines for the use of derivatives strictly for hedging purposes.
  • Policies on matching transfer requests between existing and new investors.
  • Methods for calculating ELTIF costs.

Sector specific analysis

The report breaks down the impact for three banking models:

• Universal banks: provide a wide range of banking services.
• Retail-oriented banks: primarily serve retail customers.
• Corporate-oriented banks: focus on corporate clients and other activities.

Additional Insights

The report also considers the influence of new standards for market risk (FRTB) and credit valuation adjustments (CVA). Notably, the impact on G-SIIs has reduced due to their adoption of an additional leverage ratio requirement in 2023, which lowered the capital requirements relative to previous estimates.

For in-depth analysis, the EBA has provided an interactive tool with data visualizations. However, users are cautioned to interpret results carefully, as official conclusions are those presented in the report itself.

The annex provides a comparison between the baseline Basel III framework and the adjusted EU-specific requirements under CRR3, helping stakeholders understand how EU adaptations affect capital needs.

On 11 October 2024, EBA launched a consultation on its planned Pillar 3 data hub, which aims to centralise prudential disclosures from financial institutions on the EBA's website.

This initiative is part of the recent Banking Package, aligned with the Capital Requirements Regulation (CRR3) and Capital Requirements Directive (CRD6).

The draft standards specify IT solutions and data formats that large institutions and others will use to submit their Pillar 3 disclosures. The EBA encourages input from both institutions and users of this information.

The consultation paper reflects feedback from an industry discussion held in December 2023. Simultaneously, the EBA is conducting a pilot program with volunteer institutions to test and refine the system.

Comments on this consultation are open until 11 November 2024.

On 7 October 2024, the Joint Committee of the ESAs released its 2025 Work Programme, prioritising efforts to address cross-sectoral risks, enhance sustainability, and strengthen digital resilience across the EU financial sector.

Key initiatives for 2025 include:

• Sustainability disclosures: providing additional guidance to improve transparency on sustainability across financial entities.
• Digital operational resilience: advancing oversight of critical third-party ICT providers and implementing an incident coordination framework under the Digital Operational Resilience Act (DORA).
• Financial conglomerates monitoring: ensuring stability and regulatory consistency across conglomerates.
• Innovation and coordination: enhancing cooperation among national innovation facilitators to support the growth of innovative financial solutions.
• Cross-sectoral focus areas: addressing issues in retail financial services, investment products, and securitisation.

On 2 October 2024, EBA released its 2025 Work Programme, highlighting key priorities for the upcoming year. In 2025, the EBA's main areas of focus will be:

• Implementing the EU banking package and advancing the Single Rulebook to ensure regulatory consistency across the EU.
• Promoting financial stability through risk-based and forward-looking analysis to support a sustainable economy.
• Enhancing data infrastructure by launching a new data portal to improve accessibility and transparency.
• Supervising digital resilience and Crypto-Assets under the DORA and MiCAR.
• Strengthening consumer protections and facilitating the transition to the new anti-money laundering and counter-terrorism financing (AML/CFT) framework.

EBA will collaborate closely with EU and international stakeholders, particularly in DORA oversight, which will be a joint effort with EIOPA and ESMA. Resources have been allocated for DORA, MiCAR, and EMIR responsibilities, while the EBA continues to streamline operations to enhance flexibility and efficiency.

On 7 October 2024, EBA published its third Basel III Monitoring Report, assessing the impact of the EU's implementation of the Basel III framework, set to be fully in place by 2033.

This report evaluates the effects of the upcoming Capital Requirements Regulation (CRR3), including Pillar 2 requirements and EU-specific capital buffers.

Key findings:

• Minimal capital shortfall: the Tier 1 capital shortfall for EU banks is estimated at only EUR 0.9 billion, with the total capital shortfall at EUR 5.1 billion. Given the long timeline until full implementation, EU banks are expected to comfortably raise the needed capital.
• Capital increase requirements: the monitoring exercise shows a 7.8% increase in the minimum Tier 1 capital requirement across EU banks by 2033, driven mainly by the output floor and operational risk factors. The requirements are for:
  • Group 1 banks (large, internationally active banks): +8.6%
  • Global systemically Important Institutions (G-SIIs): +12.2%
  • Group 2 banks (smaller, non-international banks): +3.6%

On 16 October 2024, ESMA responded to the EU Commission proposal to amend the Markets in crypto-assets Regulation (MiCA) Regulatory Technical Standards (RTS). ESMA acknowledges the legal limitations raised by the Commission but emphasises the importance of the policy objectives behind the initial proposal.

In the Opinion, ESMA takes note of the amendments proposed to the two RTS specifying:

• the information to be included in a notification by certain financial entities of their intention to provide crypto-asset services and
• the information to be included in an application for authorisation as cryptoasset service provider.

ESMA also reiterates that the final objective of these RTS is to ensure a thorough entry point assessment for applicant crypto-asset service providers (CASPs) and financial entities intending to provide crypto-asset services in the EU. This will increase the resilience of the crypto assets market and enhance investor protection in the crypto-assets space.

ESMA therefore recommends the Commission consider amendments to the MICA regulation (Level 1), namely:

• requiring applicant crypto-asset service providers and notifying entities to provide the results of an external cybersecurity audit; and
• including, in the assessment of the good repute of the members of the management body of applicant crypto-asset service providers, checks regarding the absence of penalties also in areas beyond commercial law, insolvency law, financial services law, anti-money laundering and counter terrorist financing, fraud or professional liability.

Background

On 25 March 2024, ESMA published its first final report on the draft RTS specifying certain requirements of MiCA and submitted it to the EC for adoption. In September 2024, the EU Commission informed ESMA that it intended to adopt two of the proposed RTS with amendments and invited ESMA to submit new draft RTS reflecting the amendments provided.

This opinion has been communicated by ESMA to the EU Commission, the European Parliament and the European Council.

The EC may adopt the two RTS with the amendments it considers relevant or reject them. The European Parliament and the Council may object to an RTS adopted by the EC within a period of three months.

On 9 October 2024,I OSCO released its Final Report on investor education surrounding Crypto-Assets. This Report summarises the results of a survey distributed to members of IOSCO's Committee for Retail Investors (C8) in autumn last year about retail investor behaviour, demographics, and experiences with crypto-assets.

Crypto-assets have been a key priority for IOSCO for some time and in 2022 it established a Board-level FinTech Task Force to develop, oversee, deliver and implement IOSCO's work with respect to FinTech and crypto-assets. Early work has shown that investors are drawn to invest in crypto-assets for three key reasons:

• Fear of missing out" ("FOMO") or as a speculative investment;
• Low cost of entry; and
• Advice from friends and/or social media.

This Final Report highlights examples of regulatory changes and enforcement activity by C8 members since the related 2020 report, as well as current priority issues around investor education in the crypto-asset space, such as relationship investment scams and the need to communicate with retail investors on, and about, social media. The Report suggests specific investor education messages which C8 members could consider when driving forward education of crypto assets in their local jurisdiction.

• Investments in crypto-assets can be exceptionally risky and these assets are often volatile.
• Investors should be wary of investments promoted on social media and use skepticism when following "finfluencers."
• Crypto-asset investments might lack basic investor protections, as those offering crypto-asset investments or services may not be complying with applicable law, including registration and licensing requirements.
• Investments offered in compliance with a jurisdiction's regulatory framework confers investors with certain investor protections.
• Fraudsters continue to exploit the rising popularity of crypto assets to lure retail investors into scams, often leading to devastating losses.
• Understanding the nature of investing generally, including having an investing plan, and understanding risk tolerance and time horizon, as well as understanding the nature of investing in crypto-assets, can be critical to overall and long-term investing success.