EU FINANCIAL REGULATION
A significant number of financial services files made progress in the last plenary session of the European Parliament at the end of April 2024.
However, in light of the impending EU elections in early June 2024, further progress on these is not (with the exception of CSDDD, the AML/CFT package and the Basel III EU banking package (CRR III and CRD VI)) expected until at least September 2024.
Final endorsement is still needed from the EU Council on the following before they can be published in the Official Journal: the regulation on ESG ratings, EMIR 3.0, the Listing Act-related elements of the European Commission's December 2022 Capital Markets Union: Clearing, Insolvency and Listing Package, the changes to the Solvency II Directive, and the new Insurance Recovery and Resolution Directive.
Discussions and trilogue negotiations on the following will post-date the EU elections: the proposed bank crisis management and deposit insurance package, the proposed retail investment package, the proposed changes to the EU Benchmarks Regulation, and the proposed new Payment Services Regulation and related Directive.
For more information on those files, read our insights here: Financial Services: Key week in the European Parliament.
AML/CFT
Following final approval by the EU Council on 30 May 2024, the following are expected to be published in the Official Journal in the coming weeks, most likely in June 2024:
- The ‘single rulebook' AML/CFT Regulation (here).
- The Anti-Money Laundering Authority (AMLA) Regulation (here).
- The related AML/CFT Directive (here).
On timing for application of the new rules:
- The ‘single rulebook' AML/CFT Regulation (where most of the new AML/CFT framework will be housed to ensure a harmonised approach across all EU Member States) will apply 36 months + 20 days after publication in the Official Journal (save in respect of football agents and football clubs, in respect of which it will apply 60 months + 20 days after publication).
- The AMLA Regulation will apply from 1 July 2025, save for the mandates to develop related technical standards, guidelines and recommendations, and the provisions relating to the establishment of AMLA's organisational structure, which will apply straight away. AMLA will be located in Frankfurt, Germany.
- Most provisions of the Directive will require transposition by EU Member States 36 months + 20 days after publication in the Official Journal (at which stage the Fourth Money Laundering Directive as amended by the Fifth Money Laundering Directive will be repealed).
Under the new AML/CFT framework, EU Member States must make information from centralised bank account registers available through a single access point. As the AML/CFT Directive will give access to that single access point to Financial Intelligence Units, a separate Directive was adopted at the same time by the EU Council to ensure that law enforcement authorities in the relevant Member State will have access to these registers via the single access point.
BANKING UNION/BASEL III
Following final approval by the EU Council on 30 May 2024, the key legislative deliverables under the Basel III package are expected to be published in the Official Journal in the coming weeks, most likely in June 2024.
The CRR III Regulation and CRD VI Directive will amend the existing Regulation and Directive, not only to implement the Basel III standards, but also to set out minimum authorisation requirements for branches of third-country banks and the supervision of their activities in the EU, to improve banks' management of ESG risks, and to establish a transitional prudential regime for crypto-assets.
The key Basel III reform which the new legislative framework will introduce is an “output floor” which will limit the risk of excessive reductions in banks' capital requirements and, makes those requirements more comparable. The output floor sets a lower limit on the capital requirements that are determined in accordance with banks' internal models to 72.5% of the capital requirements that would apply if they used standardised measurements.
The CRR III Regulation will be directly effective in EU Member States from 1 January 2025. EU Member States will have 18 months + 20 days from the date that the CRD VI Directive is published in the Official Journal to transpose it into domestic law. The texts as approved by the EU Council are here (CRR III Regulation) and here (CRD VI Directive).
BANKS - CRR III
The EBA's public consultation on draft regulatory technical standards (RTS) under the upcoming Capital Requirements Regulation (CRR3) regarding off-balance sheet items under the standardised approach of credit risk closes for feedback on 4 June 2024.
BANKS - G-SIB - 'WINDOW-DRESSING'
The consultation by the Basel Committee on Banking Supervision (BCBS) on potential measures to address ‘window-dressing' behaviour by some banks in the context of the framework for global systemically important banks (G-SIB) closes for feedback on 7 June 2024.
The BCBS had found evidence that some banks were temporarily lowering the values of certain indicators at year-end, leading to an underestimate of the systemic importance of those banks.
The BCBS' proposals aim to mitigate banks' ability to window-dress by requiring banks participating in the G-SIB assessment exercise to report and disclose the stock G-SIB indicators based on an average of values over the reporting year, rather than based on year-end values.
CREDIT RATING AGENCIES
ESMA's consultation on proposed changes to Annex I of the Credit Rating Agencies (CRA) Regulation and Commission Delegated Regulation (EU) 447/2012 on the demonstration of compliance of credit rating methodologies closes for feedback on 21 June 2024.
In June 2023, the Commission formally asked ESMA for technical advice on amendments to the CRA regulatory framework. In particular, it sought advice on how Annex I (Independence and Avoidance of Conflicts of Interest) of the CRA Regulation, and the Delegated Regulation, could be updated to ensure that relevant ESG risks are systematically captured in credit ratings and improve transparency on the inclusion of ESG risks by CRAs in credit ratings and rating outlooks. ESMA's proposed advice includes:
- Amending the Delegated Act to refer to “rating outlooks” throughout where the term “credit rating” is used; clarify what is meant by “methodology”; include explicit reference to ESG factors; clarify the information to be included in a methodology; and ensure that CRA's methodologies can be applied in a systematic manner to ensure a more systematic approach to the inclusion of ESG factors.
- Amending the CRA Regulation to ensure that the transparency provisions introduced by ESMA's guidelines on disclosure are integrated into the Regulation.
ESMA plans to submit its technical advice to the Commission by the end of December 2024.
INSURANCE - NATURAL CATASTROPHE RISKS
EIOPA consultation on the 2023/24 reassessment of natural catastrophe (NatCat) risks in the standard formula under the Solvency II Directive closes for feedback on 20 June 2024.
EIOPA noted in the consultation paper that, in the light of climate change, new scientific insights and recent catastrophic events, it is important to ensure that the NatCat parameters of the standard formula are still valid. Insurers' capital requirements for natural catastrophe underwriting risk must continue to reflect the expected impact of climate change. EIOPA reviewed NatCat parameters in the standard formula to see if previous parameters need recalibrating in the light of new evidence. It has also assessed whether new perils or regions should be included. The review is designed to better capture the risks stemming from perils such as earthquake, flood, hail and windstorm based on new insights, new data and new models that have come online since the last reassessment in 2018.
Following the reassessment exercise, EIOPA proposed: new risk factors for 25 perils and regions across 5 perils; including more countries in the standard formula for which certain NatCat risks were previously not covered (e.g. it proposes to add 9 countries including Ireland for flood risk); and including wildfire, coastal flood and drought in the future as new perils to be covered under the standard formula.
EIOPA plans to submit an opinion on NatCat risks to the Commission by the end of 2024. The Commission will consider the opinion for a potential recalibration of the standard formula parameters.
INSURANCE - IAIS CONSULTATIONS
Three consultations by the International Association of Insurance Supervisors (IAIS) close in June 2024:
The consultation on revisions to supervisory material related to the holistic framework. In this consultation, the IAIS proposed changes to certain Insurance Core Principles (ICP) and related standards in the Common Framework for the Supervision of Internationally Active Insurance Groups that form part of the holistic framework. In particular, it is proposing to amend its standards and guidance material relating to (a) liquidity risk, counterparty risk appetite and contingency funding plans and (b) recovery and resolution plans. The consultation closes on 27 June 2024.
- The third consultation on climate risk supervisory guidance. The first and second consultations took place in 2023, and the fourth and final consultation will launch later in 2024 (covering issues including supervisory reporting and public disclosures). This third consultation includes proposed changes in selected ICP guidance and supporting material to reflect climate risk. It covers issues related to corporate governance, risk management and internal controls, valuation of assets and liabilities for solvency purposes, investment activities of insurers and insurers' enterprise risk management framework. It closes on 19 June 2024.
- The consultation on supervising diversity, equity and inclusion (the governance, risk management and culture perspective) closes on 14 June 2024.
MICA - EBA CONSULTATION ON REDEMPTION PLANS
MiCA will cover the activities of offering to the public or seeking admission to trading of asset referenced tokens (ARTs) and e-money tokens (EMTs) and issuing those tokens.
MiCA confers supervisory tasks on the EBA for ARTs and EMTs that are determined by the EBA to be significant. It requires each issuer of ARTs or EMTs to develop a redemption plan to ensure the orderly redemption of those tokens when the competent authority assesses that the issuer is “unable or likely to be unable to fulfil its obligations”. Article 47(5) of MiCA requires the EBA to issue guidelines specifying (a) the content of the redemption plan which has to be implemented following a competent authority's decision assessing that the issuer is “unable or likely to be unable to fulfil its obligations”, and (b) the triggers for implementation of the redemption plan.
The EBA launched a consultation on those guidelines, which closes for feedback on 10 June 2024. The draft guidelines are addressed to issuers of ARTs and of EMTs, and to competent authorities under MiCA. They (a) clarify the main principles governing the redemption plan, such as the equitable treatment of token holders, and describe the main steps for the orderly and timely implementation of the plan, including the communication plan, the content of the redemption claims and the distribution plan; (b) cover the case of pooled issuance, where the same token is issued by multiple issuers; and (c) outline the triggers for the activation of the plan by the competent authority and the cooperation with the prudential and resolution authorities.
MICA - EBA CONSULTATION ON REDEMPTION PLANS
The provisions of MiCA regarding ARTs and EMTs will apply from 30 June 2024. The EBA has supervisory tasks as regards ARTs and EMTs that are determined to be significant.
On 7 May 2024 (following the closure of related consultations) the EBA published 3 sets of final draft RTS and one set of final draft implementing technical standards (ITS) relating to the authorisation as issuer of ARTs, the information for the assessment of acquisition of qualifying holdings in issuers of ARTs, and the procedure for the approval of white papers for ARTs issued by credit institutions. Those will be submitted by 30 June 2024 to the Commission for endorsement, following which they will be subject to scrutiny by the European Parliament and the EU Council before being published in the Official Journal.
The RTS on authorisation set out information requirements to be included when applying for authorisation to offer to the public or seek admission to trading of an ART. Following the public consultation, the scope of the authorisation has been amended to clarify that the applicant issuer may only be a legal person or undertaking established in the EU; and while the issuance isn't subject to authorisation, which only covers the public offer or the admission to trading, an application may only be submitted by an applicant issuer, therefore only an issuer may be granted authorisation.
The ITS on authorisation set out the standard application letter and the application template and clarify the process relating to the assessment of completeness of the application by the competent authority. As credit institutions are only required to receive approval to publish a white paper, the RTS and ITS on authorisation do not apply to credit institutions.
The RTS on the detailed content of the information to be included in the notification for of the proposed acquisition of direct or indirect qualifying holdings set out the information requirements that are necessary to the competent authority to carry out the prudential assessment in case of proposed acquisitions in issuers of ARTs that are not credit institutions. That information covers five criteria relating to (a) the reputation of the proposed acquirer, (b) the suitability of any person who will direct the target undertaking, (c) the financial soundness of the proposed acquirer, (d) the sound and prudent management of the target undertaking following the acquisition and (e) suspicion that money laundering of terrorist financing is committed or attempted or that it may increase following the acquisition.
Unlike other ART issuers, credit institutions don't require authorisation to issue ARTs but must notify their competent authority, and the white paper must be submitted to the competent authority for approval. The RTS on the procedure for the approval of white papers for ARTs issued by credit institutions sets out the timeframes that credit institutions, competent authorities and the ECB or other central banks must follow during the procedure for the approval of a crypto-asset white paper.
MICA - EBA RTS ON COMPLAINTS
Following the publication of its Final Report on draft RTS specifying the requirements, templates and procedures for handling complaints under Article 31 of MiCA, the EBA plans to submit these final draft RTS to the Commission for endorsement by 30 June 2024.
The RTS, together with the provisions already set out in MiCA, specify effective and transparent procedures for the prompt, fair and consistent handling of complaints by holders of ARTs. Those relate to the handling of complaints and requirements related to the complaints management policy and function, and the provision of information to holders of ARTs and other interested parties. The draft RTS also specify the templates and procedures for handling complaints received from holders of ARTs and other interested parties, and procedures to facilitate the handling of complaints between holders of ART and third-party entities, where applicable.
MICA - THIRD (AND FINAL) ESMA CONSULTATION PACKAGE
ESMA's third consultation package under MiCA closes for feedback on 25 June 2024.
This consultation package includes all remaining ESMA mandates with an 18-month deadline as follows:
- Article 92(2) RTS: these relate to arrangements, systems and procedures for detecting and reporting suspected market abuse in crypto-assets.
- Article 81(5) Guidelines: these relate to aspects of the suitability requirements applicable to the provision of advice and portfolio management in crypto assets and the format of the periodic statement referred to in Article 81(14) of MiCA.
- Article 82(2) Guidelines: these relate to procedures and policies, including the rights of clients, in the context of transfer services for crypto-assets.
- Article 14(1)(d) Guidelines: these relate to the maintenance of systems and security access protocols in conformity with appropriate EU standards.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.
