Banking and Finance regulatory news, July 2021 | Hogan Lovells

Contents

• UK Securitisation Regulation: HM Treasury review
• UK CRR: FPC and PRA CP14/21 on changes to UK leverage ratio framework
• Retail banking: FCA Dear CEO letter on common AML failings
• Standards of Lending Practice: LSB guidance for smaller firms and new market entrants on good governance practices
• CRR: Implementing Regulation extending transitional period relating to treatment of exposures to third-country CCPs
• CRR: ECB Decision extending COVID-19 exclusion of certain central bank exposures from leverage ratio
• CRR: EBA Decision confirming quality of unsolicited credit assessments of certain ECAIs
• ECB options and discretions policies: ECB consultation
• Money laundering in the banking sector: European Court of Auditors report
• EU Securitisation Regulation: EBA consults on draft RTS for risk retention requirements
• CRD: EBA consults on revisions to guidelines on common supervisory procedures and methodologies for SREP and supervisory stress testing
• SFTs: BCBS finalises technical amendments on minimum haircut floors
• Corporate debt workouts: FSB launches thematic peer review

UK Securitisation Regulation: HM Treasury review

HM Treasury has published a call for evidence to inform its review of the retained EU law version of the EU Securitisation Regulation (UK Securitisation Regulation or “Sec Reg”). Article 46 of the Sec Reg requires HM Treasury to review the functioning of the Sec Reg and lay a report in Parliament by 1 January 2022 assessing:

• effects of the Sec Reg – including the introduction of the s simple, transparent and standardised securitisations (STS) framework – on the functioning of the securitisation market, the contribution of securitisation to the real economy (in particular on access to credit for small and medium-sized enterprises and investments), and the interconnectedness between financial institutions and the stability of the financial sector;
• risk retention modalities;
• disclosures related to private securitisations;
• an STS equivalence regime;
• environmental, social, and governance disclosures;
• the third-party verification regime; and
• limited licensed banks.

In addition, HM Treasury will consider how the Sec Reg can best deliver for the UK financial market and economy post-Brexit.

Reponses to the call for evidence should be submitted by 2 September 2021.

UK CRR: FPC and PRA CP14/21 on changes to UK leverage ratio framework

The Bank of England (BoE) has published consultations (in the same document, CP14/21) by the Financial Policy Committee (FPC) and the Prudential Regulation Committee (PRA) on changes to the UK leverage ratio framework. This consultation is relevant to all Capital Requirements Regulation (CRR) firms and CRR consolidation entities on an individual, consolidated, and where relevant, sub-consolidated basis.

The FPC conducted a comprehensive review of the UK leverage ratio framework in light of revised international standards, and its ongoing commitment to review its policy approach. CP14/21 outlines the changes that the FPC proposes to make to the framework, and the PRA’s proposed approach to implementing these changes, in two consultation papers: one from the FPC (in Part 1) and one from the PRA (in Part 2). The PRA has reviewed the leverage ratio framework concurrently, including to reflect international developments, and has coordinated closely with the FPC in relation to its review. The PRA considers that the FPC’s proposals would advance the PRA’s objectives.

The consultation closes to comments on 24 August 2021. If the FPC makes its proposed changes to the UK leverage ratio framework, the PRA proposes that the implementation date for changes to the definition of leverage exposure measure and reporting and disclosure will be 1 January 2022. Changes to scope and the level of application of the minimum requirement, buffers, and related additional reporting and disclosure requirements for firms that will be newly brought into scope of the leverage ratio minimum requirement will become effective on 1 January 2023.

Retail banking: FCA Dear CEO letter on common AML failings

The Financial Conduct Authority (FCA) has published a Dear CEO letter addressed to firms in its retail banking portfolio setting out action they need to take in response to common control failings in their anti-money laundering (AML) frameworks.

The FCA is disappointed to continue to identify common weaknesses among some firms in key areas of retail banks’ financial crime systems and control frameworks. These include in the areas of:

• governance and oversight;
• risk assessments;
• due diligence;
• transaction monitoring; and
• suspicious activity reports (SARs).

Details of the specific issues, where some firms have fallen short of their obligations under the FCA Handbook in SYSC 6.3, the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (the MLRs) and the JMLSG guidance on money laundering and terrorist financing, are set out in the Annex to the letter.

The FCA reminds firms that the senior managers and certification regime (SMCR) places a responsibility on all senior managers to counter the risk that their firm might be used to further financial crime. Particular responsibility lies with those SMCR roles holding responsibility for financial crime, including Senior Manager Function (SMF) 17 (Money Laundering Reporting Officer) and Prescribed Responsibility D (Financial Crime). In its supervisory work, the FCA will “continue to consider carefully whether the relevant SMF holders have carried out their responsibilities appropriately”.

The FCA expects all CEOs and their firm’s senior management to carefully consider the contents of the letter and take the necessary steps to assure themselves that their firm’s financial crime systems and controls are commensurate with the risk profile of the firm and meet the requirements of the MLRs. Firms are not required to respond to the letter but must complete a gap analysis against each of the common weaknesses identified by the FCA by 17 September 2021. Prompt and reasonable steps should be taken by firms to close any gaps identified. The senior manager holding the financial crime function should have sufficient seniority to be able to carry out the role effectively and to ensure that the gap analysis is completed promptly, and its findings shared internally and acted on, as appropriate. Firms should be able to demonstrate if required to do so that they have complied with the requirements of the letter.

Standards of Lending Practice: LSB guidance for smaller firms and new market entrants on good governance practices

The Lending Standards Board (LSB) has published guidance on good governance practices under its Standards of Lending Practice (Standards). The guidance is targeted at smaller firms and new market entrants, such as start-ups or FinTechs, who the LSB considers may find it a challenge to adhere to self-regulatory best practices like the Standards on top of the other statutory rules and regulations to which they are subject. It aims to help these firms understand how they can achieve better customer outcomes, and thereby adhere to the Standards, through systems, controls and governance arrangements that give them effective oversight, regardless of their size or resource.

The guidance is the first in the LSB’s three-part insight series, Standards for All.

CRR: Implementing Regulation extending transitional period relating to treatment of exposures to third-country CCPs

Implementing Regulation (EU) 2021/1043 on the extension of the transitional provisions related to own funds requirements for exposures to central counterparties (CCPs) set out in the Capital Requirements Regulation (CRR) has been published in the Official Journal of the European Union (OJ).

Article 497(1) of the CRR established a transitional period during which institutions may treat exposures to certain third-country CCPs as exposures to qualifying CCPs. This transitional period expires on 28 June 2021 in respect of certain third-country CCPs. The Implementing Regulation extends the transitional regime until 28 June 2022.

CRR: ECB Decision extending COVID-19 exclusion of certain central bank exposures from leverage ratio

Decision 2021/1074 of the European Central Bank (ECB) to extend the temporary exclusion of certain exposures to central banks from the total exposure measure in view of the COVID-19 pandemic has been published in the OJ. The Decision relates to Article 500b of the CRR, which was introduced by Regulation (EU) 2020/873 (COVID-19 CRR Amending Regulation) and ceased to apply on 27 June 2021. It allowed institutions to exclude exposures to their central bank from the total exposure measure where the institution’s competent authority had determined there are exceptional macro-economic circumstances. The Article 500b provisions on the exclusion of central bank exposures are replicated in a new Article 429a, which was inserted by CRR II and have applied since 29 June 2021.

The ECB has decided to extend the effect of the exclusion until 31 March 2022, as it considers that exceptional macro-economic circumstances continue to apply in respect of the eurozone.

CRR: EBA Decision confirming quality of unsolicited credit assessments of certain ECAIs

The European Banking Authority (EBA) has published Decision (EBA/DC/2021/397) amending the EBA Decision (EBA/DC/2016/151) confirming that the unsolicited credit assessments of certain external credit assessment institutions (ECAIs) do not differ in quality from their solicited credit assessments. The EBA developed the Decision on the basis of Article 138 of the Capital Requirements Regulation (575/2013) (CRR).

The EBA explains that the amended Decision confirms the quality of unsolicited credit assessments assigned by certain ECAIs for calculating institutions’ capital requirements. Institutions can only use unsolicited credit assessments of an ECAI for determining their own funds requirements if the EBA has confirmed that those unsolicited ratings do not differ in quality from solicited ratings of that same ECAI.

Since the last EBA Decision in July 2017, two additional ECAIs have been recognised and three ECAIs have been de-registered or de-certified. In addition, one registered ECAI has been renamed. The new Decision amends the 2016 Decision to reflect these developments. It is based on a quantitative and qualitative analysis, which have not yet been published.

The Decision will enter into force twenty days after it has been published in the OJ.

ECB options and discretions policies: ECB consultation

The European Central Bank (ECB) has launched a consultation on proposed updates to its harmonised policies for exercising the options and discretions that it is allowed to exercise under EU law when supervising banks. The ECB has published:

• a Q&A on its consultation proposals;
• a consultation paper on draft revisions to the ECG guide on options and discretions available in Union law;

• an explanatory memorandum on the review of its policies concerning the exercise of options and discretions;
• draft ECB Regulation amending Regulation (EU) 2016/445 on the exercise of options and discretions available in EU law;
• draft ECB Recommendation amending the ECB Recommendation ECB/2017/10 on common specifications for the exercise of some options and discretions available in Union law by national competent authorities in relation to less significant institutions; and
• draft ECB Guideline amending Guideline (EU) 2017/697 of the ECB on the exercise of options and discretions available in Union law by national competent authorities relating to less significant institutions.

The revisions primarily take account of legislative changes that have been adopted since the option and discretion policies were first published in 2016. The ECB states that most of the proposed changes relate to the application of liquidity requirements and that the consultation relates to many aspects of supervision, including permissions for banks seeking to reduce their capital, the treatment of certain exposures in the calculation of the leverage ratio as well as some exemptions from the large exposures limit.

The deadline for comments to the consultation is 23 August 2021. Once responses have been assessed, revised versions of the guide, Regulation, Guidelines and Recommendation will be published on the ECB’s website, together with the ECB’s evaluation of comments and its response.

Money laundering in the banking sector: European Court of Auditors report

The European Court of Auditors (ECA) has published a report about money laundering in the banking sector, titled “EU efforts to fight money laundering in the banking sector are fragmented and implementation is insufficient”.

The ECA states that it found institutional fragmentation and poor coordination at EU level when it came to actions to prevent money laundering and acting where risk was identified. It says EU bodies have limited tools to ensure sufficient application of AML/CFT frameworks at national level. In addition, there is no single EU supervisor, the EU’s powers are split between several bodies and coordination with member states is carried out separately. The ECA makes recommendations to remedy these issues.

EU Securitisation Regulation: EBA consults on draft RTS for risk retention requirements

The EBA is consulting on draft RTS specifying the requirements for originators, sponsors, original lenders and servicers relating to risk retention under Article 6(7) of the Securitisation Regulation. The draft RTS cover the following:

• requirements on the modalities of retaining risk;
• the measurement of the level of retention;
• the prohibition of hedging or selling the retained interest;
• the conditions for retention on a consolidated basis;
• the conditions for exempting transactions based on a clear, transparent and accessible index;
• the modalities of retaining risk in case of traditional securitisations of non-performing exposures; and
• the impact of fees paid to the retainer on the effective material net economic interest.

The consultation ends on 30 September 2021. Once concluded, the EBA will submit final draft RTS to the Commission for adoption.

CRD: EBA consults on revisions to guidelines on common supervisory procedures and methodologies for SREP and supervisory stress testing

The EBA has published a consultation paper on draft guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing under Article 107(3) of the Capital Requirements Directive (CRD).

The consultation sets out proposals for revisions to the EBA’s current guidelines. The main amendments implement requirements contained in CRR II and CRD V.

The consultation closes on 28 September 2021.

SFTs: BCBS finalises technical amendments on minimum haircut floors

The Basel Committee on Banking Supervision (BCBS) has published a technical amendment on minimum haircut floors for security financing transactions (SFTs). The technical amendment relates to CRE56, which sets out the calculation of minimum haircut floors on SFTs. The amendments are intended to clarify the application of the exemption for collateral upgrade transactions in CRE56.5 and to correct a formula in CRE56.10 used to calculate haircut floors for netting sets of SFTs.

The BCBS consulted on the technical amendment in January 2021. It has not changed the drafting of the technical amendment in response to feedback.

The BCBS expects its members to implement its standards on minimum haircut floors for SFTs in CRE56, which form part of the final Basel III reforms, by 1 January 2023.

Corporate debt workouts: FSB launches thematic peer review

The Financial Stability Board (FSB) has announced the launch of a thematic peer review on corporate debt workouts. The peer review will examine existing and planned out-of-court debt workouts frameworks in FSB jurisdictions. The implications for financial stability will form part of the review. Terms of reference provide more details on the objectives, scope and process for this review.

The deadline for providing feedback to the FSB is 9 August 2021. The peer review report is expected to be published in early 2022.