to the point: financial regulation | 11/2023

The LMA provided information that on 21November 2023, the European Commission officially published the EU Taxonomy Environmental Delegated Act (TEDA) and the Climate Delegated Act (CDA) in the Official Journal of the European Union. The TEDA outlines the technical screening criteria to assess whether economic activities significantly contribute to sustainable use and protection of water and marine resources, the transition to a circular economy, biodiversity and ecosystems, as well as pollution prevention and control. Meanwhile, the CDA provides the technical screening criteria to ascertain whether specific economic activities substantially contribute to climate change mitigation or adaptation. Following their publication, the Delegated Acts will come into force as of 1 January 2024.

The LMA published news about the European Commission publishing the Energy Efficiency Financial Institutions Group (EEFIG) working group's final report focusing on integrating the energy efficiency first principle into financial institutions, a crucial aspect of the European Union's energy strategy. The energy efficiency first approach prioritises consideration given to cost-effective energy efficiency measures in energy planning, policies and investment decisions to enhance energy demand and supply efficiency. Established by the Energy Efficiency Directive as a fundamental component of the EU's energy strategy, this principle aims to reduce energy consumption and production. The report includes recommendations for financial institutions across three levels: (i) policy and governance; (ii) portfolio; and (iii) transaction. These recommendations encompass 25 tools, such as measuring portfolio energy efficiency. At the transaction level, the recommendations advocate for assisting clients in identifying and evaluating energy efficiency aspects within projects and assets. Adopting these recommendations not only enables financial institutions to reform their practices, but also facilitates financing for energy efficiency measures aligning with climate change targets. Finally, the report extends recommendations to other stakeholders and policymakers, emphasising the need to enhance capacity for implementing energy efficiency measures.

The Council and the European Parliament have reached a political agreement on the instant payments regulation proposal, which will improve the availability of instant payment options in euro to consumers and businesses in the EU and in EEA countries. The key points are:

1. Strategic Autonomy Enhancement: the agreement aims to reduce overreliance on third-country financial institutions and infrastructure, thereby improving the strategic autonomy of the European economic and financial sector;
2. Instant Payment Features: instant payments allow money transfers within ten seconds, round the clock, including outside regular business hours, not only within a country but also across EU Member States;
3. Obligations for Payment Service Providers: payment service providers offering standard euro credit transfers will be mandated to provide instant payment services in euros, with charges for instant payments not being able to exceed those for standard credit transfers;
4. Access for Payment Institutions: payment and e-money institutions will gain access to payment systems, mandating them to offer instant credit transfers after a transitional period;
5. Verification Measures: instant payment providers will be required to verify the beneficiary's IBAN and name match, enhancing security by alerting the payer to potential errors or fraud (this verification applies to regular transfers as well);
6. Review Clause: a review clause has been included, requiring the Commission to present a report assessing the evolution of credit charges.

The Council has approved a regulation establishing the European Single Access Point (ESAP), a platform set to provide investors with easy access to financial and sustainability-related information about EU companies and investment products. This initiative aims to offer a centralised, user-friendly and digital resource, enhancing transparency for investors. It will particularly benefit smaller companies in smaller capital markets. The ESAP will offer free access to existing public information, ensuring that investors have comparable data for decision-making without imposing additional reporting requirements on companies. The ESAP platform is expected to be available from summer 2027.

ESAs have released two amended Implementing Technical Standards (ITS) on the mapping of credit assessments from External Credit Assessment Institutions (ECAIs) in accordance with the Capital Requirements Regulation (CRR) and the Solvency II Directive, reflecting the assessment of the adequacy of current mappings and the deregistration of three credit rating agencies. The updated ITS propose changes in credit quality step allocation for four ECAIs and introduce new or revised credit rating scales for seven ECAIs. Additionally, the amendments exclude mapping tables for the three revoked ECAIs.

The Council has adopted a regulation aimed at modernising the rules on governing Central Securities Depositories (CSDs). This new law intends to lighten the financial and regulatory load on CSDs, making it easier for them to function across borders while reinforcing financial stability. The regulation seeks to cut compliance costs and administrative burdens, enhancing EU securities settlement efficiency and fostering cross-border CSD services while strengthening supervisory cooperation. The updated rules streamline the procedure for CSDs from one EU state to offer services in another, reducing barriers to cross-border settlement and easing administrative and financial constraints. It establishes a college for significant cross-border CSD activities, allowing better supervision and access to information on non-EU CSDs operating in the EU. Furthermore, settlement efficiency should be enhanced by refining elements of the settlement discipline regime, minimising the need for mandatory buy-ins except as a last resort. Conditions are outlined for CSDs to access banking-type services across currencies and borders, broadening their service scope. The regulation will enter into force 20 days after its publication in the Official Journal of the EU.

In its press release the EFAMA praises the European Commission and co-legislators for maintaining the core principles of the AIFMD and UCITS during their review, recognising these directives as vital for a strong funds market and the Capital Markets Union. While the delegation framework mostly stays unchanged, new reporting requirements enhance transparency but might create some duplication. The flexibility in liquidity tools benefits asset managers, but interventions in redemptions and subscriptions are limited under specific conditions. Regarding the revised AIFMD, the EFAMA acknowledges the allowance for cross-country depositary appointments in particular cases, but opposes a full EU depositary passport, citing concerns about potential implications for investor protection. Concerns also arise about how loan-originating funds fit within the AIFMD and the impact of retention requirements on fund risk management. Finally, the EFAMA questions references to "undue costs" within the AIFMD, asserting its mismatch with the directive's focus and the ongoing ESMA reports on AIFs and UCITS.

The EBA recently released final Draft Regulatory Technical Standards (RTS) outlining the assessment methodology used by competent authorities to verify institutions' adherence to internal model requirements under the Fundamental Review of the Trading Book (FRTB) rules. These standards are part of the EBA's phase 4 deliverables of the EBA roadmap on market risk and counterparty credit risk approaches. Among other things, the RTS offer clarity on how competent authorities assess compliance with FRTB requirements, focusing on governance, internal risk-measurement models (expected shortfall and stress scenario risk measure), and internal default risk models. The RTS also prescribe mandatory assessment techniques while leaving some optional, depending on the institution's circumstances, ensuring clarity on the expectations institutions face during investigations by competent authorities. Institutions aiming to use the new internal model approach (IMA) for calculating market risk-based capital requirements must secure approval from their competent authority, which involves a comprehensive assessment of the institution's internal model to ensure compliance with the respective regulatory provisions.

The EBA has unveiled the final templates designated for gathering climate-related data from EU banks in the context of the Fit-for-55 climate risk scenario analysis. These templates come with comprehensive guidance, outlining definitions and rules for compiling the data. The EBA has also disclosed a list of banks participating in this exercise. These templates are specifically crafted to conduct a data collection initiative among 110 EU banks, aiming to capture both climate-related and financial information concerning credit risk, market risk and real estate risk. The data collection process involves two crucial aspects: aggregated and counterparty-level data. Aggregated data will offer insights into the broader climate-related risks prevailing across the banking sector, while the inclusion of counterparty-level data will enable a thorough assessment of concentration risk associated with substantial climate exposures and facilitate the identification of amplification mechanisms and secondary impacts.

The ECB has recently approved Scope Ratings GmbH as a new external credit assessment institution (ECAI) within the Eurosystem Credit Assessment Framework (ECAF). This acceptance is contingent upon Scope Ratings meeting compliance requirements for Eurosystem eligibility. Although Scope Ratings' Asset-Backed Securities (ABS) ratings are currently not aligned with these requirements, the ECB will integrate the agency into its infrastructure, a process expected to take several months. The go-live date for Scope Ratings' use in monetary policy will be announced on the ECB's website. The ECB also ensures ongoing due diligence on all accepted ECAIs and their ratings, emphasising the avoidance of solely relying on external ratings while supervising credit rating agencies through the European Securities and Markets Authority (ESMA).

The EBA extended its anti-money laundering and terrorism financing (AML/CFT) guidelines to cover supervisors of crypto-asset service providers (CASPs), as they outline clear steps for identifying and managing financial crime risks in this sector. By expanding these guidelines, EBA aims to establish a unified approach among EU member states for supervising CASPs and addressing their potential AML/CFT risks. The guidelines stress the need for uniform supervisory expectations, highlight the importance of training for competent authority staff, and lay the groundwork for forthcoming specific guidance tailored for CASPs. The amended guidelines will come into effect as of 30 December 2024, with a two-month compliance reporting period for competent authorities.

The Czech National Bank (CNB) published a call on entities providing or planning to provide services in the field of crypto-assets to express their interest in obtaining the pertinent licence under the MiCA The call applies to providers of crypto-asset-related services under Title V of MiCA, issuers of asset-linked tokens under Title III of MiCA, or electronic money issuers (EMI or VEPMR) issuing tokens under Title IV of MiCA. The call does not apply to credit institutions, central securities depositories, securities dealers, market operators, electronic money institutions (EMIs), small-scale electronic money issuers (SSMEs), UCITS management companies and alternative investment fund managers. The respective entities will provide the CNB with information via a form for expressing interest in obtaining the MiCA licence.

The Government of the Czech Republic has just completed the comment procedure on the Draft of the Digital Finance Act, which will implement the DORA and MiCA regulations into the Czech legal system. Among other things, the draft contains a regulation of offences and the powers of the CNB as a supervisory authority, or a special regime for the reserve of assets of issuers of asset-linked tokens or electronic money tokens. In line with the requirements of both Regulations, the effectiveness of the Act is proposed for 30 June 2024, 30 December 2024 and 17 January 2025.

The FAO published information that on 10 November 2023, the EC released a consolidated list of functions that confer the status of a Politically Exposed Person (PEP) within the EU's Member States, international organisations accredited to these states, and institutions and bodies of the EU. This list contains specific positions across individual EU Member States, international organisations linked to these states, and EU institutions that grant individuals the PEP status as defined in Section 4(5)(a) of the Czech AML Act. For more details on this list and its utilisation concerning foreign PEPs, additional information and guidance are available on the FAO's website here.

The Austrian Financial Market Authority (FMA) published a revised set of minimum standards concerning the conduct of due diligence procedures when entering into business relationships with counterparties. The new rules are geared towards all asset managers of collective investment funds whose main task is the management of third-party assets (i.e. AIFMs, management companies, severance funds, etc.). These recommendations focus on the performance and documentation of due diligence for the purpose of selecting and monitoring business partners. Key changes include an update on the legal provisions, clarifications regarding the frequency of required audit procedures and additional enhanced due diligence measures.

On 10 November 2023, the Polish Financial Supervision Commission (FSC) published notice on the use of services of crowdfunding platforms for economic purposes. Crowdfunding platforms can be divided by their investment profile, which deals with raising capital from investors for project owners, and by their lending profile, which aims to broker loans from investors to project owners.

Under the transitional regulations in effect until November 10, 2023, platforms were allowed to operate without a license, but this was limited to promotional activities related to public offerings or loan offerings. After the transition period, the company will be required to obtain the appropriate permit from the FSC to continue operating. As of 9 November 2023, the FSC has granted one loan and two investment permits.

The regulations provide for a fine of up to PLN 5m for carrying out activities related to the provision of crowdfunding or similar services without a permit.

On 13 November 2023, the Government submitted to the Parliament an important draft bill to amend the Payment Services and Payment Systems Act, with respect to Bulgaria's adoption of the euro and accession to the Eurozone scheduled for January 2025. When the bill is adopted and becomes a binding piece of legislation, it will have wide-ranging effects not limited to financial and payment relations only.