to the point: financial regulation | 12/2023

ESAs have released their Final Report proposing amendments to the draft Regulatory Technical Standards (RTS) linked to the Sustainable Finance Disclosure Regulation (SFDR). The key amendments include:

1. New Social Indicators: The ESAs recommend incorporating new social indicators into the disclosure framework, focusing on the impact of investment decisions on society.
2. Streamlining Environmental and Social Impact Disclosure: The proposal seeks to streamline the framework for disclosing the principal adverse impacts of investment decisions on both the environment and society.
3. Product Disclosures on Greenhouse Gas Emissions Reduction Targets: The ESAs suggest introducing new product disclosures for "greenhouse gas emissions reduction" targets.
4. Improved disclosures on ensuring that sustainable investments "Do No Significant Harm" (DNSH) to the environment and society.
5. Simplification of pre-contractual and periodic disclosure templates for financial products.
6. Technical adjustments related to derivatives treatment, sustainable investment calculations, and provisions for financial products with underlying investment options.

The European Commission will review the draft RTS within a three-month period to decide whether to endorse them.

The European Parliament's Economics and Monetary Affairs Committee voted to amend the proposed regulation on ESG rating activities by the European Commission. The amendments aim to enhance transparency and competition among ratings providers. They include:

1. Requirement for separate ESG scores instead of a single rating to prevent concealing low ratings for specific factors. If ratings are aggregated, providers must detail the weighting of each factor and justify their ratings.
2. Mandating information on how ratings align with key agreements like the Paris Agreement for environmental factors, International Labour Organisation conventions for social factors, and international standards for governance factors.
3. Encouraging a double materiality approach, prompting providers to disclose whether their analysis considers risks to the rated entity and the entity's impact on the environment and society.
4. Promoting competition by urging rated entities to choose at least one ESG rating provider with a market share below 15 % when seeking multiple ratings.

These amendments seek to foster transparency, prevent rating manipulation, and encourage diversity among ESG rating providers, aligning ratings more closely with critical global objectives and improving the overall quality of ESG assessments.

The European Council established its negotiating stance on the Corporate Sustainability Due Diligence Directive (CSDDD), (EC text available here) proposing three primary changes to the CSDDD framework:

1. Scope Reduction: The EC suggests narrowing the CSDDD scope through various modifications:
   • A phased-in application for "very large companies".
   • Revised criteria for "Group 2" companies, requiring a minimum turnover of EUR 20m in designated "high-impact sectors".
   • Shifting from "value chains" to "chain of activities", thereby reducing a company's due diligence obligations.
2. Alignment with the Reporting Directive: The EC aims for closer alignment with the Corporate Sustainability Reporting Directive.
3. Adjustments of Civil Liability and Director's Duties:
   • Omitting the expansion of a director's duty of care to cover human rights and climate change or environmental consequences.
   • Offering clearer conditions for civil liability, stipulating compensation for damages arising from a company's failure to adhere to CSDDD obligations.

The proposed changes aim to refine CSDDD regulations, focusing on a phased rollout, specificity in company categorisation, and clearer criteria for liability. The emphasis on aligning with reporting directives indicates an effort to harmonise sustainability-related regulations across corporate governance frameworks in the EU.

The ESMA released a Final Report regarding updated Guidelines on stress test scenarios for Money Market Funds (MMFs) under the Money Market Funds Regulation (MMFR). It includes a revamped methodology for implementing scenarios involving hypothetical changes in asset liquidity levels within MMF portfolios. It also involves the annual recalibration of risk parameters. The methodology updates are a response to stakeholder feedback, incorporating parameters that mirror liquidity stresses in money markets and a new risk factor simulating the impact of asset sales during stressed market conditions, represented by increased costs in selling securities due to limited buyers. The 2023 parameter update reflects prevailing systemic risks in the financial system amid prolonged low growth, heightened inflation and increased interest rates. Notably, the severity of stress test parameters regarding hypothetical interest rate movements has significantly increased compared to the 2022 Guidelines. Other scenarios have been updated with similar severity levels as the previous exercise.

The ESMA issued a Final Report outlining draft Regulatory Technical Standards (RTS) for the European Long-Term Investment Fund (ELTIF) regulation. These standards cover various aspects, including determining the compatibility of the ELTIF's lifespan with its underlying assets, features of the fund's redemption policy and cost disclosures. The report provides a detailed framework for minimum holding periods, maximum redemption frequencies, liquidity management tools, notice periods and the percentage of liquid assets eligible for redemption. The key proposals are:

1. Minimum Holding Period: ELTIF managers can choose a suitable minimum holding period based on RTS criteria and justification to the competent authority.
2. Maximum Redemption Frequency: Proposes a common standard for quarterly redemption frequency but allows ELTIF managers to deviate with justifications to the competent authority.
3. Choice of Liquidity Management Tools: Suggests mandatory anti-dilution mechanisms and redemption gates, permitting deviations under specific circumstances with competent authority justifications.
4. Notice Period and Maximum Percentage of Liquid Assets Redeemable: Sets minimum percentages of liquid assets based on notice periods and different maximum redemption percentages.
5. The final RTS aims for a balance between prescriptive rules and managerial discretion, enabling ELTIF managers to deviate under specific circumstances.

The EBA published updated Guidelines specifically tailored for the largest EU financial institutions surpassing a leverage ratio exposure of EUR 200bln. These Guidelines aim to harmonise practices, ensuring these institutions disclose critical values necessary for identifying and assessing Globally Systemically Important Institutions (G-SIIs) consistently. Through these updates, the EBA is seeking to enhance the transparency and effectiveness of G-SII identification processes. By aligning with international standards set by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB), these Guidelines not only meet but exceed minimum requirements. They extend the scope of disclosed information, offering a more comprehensive view than what is mandated by BCBS standards. The Guidelines are pivotal in ensuring a level playing field within the European financial market, ensuring fair competition and transparency. By disclosing more extensive and detailed information, they empower stakeholders and market participants with a clearer understanding of systemic importance indicators, fostering trust and informed decision-making. This approach supports financial stability and confidence in the EU banking sector.

The EBA has released Final Draft Implementing Technical Standards (ITS) on amendments to disclosure and reporting for the minimum requirement for own funds and eligible liabilities (MREL) and the total loss absorbency requirement (TLAC). These changes respond to the introduction of the "daisy chain" framework, which involves deducting investments in eligible liabilities instruments of entities within the same resolution group. They also address other alterations in the prudential framework. Effective from June 2024, these amendments adjust disclosure and reporting requirements in accordance with amendments to the Capital Requirements Regulation (CRR). They further clarify details based on the Single Rulebook Q&A process. Beyond the "daisy chain" framework, the adjustments encompass information on the prior permission regime for repurchasing eligible liabilities instruments issued by reporting entities and groups, along with a breakdown based on insolvency ranking. The EBA has updated the mapping between disclosure and reporting requirements, reflecting changes in both areas.

Council of the EU published a press release about reaching a provisional agreement with Parliament on amendments to the Solvency II Directive and new Insurance Recovery and Resolution Directive (IRRD). The amendments to Solvency II aim to encourage insurers to invest in long-term capital for the economy, especially towards initiatives like the Green Deal, while enhancing the industry's resilience and stability. They also focus on improving consumer protection and simplifying rules for smaller insurance companies. The EIOPA will have new responsibilities in framing secondary legislation to harmonise the implementation of the Directive across Member States. Regarding the IRRD, it aims to ensure better preparedness of insurers and authorities during significant financial distress, enabling timely intervention in crisis situations without impacting policyholders or necessitating taxpayer funds. The agreement outlines a harmonised European resolution regime, granting national authorities powers to intervene early and mandating the establishment of national insurance resolution authorities. It also requires (re)insurance companies to develop pre-emptive recovery plans and mandates resolution plans for larger market players. It equips resolution authorities with tools to address failures, especially in cross-border scenarios, while ensuring safeguards to protect policyholders' interests. The next steps involve finalising the agreements and seeking approval from Member States' representatives and the European Parliament.

December 2023 was a landmark month for CHF loans. On 7 December, the judgment of Case C-140/22 was handed down in which the Court of Justice of the European Union (CJEU) ruled that the obligation to make declarations resulting in the invalidity of a contract was incompatible with the provisions of Directive 93/12. Therefore, the CJEU indicated that it is the duty of the courts to review and exclude contractual terms that have an unfair character. However, the court's exclusion of unfair clauses cannot be subject to suspension or be made subject to additional conditions provided by the national law. The CJEU thus ruled on the right of consumers to receive the full value of their claims, without being reduced by the interest the bank would have received.

Just a week later, on 14 December, the judgment in Case C-28/22 was handed down, clarifying the situations in which claims are limited. According to the CJEU, the statute of limitations for a bank's claim cannot begin earlier than that of the consumer. Nor can such a situation be contingent on possible declarations resulting in nullity or the declaration of the contract as ineffective. The CJEU also referred to the "right of retention" exercised by banks. Banks thus cannot exercise the right of retention without limitation, since doing so would result in the loss of default interest for consumers.

At the end of December, the Polish Financial Supervisory Authority (PFSA) issued a statement on the operation of "family offices" consisting of activities conducted through entities based in Poland that offer wealth management services, including through informal cooperation and representation of clients in the purchase or sale of financial instruments. The issue caught the PFSA's attention because of the nature of the services, which may come under the brokerage activities that it regulates. According to the PFSA, the entities and their activities should be evaluated in view of the Polish Financial Instruments Trading Act, i.e. in terms of brokerage activities.

From the beginning of 2024, the PFSA will be the entity that supervises the activities of lending institutions regarding the provision of consumer credit. A business that grants or promises to grant consumer credit and that enters into a lease agreement obliging the consumer to purchase the subject of said agreement, or another agreement providing for the obligation to purchase the subject of the agreement, making it dependent on the borrower, is a lending institution for which registration in the register of lending institutions is required. As of 1 January 2024, such lending institutions may only carry out their activities after obtaining registration.