CUBE RegNews: 10th November

A selected summary of key developments for regulated financial institutions

Greg Kilminster

Greg Kilminster

Head of Product - Content

European Banking Authority consults on guidelines for credit servicers

The European Banking Authority (EBA) has initiated a consultation on its draft Guidelines on complaints handling by credit servicers under the Credit Servicers Directive (CSD). 

The EBA aims to extend the application of the existing Joint Committee Guidelines (JC Guidelines) on complaints handling to credit servicers under Directive 2021/2167. The JC Guidelines, developed by the three European Supervisory Authorities (ESAs), have been in effect since 2014, providing standardised procedures across the banking, investment, and insurance sectors. 

The proposed Guidelines, addressed to competent authorities under the CSD, specifically target credit servicers, outlining requirements for the establishment and maintenance of effective and transparent procedures for handling complaints from borrowers. These guidelines align with Article 24(1) of Directive (EU) 2021/2167 and mirror the JC Guidelines in terms of subject matter, scope, addressees, and definitions. 

The deadline for submissions is 9 February 2024.

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Bowman reiterates her concerns on recent regulatory proposals

In a speech at the New York Bankers Association’s Financial Services Forum Federal Reserve Governor Michelle W Bowman reiterated her concerns, expressed earlier in the week at another speech, regarding three key regulatory developments. 

Bowman addresses the significance of the proposed reforms to capital requirements for banks with assets exceeding $100 billion and queried again the critical question of whether the benefits of proposed changes outweigh the costs. The analysis recognised the importance of higher capital levels for the safety of the banking system but emphasised the need for a thorough evaluation of the balance between benefits and costs. She raised concerns about the substantial direct and indirect costs, potential impacts on market liquidity and lending, and the disproportionate harm to underserved markets. 

Bowman acknowledged increased public feedback process and the need to extend the comment period until mid-January 2024. She also noted the federal banking agencies efforts to gather more information about the potential impact of the proposal and recommended that: redundancy in the capital framework, calibration of the market risk capital rule, the efficiency of two standardised capital stacks, and punitive treatment of fee income should be the areas to be addressed. 

Community Reinvestment Act (CRA) implementation 

Bowman moved on to Community Reinvestment Act (CRA), expressing support for its goals but raising concerns about the final rule’s complexity, prescriptiveness, and potential disproportionate impact on community banks. The lack of recognition for differences in size, risk, and business models among community banks was emphasised, along with the potential unintended consequences for credit availability in certain communities. 

Interchange Fee Cap proposal 

The speech critiqued the Federal Reserve’s proposal to amend the regulatory cap on debit card interchange fees. Concerns were raised about potential costs to consumers, especially for smaller issuers, and the regressive impact on lower-volume issuers. The need for careful consideration of the proposal’s impact on financial institutions, particularly smaller ones, was highlighted. 

Climate guidance 

Bowman questioned the need and legal basis for recent guidance on climate-related financial risks. She raised concerns about the unclear expectations, significant compliance costs, potential impact on lending to certain industries, and the guidance’s departure from existing supervisory standards. 

Prioritisation of regulation and supervision: 

Bowman emphasised again the importance of appropriately calibrating and prioritising regulatory actions, noting concerns about recent regulatory changes that may not address core banking risks, potentially distracting banks from focusing on key risks. 

Bowman’s stance on the recent volume and materiality of regulatory reforms is clear. The challenges presented to banks in implementing proposed changes, and the potential unintended consequences that may arise demand a balanced approach that considers the benefits and costs of regulatory changes, with a focus on addressing identified shortcomings and without unduly burdening financial institutions. Hand in hand with this approach is the need for ongoing engagement with stakeholders to gather diverse perspectives and ensure a well-informed decision-making process. 

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SFC urges LCs to manage IPO risks amid FINI launch

The Hong Kong Securities and Futures Commission (SFC) has issued a reminder to licensed corporations (LCs) to prudently manage their risks when providing initial public offering (IPO) subscription and financing services to clients. The reminder comes as the Hong Kong Exchanges and Clearing Limited (HKEX) prepares to launch the Fast Interface for New Issuance (FINI) on 22 November 2023, which will streamline and digitalise the IPO settlement process in Hong Kong. 

Under FINI, the pre-funding mechanism for public offer tranches will be modified, which may affect the cash flow and liquidity of LCs. The SFC advises LCs to exercise prudent risk management and controls, and to implement effective measures to prevent any improper risk-taking activities, such as accepting large subscription orders without sufficient subscription deposits or providing excessive IPO financing to clients. 

The SFC also expects LCs to follow the following guidelines for prudent credit risk management and liquidity risk management: 

  • Ensure that clients have enough financial resources to settle their IPO obligations in full before accepting their orders, and impose upfront subscription deposit requirements on non-fully funded IPO orders where appropriate. 
  • Formulate a prudent credit policy for IPO financing and set appropriate credit limits for clients, considering the financial capability of the firm, the financial circumstances of the clients, the size of and demand for the IPOs and the prevailing market conditions. 
  • Properly justify any deviation from the credit policy and credit limits with a written risk assessment and obtain senior management’s approval for the deviation. 
  • Prepare sufficient cash or credit facilities with banks for IPO money settlement, and be aware of the consequences of settlement defaults by clearing participants. 

The SFC will continue to monitor the market developments and the conduct of LCs in relation to IPO activities, and will take appropriate regulatory actions if necessary. 

Click here to read the full RegInsight on CUBE’s RegPlatform

ESMA focuses on cyber risk

The European Securities and Markets Authority (ESMA) has announced a shift in its supervisory priorities, with a new focus on cyber risk, digital resilience, as well as its existing focus on ESG disclosures. The new Union Strategic Supervisory Priorities (USSPs) will come into force in 2025, at the same time as the Digital Operational Resilience Act (DORA). 

The move reflects the growing importance of these issues for the financial sector. Cyber-attacks are becoming more frequent and sophisticated, and digital transformation is introducing new risks. ESG disclosures are also essential for ensuring that investors can make informed decisions about their investments. 

Under the new USSPs, ESMA and national competent authorities (NCAs) will focus on: 

  • Reinforcing firms’ ICT risk management through close monitoring and supervisory actions, building new supervisory capacity and expertise. 
  • Tackling greenwashing, increasing investors’ understanding, and embedding sustainability requirements when firms advise investors. 
  • Continuing their work on data quality, leveraging on the new methodologies and tools developed through the previous USSP. 

ESMA has stated that the aim of the new USSPs is to keep pace with market and technological developments, and closely monitor potential contagion effects of attacks and disruptions across markets and firms. The new USSPs will also help to ensure that the EU financial sector is well-positioned to support the transition to a more sustainable economy. 

Click here to read the full RegInsight on CUBE’s RegPlatform