Greg Kilminster
Head of Product - Content
FRC launches market study on UK sustainability assurance services
The Financial Reporting Council (FRC) has launched its first market study to examine the UK market for sustainability assurance services. The study will evaluate the market’s effectiveness, the quality of assurance provided, and the costs and burdens on businesses. It will also focus on the market’s future development.
The FRC conducted an initial review in 2023, which identified three key areas for the market study:
Choice and competition: The goal is to understand whether UK companies have a wide range of options when selecting a sustainability assurance provider. This will involve examining the factors that drive their choices and determining if they have access to the necessary information to make informed decisions and receive high-quality assurance. Additionally, the FRC intends to explore the impact of their provider selection on competition within the market and examine how competition operates in this context.
Market capacity, opportunities, and barriers to entry/expansion: The aim is to assess suppliers’ capacity to meet the demand for sustainability assurance. Given the specialised expertise required, the FRC will investigate whether there are any labour market challenges in acquiring skilled staff. They will also assess whether firms perceive opportunities in this market and identify any barriers to entering or expanding their operations.
Regulatory framework: The aim is to understand how changes in international regulatory requirements could potentially influence the UK’s sustainability assurance market. The FRC is also interested in obtaining stakeholders’ perspectives on any desired developments in the UK market in light of these regulatory changes.
What’s next?
The FRC has invited comments and evidence by 13 June 2024. The market study is expected to conclude in early 2025.
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HMT publishes policy paper on CTPs designation
HM Treasury (HMT) has published a policy paper outlining its approach to designating critical third parties (CTPs) to the UK financial services sector. The paper details the criteria and procedures for designation as well as the communication and de-designation processes.
Some context
In 2022, the Government announced its plans to establish a regime for effectively managing the risks posed by CTPs. The Financial Services and Markets Act 2023 established the statutory framework for the regime, granting HMT the authority to designate a third-party service provider to the UK financial services sector as ‘critical’.
It also empowers the Bank of England (BoE), the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA) to set and enforce rules, gather information, and conduct investigations regarding designated CTPs.
In December 2023, the FCA, PRA, and BoE released a consultation paper (CP) outlining their proposed rules for CTPs (PRA CP26/23, FCA CP23/30), with a response deadline of 15 March 2024.
What’s next?
The PRA and BoE plan to issue a further consultation paper related to CTPs, which will include a draft statement of policy on their approach to the use of disciplinary powers. The FCA also intends to consult on its statement of policy around the same time.
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ECB fines Confédération Nationale du Crédit Mutuel €3.54 million
The European Central Bank (ECB) has fined Confédération Nationale du Crédit Mutuel €3.54 million for breaching requirements outlined in two ECB decisions on internal models.
What happened?
Between May 2021 and April 2022, the bank failed to apply floors set by the ECB for calculating credit risk for certain exposures when using its internal models to determine its risk-weighted assets. This negligence prevented the ECB from obtaining a comprehensive view of the bank’s risk profile.
The ECB classified one of the breaches as moderately severe and the other as minor.
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US agencies issue supplemental rulemaking on Community Reinvestment Act
The Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (Federal Reserve), and the Office of the Comptroller of the Currency (the Agencies) have issued supplemental rulemaking regarding the Community Reinvestment Act (CRA).
The supplemental rulemaking includes an interim final rule which extends the applicability date of certain provisions in the Community Reinvestment Act (CRA) and technical, non-substantive amendments to the CRA final rule and related agency regulations that reference it.
Some context
The CRA requires the agencies to assess a bank’s record of meeting the credit needs of its entire community, including low- and moderate-income neighbourhoods, consistent with the bank’s safe and sound operation. Upon completing this assessment, the statute requires the agencies to prepare a written evaluation of the institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighbourhoods. The statute further provides that each agency must consider a bank’s CRA performance in evaluating an application for a deposit facility by such institution.
In October 2023, the agencies issued the 2023 CRA final rule, amending their CRA regulations to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated.
The 2023 CRA final rule was published in the Federal Register on 1 February 2024, and it takes effect on 1 April 2024, with staggered applicability dates of 1 April 2024, 1 January 2026, and 1 January 2027.
What is changing?
The supplemental rulemaking includes an interim final rule and a technical corrections final rule as follows:
Interim final rule
The interim final rule revises the applicability date of two provisions in the 2023 CRA final rule, the facility-based assessment areas provision and the content and availability of public file provision, from 1 April 2024 to 1 January 2026.
The revisions will, among other things, make the provisions applicable concurrent with the definition of key terms, as well as reduce uncertainty and ensure consistency of the requirements applicable as of 1 January 2026.
Final rule technical corrections
The technical corrections to the final rules are:
- A correction to the applicability date of the public notice provision in the 2023 CRA final rule from 1 April 2024 to 1 January 2026, to clarify the requirement.
- A correction to the asset-size thresholds in the FDIC’s and Federal Reserve’s appendix G of the 2023 CRA final rule, which contains the CRA regulations in effect on 31 March 2024, to reflect updated asset-size thresholds since the issuance of the 2023 CRA final rule.
- Corrections to the Agencies’ agency-specific amendments in the 2023 CRA final rule to add a missing conforming amendment to the strategic plan provision and correct an otherwise incomplete cross-reference of an amendatory instruction for appendix B.
- Corrections to the Agencies’ CRA Sunshine regulations to update cross-references to the Agencies’ CRA regulations that will be out of date on 1 April 2024, when the 2023 CRA final rule becomes effective.
What’s next?
The interim final rule and technical corrections final rule are effective on 1 April 2024. The Agencies are requesting comments on the interim final rule for a period of 45 days after its publication in the Federal Register.
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FDIC issues proposed amendments to SoP on bank mergers
The Federal Deposit Insurance Corporation (FDIC) has released proposed amendments to its Statement of Policy (SoP) on bank merger transactions. This update follows the Office of the Comptroller of the Currency’s (OCC) issuance of a related Notice of Rule Proposal (NPR) in January.
What are the proposals?
The revised SoP, which is broadly aligned with the OCC NPR, takes a principles-based approach. It outlines the types of applications that require FDIC approval, addresses each statutory factor separately, and highlights other relevant considerations such as interstate mergers and applications from non-banks or non-traditional community banks.
This proposed SoP has sparked numerous comments from other agencies.
Rohit Chopra, Director of the Consumer Financial Protection Bureau (CFPB), stated, “The FDIC’s proposed Bank Merger Act Policy Statement would bring analytical rigour to merger review and better align the agency’s framework with the statute.”
Michael J. Hsu, Acting Comptroller of the Currency, added, “Merger applications that would diminish competition, hurt communities, or present systemic risks should be withdrawn or rejected. Today’s proposed Statement of Policy, like the OCC’s, aims to offer further clarity into how the statutory factors will be weighed to achieve these outcomes.”
What’s next?
The FDIC welcomes comments from all interested parties within 60 days of publication in the Federal Register.
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ESMA releases feedback to call for evidence on T+1
The European Securities and Markets Authority (ESMA) has issued feedback to its Call for Evidence on the potential reduction of the settlement cycle.
Some context
The Central Securities Depositories Regulation 2 (CSDR), adopted in 2014, mandates that all transactions in transferable securities completed on trading venues be settled within two business days of the trading event, the "T+2" settlement cycle.
In 2022, ESMA held consultative working groups with National Competent Authorities (NCAs) and industry representatives to discuss the possibility of shortening the settlement cycle.
Based on these conversations, ESMA released the call for evidence in October 2023.
It should be noted that the T+1 settlement cycle has already been established in the United States, with an implementation date of 28 May 2024.
Findings
ESMA has received 81 responses, and here is a summary of the feedback:
- The reduction will result in many operational impacts beyond adaptations of post-trade processes.
- Respondents identified a wide range of both potential costs and benefits of a shortened cycle, with some responses supporting a thorough impact assessment before deciding.
- Respondents provided suggestions around how and when a shorter settlement cycle could be achieved, with a strong demand for a clear signal from the regulatory front at the start of the work and clear coordination between regulators and the industry.
- Stakeholders made clear the need for a proactive approach to adapt their own processes to the transition to T+1 in other jurisdictions. Some responses warned about potential infringements due to the misalignment of the EU and North America settlement cycles that ESMA is currently assessing.
What’s next?
ESMA will continue assessing the responses received and include lessons learnt from the North American move to T+1, as well as any further feedback received from stakeholders in the APAC region.
ESMA intends to deliver its final assessment to the European Parliament and the Council before 17 January 2025.
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EU new digital hub allows firms to train AI models
Mairead McGuinness, European Commissioner responsible for financial services, has outlined the next phase of the European Commission’s (EC) Digital Finance Platform – the data hub.
McGuinness traced the recent evolution of digital finance noting that distributed ledger technology (DLT) and tokenisation are here to stay but adding that the introduction of artificial intelligence (AI) into the mix exposes consumers and finance to greater risks.
Noting that AI is built on data and “if you put rubbish in, you get rubbish out” McGuinness summarised recent regulatory developments to embrace digital benefits whilst avoiding risk.
- The Markets in Crypto-Assets Regulation, or MiCA, and that will apply from June of this year.
- The pilot DLT regime is in place.
- The AI Act is set to regulate the use of artificial intelligence in the European Union.
- The Digital Operational Resilience Act helps companies share data about cyber risks.
However, as well as regulation, McGuinness noted that the EC can support innovation in other ways such as with the launch of the Digital Finance Platform.
Launched two years ago, the idea of the Platform was to: “connect innovative financial companies and financial supervisors in the European Union...provide[s] resources, guidance, and networking opportunities for stakeholders in the digital finance ecosystem”.
The launch of the Data Hub is an attempt to encourage financial supervisors and innovative companies to work together through data sharing, providing secure access to data held by supervisors, to allow innovative companies to test new solutions and train AI models.
McGuinness explained that the Data Hub has been built using synthetic data: artificial data generated from original data thereby allowing financial supervisors to participate in the Data Hub – without making the original data they hold accessible to a third party.
McGuinness concluded by noting the amount of collaborative work that has gone into the creation of the Digital Hub between European authorities and market participants.
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