Greg Kilminster
Head of Product - Content
ESMA fines Scope Ratings EUR 2.2 million for violating CRA regulation
The European Securities and Markets Authority (ESMA) has fined Scope Ratings (Scope) EUR 2,197,500 for violating the Credit Rating Agencies (CRA) regulation, specifically, conflict of interest requirements.
What happened?
Although Scope had policies and procedures in place to address conflicts of interest and other aspects of its operations, they were inadequate in ensuring compliance with the CRA regulation. Several issues were identified, including lack of clarity, undefined terms, uncertainty about the individuals to whom the policies were applied, and absence of steps for suspected policy violations.
There were also shortcomings in addressing conflicts of interest, including lack of clarity on identifying, managing, and disclosing conflicts, as well as situations where an entity holds 5% or more of Scope’s capital or voting rights.
Additionally, Scope’s policies did not address the provision of ancillary services.
ESMA determined that all breaches resulted from Scope’s negligence. When calculating the fine, ESMA considered both aggravating and mitigating factors outlined in the CRA regulation.
Click here to read the full RegInsight on CUBE’s RegPlatform
MAS updates framework for financial institution risk assessment
The Monetary Authority of Singapore (MAS) has updated its framework for impact and risk assessment of financial institutions.
The document contains information on MAS’ risk-based supervision of financial institutions, such as how MAS assesses financial institutions’ impact, the use of the comprehensive risk assessment framework and techniques to assess their risks, and the frameworks for identifying and supervising domestic systemically important banks (D-SIBs) and domestic systemically important insurers (D-SIIs) in Singapore.
The update primarily reflects the adoption of the new framework for D-SIIs, published on 21 September 2023 and effective from 1 January 2024.
Click here to read the full RegInsight on CUBE’s RegPlatform
US and Canada join forces to combat fraud
The US Federal Trade Commission (FTC) has announced a new collaboration with consumer protection and law enforcement agencies from the United States and Canada in a joint effort to combat fraud. This partnership includes the Canada Competition Bureau, the current chair of the partnership, as well as the US Postal Inspection Service, the US Secret Service, the Canadian Anti-Fraud Centre, Canada Post, the Canada Revenue Agency, and several local police departments in Quebec.
The primary focus of this collaboration is public outreach to raise awareness and prevent fraud.
The partnership will involve sharing intelligence, complaints, and other relevant materials, as well as providing investigative assistance. Besides enforcement efforts, the participants will work together on initiatives and consumer education programs and utilise different media platforms to promote awareness and provide guidance on avoiding investment, tax, and package delivery scams.
Click here to read the full RegInsight on CUBE’s RegPlatform
ECB speech on digital finance and regulatory stability
In a speech at the Future of Digitalisation and Finance symposium in Frankfurt, Claudia Buch, Chair of the Supervisory Board of the European Central Bank (ECB), discussed the implications of digital finance and its effect on banking stability.
Buch began by posing three questions arising from the transformative effect of digitalisation:
- Are we witnessing a technological breakthrough in financial services provision?
- How does digitalisation affect banks’ risk/return trade-off?
- How should regulators respond to these trends?
To try to address these questions, she briefly outlined the banking competitive landscape and particularly three shifts:
- The pace of growth of internationalisation within banking.
- The increase in competition to banks from non-banking entities (e.g. bigtech and fintech startups).
- How digitalisation is changing the way in which financial services can be bundled together.
Buch then discussed how digitalisation has had a profound impact on the stability of banks and the regulatory landscape surrounding financial services. The ongoing debate centres on whether digitalisation has enhanced or diminished competition within financial services and how this, in turn, influences stability and the risk/return trade-off within the banking sector.
On one hand, limited competition may bolster stability as it encourages banks to invest in safer assets to protect their monopoly rents. Conversely, less competition can lead to increased instability, with dominant banks setting higher interest rates, enticing borrowers into riskier ventures and thus elevating overall risk. The evidence suggests that the risk/return dynamics in banking are contingent upon various factors including the types of risk and the business models under consideration.
Buch argued that over the past three decades, several trends have reshaped the risk/return trade-off.
- Internationalisation has allowed banks to diversify risks across different markets, enhancing stability. However, it also facilitates the transmission of financial shocks across borders, potentially destabilising interconnected banking systems.
- The establishment of a banking union, notably through the Single Supervisory Mechanism (SSM), addresses vulnerabilities and enhances integration within the European banking sector.
- The growth of Non-Bank Financial Institutions (NBFIs) diversifies risks but introduces new vulnerabilities, such as liquidity squeezes and interconnectedness with traditional banks.
- Digitalisation introduces both risks and opportunities. Cyber threats and reliance on third-party providers pose risks, while concentration within the financial sector may enhance profitability and resilience.
Noting the need for regulatory responses to adapt to these changes, Buch cited the current ECB cyber resilience stress test being carried out on more than 100 banks and the introduction of the Digital Operational Resilience Act (DORA) to provide supervisory authorities with more competencies for the oversight and supervision of banks’ outsourcing activities.
She also highlighted the roles that the Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) have played in helping supervise the international, borderless nature of digitised banking. Noting the post-2008 crisis requirements to enhance banks’ capitalisation, Buch said the same risks need to be addressed for NBFIs which: “need sufficient resilience to reduce the likelihood of distress and to mitigate the amplification of shocks, taking a systemic perspective rather than focusing solely on individual institutions”.
She also pointed out that, despite the relatively small market capitalisation of cryptoassets, regulators need to be mindful of future systemic risk. Hence the welcome introduction of the Markets in Crypto-Assets (MiCa) regulation.
In the evolving digital financial landscape, Buch concluded, the convergence of traditional policy domains presents a new challenge. Digital financial services blend banking, investment, and insurance elements, affecting multiple policy areas. Consequently, prudential supervisors must collaborate not only among themselves but also with competition authorities to grasp the complex market dynamics. This coordination is essential to prevent the potential destabilisation of financial markets resulting from digitalisation and the growing influence of third-party service providers.
Click here to read the full RegInsight on CUBE’s RegPlatform
APRA speech: the importance of proportionality in banking regulation
In a speech at the Customer Owned Banking Association (COBA) CEO and Director Forum, Australian Prudential Regulation Authority (APRA) member Therese McCarthy Hockey discussed the regulatory approach of APRA and its efforts to address the concerns of the mutual banking sector.
McCarthy Hockey begins by emphasising APRA's commitment to proportionality in regulation: a fundamental principle for risk-based financial safety regulation.
Referring to the March 2023 banking crisis, McCarthy Hockey noted the array of risks banks now need to monitor, as well as the increasing reliance on third parties and the increased risk that too brings.
She noted that APRA’s response to these challenges was to be forward looking, to look at strengthening banks’ liquidity requirements and management of interest-rate risk, as well as introducing a new standard on operational risk management. She moved on to discuss how APRA continues to address the banking sector’s concerns on the regulatory burden.
She began by covering the Financial Accountability Regime (FAR) which came into force for banks this month, noting how APRA had supported amendments to reduce unnecessary reporting burden by ensuring the definitions aligned with APRA’s own distinction between significant and non-significant financial institutions (SFIs and non-SFIs), hence bringing more proportionality to the regulatory regime with limited requirements for smaller institutions, commensurate with their lower systemic importance and complexity.
McCarthy Hockey added that proportionality was not the only tool hoever to reduce regulatory burden, adding that the Modernising the Prudential Architecture (MPA) initiative aimed to both reduce the prudential regulatory framework and, by digitising the Prudential Handbook, make navigation easier.
She added that complementary to this work is a commitment to increase transparency, giving a recent example of adding commentary on the rationale for new policies and consultations to aid understanding.
Finally, McCarthy Hockey commented on the recent announcement by the Australian Government of a new financial sector regulatory grid, aimed at helping coordinate, formalise and clarify various regulatory initiatives from Australian regulators: she remains convinced of the benefits of the grid in helping firms get to grips with the pace of regulatory change.
In concluding, McCarthy Hockey reaffirmed APRA's commitment to proportionality and risk-based regulation while acknowledging the sector's challenges and evolving risks. She reminded banks of the need to stay vigilant, understand emerging risks, and adapt to changing market dynamics to ensure long-term sustainability.
Click here to read the full RegInsight on CUBE’s RegPlatform