Considerations for firms

• Have we considered the full range of new regulations or amendments that will impact us directly or indirectly, and are we on track to update our approach to meet clients’ and supervisors’ expectations?
• Do we understand the extent of our own and our clients’ ESG exposures?

Climate-related financial risk:

The potential risks to financial stability from climate change are a key priority for prudential regulators. Guidance has been issued at a global level (BCBS principles for the effective management and supervision of climate-related financial risks and IAIS Application Paper on the Supervision of Climate-related risks in the Insurance Sector) and in the EU and UK (ECB Guidelines and PRA Supervisory Statement 3/19). In the UK, the PRA expects firms to “refine, innovate and integrate” climate-related financial risk management practices and all elements of the supervisory review cycle will include consideration of climate-related risks. The full range of supervisory powers will be exercised where firms are not deemed to have made sufficient progress, including risk management and governance-related capital scalars, capital add-ons or s166 ‘Skilled Person' reviews. Some firms will have to report on how they have embedded the management of climate-related financial risks into their existing risk management frameworks alongside their 2021/22 ICAAP (deposit-takers) or ORSA (insurers). Insurers are encouraged to conduct further research on emerging climate-related risks such as the potential impact of litigation risk on their balance sheets and the impact of physical risks on assets and liabilities.

In the EU, the ECB expects banks to proactively incorporate climate-related and environmental risks into their business strategies and governance and risk management frameworks. ESG risks will be integrated in the SREP together with thematic review of banks’ strategies and risk management frameworks and on-site inspections. Again, action will be taken where banks are not deemed to have made adequate progress. CRD6 would introduce 10 year+ time horizons for business strategy, planning and scenario analyses, requirements for plans to be reviewed at least every 2 years and incentives for banks to align their strategies with initiatives such as the EU Green Deal and EU Sustainable Finance Strategy. Supervisors would have powers to intervene in the case of misalignment. CRR3 would introduce a harmonised definition of ESG risks, consistent with the EBA’s June 2021 definition and reflecting environmental risks include factors explicitly related to the six objectives of the EU Taxonomy. ICLAAPs are to consider ESG risks for short, medium and long-term (greater than 10 years) horizons. The EBA will develop guidelines for banks to identify, measure, manage and report on ESG risks and develop quantifiable targets to monitor them. And the delivery date for the EBA’s report on the classification and prudential treatment of assets from a sustainability perspective has been brought forward from 28 June 2025 to 28 June 2023.

Following consultation and a pilot exercise, EIOPA has published its application guidance on how to reflect climate change in the ORSA, to support “forward-looking management” of climate change-related physical and transition risks. Under the Solvency II review, the European Commission proposed a mandate for EIOPA to consider whether a differentiated prudential treatment of exposures to assets and activities associated with environmental and/or social objectives would be justified, and to submit a report the Commission on its findings by end-June 2023. EIOPA is also required to review the scope and calibration of standard formula parameters with respect to natural catastrophe at least every three years, taking into account the latest available evidence on climate science.

Results of the BoE CBES for the largest UK banks and insurers and the ECB stress test for banks have now been published. As lessons are learned and modelling techniques become more sophisticated, regulators will likely refine their requirements and the standard of submissions expected. Firms’ results may also start to feed through more explicitly to capital calculations. The EBA will develop specific guidelines on climate related stress testing, update standards on supervisory reporting to include exposures to ESG risks and extend application of Pillar 3 disclosures to a significantly larger set of banks. For more on integrating climate-related financial risk into capital frameworks see Maintaining financial resilience.

Taxonomies

The development of taxonomies is intended to create consistent definitions for what can be considered as environmentally (or, in future, socially) sustainable. From 1 January 2022, EU firms are required to consider their alignment with the first two environmental objectives (climate risk mitigation and adaptation) of the EU Taxonomy Regulation. Gas and nuclear will be included in the Taxonomy as transitional activities under the Complementary Climate Delegated Regulation which will come into force on 1 January 2023. Requirements for the remaining four environmental objectives are expected to apply from January 2023 although Level 2 rules have yet to be issued. The Platform for Sustainable Finance has issued its final report on an EU Social Taxonomy – this will be challenging to implement and no clear timeline has been set out. Work on a UK Green Taxonomy is underway, as announced under the Government’s Greening Finance Roadmap in October 2021. The UK taxonomy is likely to follow the EU in terms of structure and objectives but specific definitions and treatment of the economic activities covered may diverge. Consultation on the first two objectives is due imminently, with legislation targeted by the end of 2022. Legislation on the first two objectives was expected by the end of 2022 but may be delayed. Consultation/legislation on the remaining objectives will then follow.

Reporting & disclosures

Corporate reporting: The new International Sustainability Standards Board (ISSB) has published its first two exposure drafts, building on the TCFD recommendations and providing an IFRS-style framework. Further standards will follow. TCFD-aligned disclosures are now mandatory for the largest UK firms, for accounting periods beginning on or after 1 January 2022, and requirements will extend to smaller firms over time. The EU’s proposed Corporate Sustainability Reporting Directive is being finalised – from 2024 it will apply to companies already subject to the Non-Financial Reporting Directive (NFRD). From 2025 it will then apply to large companies not subject to the NFRD, and from 2026 to certain additional companies. In May, the European Financial Reporting Advisory Group (EFRAG) delivered draft European Sustainability Reporting Standards (cross-cutting and topical) which will underpin the CSRD. And in the US, the SEC has published proposals to enhance and standardise climate-related disclosures for investors. Firms operating in multiple jurisdictions will need to assess the extent of convergence/divergence of reporting requirements – noting that there may be some provisions which enable compliance with one set of requirements to fulfil respective requirements in another jurisdiction. Common points of discussion are around whether to apply double or single materiality, thresholds and proportionality for reporting, and reporting on Scope 1, 2 and 3 emissions.

Market and client disclosures: Following publication of the EBA’s Final Draft Implementing Technical Standards for Pillar 3 ESG disclosures, EU banks will start to make quantitative and qualitative disclosures from June 2022, with scope expanding to 2024 when they will also have to report on their green asset ratio (GAR) and banking taxonomy alignment ratio (BTAR). Buy-side firms’ implementation of EU SFDR continues, ahead of the Level 2 rules coming into force from January 2023. The FCA will consult further in the autumn on the new Sustainability Disclosure Requirements (SDR) for asset owners and asset managers. SDR will build on the FCA’s application of the TCFD recommendations and incorporate ISSB standards, but the FCA also recognises that many UK firms’ EU operations are impacted by EU SFDR.

Transition planning: From 2023, the largest UK companies will be required to have a net zero transition plan. The Transition Planning Taskforce has a two year mandate to develop a gold standard for transition plans – the FCA will be actively involved. The Glasgow Financial Alliance for Net Zero (GFANZ) and the ISSB are also preparing guidance. The UK’s expectations on transition plans are likely to drive similar requirements in other countries/regions.

Expanding scope: The Task Force for Nature-related Disclosures (TNFD) has issued a beta framework and guidance which will be iterated several times until publication of the final framework in 2023. Reporting and disclosure requirements (e.g. EBA Pillar 3 disclosures, ISSB etc.) will expand over time to include the “S”.

Product labels and standards

The final EU Green Bond Standard (EU GBS) is yet to be issued. ESMA welcomed the potential of the proposals to help channel investment flows towards more sustainable activities, but noted challenges in three key areas: the timing of implementing measures — so-called “level 2” deliverables, the functioning of third country regimes and the appropriateness of the resourcing and funding model provided for ESMA's supervision, taking into account the need for external verifiers for third country regimes. The legislative proposal for an EU Ecolabel has been delayed due to ongoing work on Level 2 rules under the EU Taxonomy Regulation and SFDR. Meanwhile, an increasing number of national regulators are expressing concerns about how investment products are being marketed and are taking action. In the UK, in addition to the new SDR, the FCA has proposed a set of mandatory product labels. Pan-European operators may also have to adopt the new UK labels for any products manufactured or marketed in the UK. Meanwhile, we may see further commentary from regulators about what is required for a product to fall within SFDR Articles 8 and 9.

Data and ratings

IOSCO has called for oversight of ESG ratings and data product providers and published 10 recommendations aiming to increase trust in ESG ratings and data across: possible regulatory and supervisory approaches, internal processes for ratings and data providers, use of ratings and data products and the interactions of ESG ratings and data product providers with entities subject to assessment such providers. The FCA contributed to IOSCO’s work and issued a Feedback Statement in June which supports bringing ESG data and ratings providers within its regulatory perimeter. ESMA’s call for evidence on the markets structure of ESG rating providers in the EU found an immature but growing market which, following several years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers. ESMA’s work, together with a further targeted consultation by the EC will feed into the development of appropriate regulatory safeguards and potential supervisory approaches for ESG ratings providers, which, as in the UK, are currently outside the regulatory perimeter.

Carbon markets

Regulators are monitoring EU carbon markets closely as firms try to meet net zero targets. ESMA published its final report in response to the European Commission’s request for analysis of the trading of emission allowances and emission allowance derivatives. ESMA found no abnormality in the functioning of the EU carbon market from a financial supervisory perspective, but put forward a number of policy recommendations to improve market transparency and monitoring. It also identified two possible courses of actions for the European Commission to consider regarding the introduction of position limits on carbon derivatives – potentially through the legislative framework – and centralised market monitoring of the carbon market at EU level. The EU Commission will continue to work closely with national authorities to monitor developments. The UK’s consultation on developing its ETS has closed – proposals included alignment of the UK ETS cap with the UK's net zero target, extending coverage to include the domestic maritime and waste sectors, bringing methane and other greenhouse gases within scope, and the introduction of a Carbon Border Adjustment Mechanism (CBAM). The EU CBAM is more advanced in its development, having been approved by the EU Commission in March 2022 for phasing-in from 2023 with charges applied from 2026.

Portfolio management and advice

Since August 2022, amendments to Level 2 requirements for EU UCITS Management Companies, AIFMs and MiFID investment firms require them to integrate sustainability risks and sustainability factors into their approach. Firms need to take account of them across various areas including decision-making procedures and organisational structures, risk management, due diligence, resources, and conflicts of interest. The new requirements make the link between the Principal Adverse Indicators (PAIs) under the SFDR and the due diligence requirements for UCITS Man Cos and AIFMs. For MiFID investment firms, the amendments also introduce the concept of “sustainability preferences” into the investment advice and suitability process, as well new product governance requirements on manufacturers and distributors (the latter will apply from November 2022). Firms need to consider clients’ sustainability preferences in addition to their risk tolerance, and apply them to investment objectives. In the context of these developments there are also proposed EU guidelines that build on the new requirements. ESMA finalised updated guidelines regarding suitability in September 2022 and is expected to publish revised product governance in Q3 2022 and Q1 2023 respectively.

Considerations for firms

• Do we have a clear governance and control framework around the use of machine learning and AI?
• Have we considered potential future regulatory impacts of holding or operating with crypto-assets?

Crypto assets and CBDCs

Regulation is developing to bring crypto-assets within the regulatory perimeter. In the EU, the Markets In Crypto-assets (MICA) regulation will provide a regulatory and supervisory framework for stablecoins and unbacked cryptoassets. In the UK, HMT has confirmed that stablecoins will be regulated by amending e-money and payment services legislation. The FCA held an innovative ‘Crypto-sprint’ to gain industry input into crypto-asset regulation that will be consulted upon formally later in the year.

The second BCBS consultation on a prudential framework for crypto-assets continues to propose a conservative capital treatment. The PRA has already asked firms to consider how the existing prudential framework should be used to manage the risks associated with crypto-asset activity.

Regulators continue to warn consumers that these assets are not generally suitable as an investment or as a means of payment or exchange, and in the UK the financial promotions regime will be updated so that crypto-assets can only be promoted by authorised firm or after being approved by authorised firm.

However, firms are being encouraged to experiment using DLT in financial market infrastructure by a regulatory sandbox in the UK and the EU Pilot Regime.

The 2021 BIS survey showed most central banks are exploring CBDCs and that more than a half are developing or running concrete digital currency pilots. Many are exploring a CBDC ecosystem that involves private sector collaboration, particularly for customer facing activities, and interoperability with existing payment systems.

Artificial Intelligence and machine learning

Over the past year, a number of different regulators (IOSCO, EIOPA, BaFIN, BoE/FCA AI Public Private Forum) have issued guidelines and best practice on the use of AI in financial services. Common actions for firms fall into three main areas: data quality and governance – that data should be of sufficient quality to prevent biases and sufficiently broad to obtain logical results while still complying with data protection requirements; that models need to be designed so that they don’t reinforce biases, firms need to strive to use explainable and transparent AI models and all new models should be reviewed and signed-off; and that firms need to have a governance framework that allows for senior management oversight of the development, testing, deployment, monitoring and controls of AI and ML.

The BoE and the FCA will publish a joint Discussion Paper later in the year considering the appropriate role of regulators in supervising potential data and systemic risks which stem from firms' use of AI or machine learning systems.

The Artificial Intelligence Act proposed by the European Commission classifies AI activities into four tiers of risk with increasing levels of requirements, starting with transparency and voluntary codes of conducts, and escalating to ex-ante conformity assessments and ex-post quality and risk assessments and monitoring. Market participants’ feedback is that that there needs to be clarity on how the Act interacts with other cross-sectoral legislation such as GDPR and that it needs to be principles-based to future-proof requirements as the technology develops.

In the UK, the Office for AI (a collaboration between the DDCMS and BEIS), will set out a proposal for governing and regulating AI in a White Paper in 2022.

Platformisation, Big Tech in Finance

BigTech (technology conglomerates with extensive customer networks or platforms with core businesses in social media, telecommunications, internet search and e-commerce) can use the strong network effects and large amounts of consumer data they have to deliver tailored financial services and financial services to those underserved by traditional financial services. However, their expansion into financial services could happen very quickly and financial regulators are concerned this could cause risks to financial stability. This is compounded by the fact that although financial services offered by BigTechs may be subject to some activity-based regulations, BigTech firms themselves tend not be subject to comprehensive group regulations or oversight.

An area of particular concern to regulators is the provision of cloud services to financial services entities, where a strong dependence on only a few providers poses risks to the overall operational resilience of financial services – see more detail in Strengthening operational resilience.

Policy makers and regulators are considering how to manage these risks with a combination of entity- and activity-based regulation. The proposed EU Digital Services and Digital Market Acts contain targeted powers over platform providers and online gatekeepers. The draft UK Digital Markets, Competition and Consumer Bill would designate BigTech firms as having ‘Strategic Market Status’, obliging them to not abuse their dominant positions at the expense of consumers and other businesses.

The UK Financial Services & Markets Bill proposes to give rule-making and supervisory powers over critical third parties in the financial sector to the financial regulators.

Data sharing and innovation

In the UK, HMT, the CMA and the FCA want to build on the initial success of Open Banking and ensure it continues to support innovation and greater competition for consumers and businesses. They have outlined plans for the regulatory oversight framework of a successor body to the Open Banking Implementation Entity (OBIE) that will develop existing standards and deliver new proposals beyond those required under current regulations.

The European Commission is consulting on small changes to its Open Banking framework that would be implemented in a wider legislative proposal revising PSD2.

Building on the Open Banking framework, regulators are keen to develop ‘Open Finance’ that would allow consumers and SMEs to access and share their data on a wider range of financial products with third party providers. In the UK, the proposed Data Reform Bill will create a clearer regulatory environment for personal data that could help drive the adoption of Open Finance.

In the EU, the European Commission is consulting on how to develop open finance while retaining customer protection. The consultation also seeks views on the sharing of supervisory data for research and innovation and the possibility for financial institutions to exchange information and data to improve risk monitoring or compliance, while protecting data confidentiality.

The UK Government is also considering a framework for pension dashboards to allow easier access to pension information.

Considerations for firms

• Is our organisation structured to deal with the increasing regulatory change and supervisory scrutiny in the FMI sector?

Central Clearing

A joint workstream of the BCBS, CPMI and IOSCO continues to consider whether market participants were fully prepared for the margin calls they experienced at the onset of the COVID pandemic, their ability to liquidate assets to meet margin calls under stressed conditions, and the role of margining practices in amplifying the ‘dash for cash’. Volatility in the commodity markets following Russia's invasion of Ukraine prompted large margin calls and has further increased the regulatory focus on margin. ESMA is consulting on revision of the current calibration of the Anti-Procyclicality tools in the EMIR regulatory technical standards. CCPs and clearing members should expect greater supervisory scrutiny around their measures to limit pro-cyclicality and their operational management of margin and liquidity.

ESMA’s fourth CCP stress test addresses credit and concentration risks and, for the first time, covers operational risk. ESMA has also called for evidence on climate stress testing for CCPs. The BoE will conclude its first supervisory stress test of UK CCPs in 2022 and use the results to further develop its CCP supervisory stress testing framework.

Given the importance and interconnectedness of CCPs to financial stability, the FSB, again in coordination with CPMI and IOSCO, continues to review the sufficiency of the existing toolkit for CCP resolution, in particular in non-default loss scenarios. HMT, through the Financial Services & Markets Bill, will expand the UK resolution regime for CCPs to align it with the latest FSB guidance. ESMA has published its final report of regulatory technical standards and guidelines for implementation of the EU CCP Recovery and Resolution regime.

Regulatory frameworks that have been implemented in more established sectors, such as banking and insurance, are now being implemented or considered for CCPs. The BoE will be reviewing CCPs’ implementation of new UK operational resilience standards that came into force in April 2022. The BoE and HMT are considering how to implement the Senior Managers and Certification Regime for FMIs including CCPs.

Looking further ahead, CCPs are assessing the potential of new technologies, such as distributed ledger technology and cloud computing, to enhance the efficiency of IT processes and their integration into the wider market infrastructure. Regulators are likely to want CCPs to consider the operational and cyber resilience impacts of these new technologies, including oversight of critical third parties. They are also considering the role of CCPs in relation to crypto-assets.

Cross border access to CCPs is considered further in Redrawing the EU-UK border.

Data regulation

The FCA is concerned that that competition issues in the provision of market data may be leading to high pricing. This cost is either passed on to the end investor or limits access to data leading to less informed investment decisions by firms and consumers. The FCA is investigating whether high trading data costs and complex licensing terms and conditions are creating harm to users, in order to decide whether further guidance or policy action is needed. It will also carry out market studies on benchmarks and credit ratings provisions.

MiFID II/MiFIR set up the regulatory framework for consolidated tape of prices and volumes of financial instruments in the EU and this framework was also onshored in the UK post-Brexit. However, a consolidated tape has not emerged in either jurisdiction. As part of its November 2021 package of measures to promote growing retail participation in capital markets, the European Commission proposed a number of amendments to the MiFID II/MiFIR framework to encourage the emergence of a consolidated tape in the EU. HMT is amending legislation in the UK so that the FCA will be responsible for setting the requirements for the multiple competitive consolidated tape providers that HMT believes will deliver the best solution. Regulatory changes in both these areas could impact the business models of both data providers and consumers and is also likely to lead to changes in pre-and post trade data reporting formats and requirements.

For more information on ESG Data and Rating providers see Delivering sustainable finance.

Payments

There is continued activity in payments infrastructure, at both the low and high value ends of the spectrum. UK policymakers and regulators are seeking to establish a future-proofed payments infrastructure that is resilient, accessible, and functional with wide interoperability. The BoE continues its plans for the renewal of the RTGS service, moving to enhanced ISO 20022 for CHAPS payments (2023) with a new core settlement engine (2024). It is also proposing a new tariff framework for RTGS and CHAPS.

The PSR and Pay.UK continue work on transforming the retail interbank payments network into the New Payments Architecture (NPA) to deliver enhancements to payment services and increase choice. In December 2021, the PSR published an updated regulatory framework for the NPA, designed to minimise risks in the NPA ecosystem (such as monopoly, horizontal competition and vertical competition risks), followed by new Directions which came into force in January 2022 imposing requirements on Pay.UK as the operator of Bacs and Faster Payments. The PSR is also continuing work to strengthen competition between providers of card-acquiring services as they compete more vigorously for merchant business.

Whilst there is a strong focus on electronic payments, there is also continued recognition that access to cash is vital for many consumers and businesses, and regulators are committed to ensuring that cash and its supporting infrastructure is protected. In a joint statement, the BoE and FCA outlined the work that they are doing in this area, including continued monitoring and the exploration of sustainable and appropriate solutions. The FCA is also consulting on updates to strengthen its guidance on branch and ATM closures or conversions. Legislation to protect access to cash is included in the Financial Services and Markets Bill. And the PSR has issued a rule to the LINK ATM network operator requiring them to maintain the broad geographic spread of the UK’s free-to-use cash machine network.

In the EU, the ECB has published a new framework for overseeing electronic payment instruments, schemes and arrangements (PISA). This is designed to replace the Eurosystem's current oversight approach for payment instruments and complement its oversight of payment systems. PISA will also complement EU regulations on crypto-assets (including stablecoins) and international standards for global stablecoins.

In response to market evolution, the European Commission has begun a comprehensive review, including a targeted consultation, of the application and impact of PSDII to assess whether legislation remains fit for purpose and is delivering on its main objectives.

Fighting the rising incidence of fraud and scams is a key priority in the payments sector. The UK Financial Services and Markets Bill includes legislation enabling the PSR to require banks to reimburse authorised push payment scam losses. The PSR also considers the widespread adoption of confirmation of payee in UK payments to be a key priority to prevent certain types of scams and misdirected payments, and introduced new rules in February 2022 allowing more Payment Service Providers to work together to ensure customers are protected by the name-checking service.

The Government and regulators are committed to maintaining the UK’s leadership in the field of Open Banking. In a joint statement, the CMA, FCA and PSR set out their expectations of the entity replacing the Open Banking Implementation Entity (OBIE) and announced the creation of a Joint Regulatory Oversight Committee (JROC) to provide regulatory oversight of the OBIE successor, led by the FCA and PSR . The first meeting of JROC was held in June 2022. The PSR is also pursuing HMT designation of Open Banking payments as a payment system under the 2013 Financial Services (Banking Reform) Act (FSBRA).

Considerations for firms

• Are our regulatory monitoring and change processes set up to deal with diverging UK and EU capital markets regulation?
• Have we critically analysed our experience during the 2020 market stress and reassessed our liquidity risk management framework for each of the funds we manage?

MIFID II/MiFIR

HMT, following consultation, will be taking forward reforms to UK MiFID II. It has prioritised two areas: easing restrictions on where market participants can trade, with removal of the share trading obligation and the double volume cap, and reducing and simplifying the regulatory burden of the regime. Changes to take this forward include recalibrating the pre-and post-trade reporting regimes, changing the Systematic Internaliser calculation from a complex quantitative to a qualitative one and simplifying the commodities derivatives regime. HMT is also committed to supporting the emergence of a consolidated tape of prices and volumes which is consistent with the EC’s proposals for the MiFIR review (see more in the Data regulation section in Redrawing the EU:UK border).

The European Commission’s MiFIR review proposals include changing the double volume cap to a single volume cap, banning payment for order flow to try to improve best execution for investors and similar changes to the pre-and post trade reporting regimes.

The EU and UK proposals will both require legislative changes and amendments to technical standards/the rule book. The Commission's proposals are now being debated and negotiated by the European Parliament and the Council. HMT has included the UK legislative changes in the Financial Services and Markets Bill. ESMA and the FCA will issue further consultations on the technical standards/rule book changes over the next few months. The timing of all these changes is likely to be spread over the next year.

A wider MiFID II review proposal is expected in the near future, and is likely to cover investor protection obligations.

The differences in the proposals may further complicate the operating environment for firms. To plan effectively for the probable change needed to systems (and possibly business models), firms working in both jurisdictions will need to keep track of developments as the proposals are finalised.

Fund liquidity management

Liquidity management approaches and tools remain in the regulatory spotlight. MMF reform has progressed most quickly and following finalisation of the FSB’s proposals last autumn, consultation and discussion papers have now been published in the EU, UK and US. Open-ended funds more broadly have been subject to a longer debate – reviews by the FSB and IOSCO are due to conclude this year but outcomes are less certain. The regulation of exchange-traded funds (ETFs) has also been revisited by IOSCO, but no fundamental changes have been proposed (only good practices to address differences across jurisdictions). As well as tracking longer term regulatory developments, fund managers need to respond quickly to new and unexpected challenges. Russia’s invasion of Ukraine impacted markets and funds with exposure to Russian, Belarussian and Ukrainian assets. UK and EU supervisors have therefore been reiterating their expectations and considering additional options and guidance in this context (for example, the use of side pockets).

Primary markets

The European Commission is consulting on a proposed Listing Act with the aim of simplifying listing requirements to make public capital markets more attractive for EU companies and facilitate access to capital for SMEs. The consultation also reviews the impact of other regulations such as MAR and MiFID II on the listing process and the appropriateness of the current listing regime when considering an IPO via a Special Purpose Acquisition Companies (SPACs). The Commission will also be undertaking post-implementation reviews of the Prospectus and Transparency Directives.

In the UK, HMT and the FCA are implementing the recommendations of Lord Hill’s UK Listing Review and the Kalifa Review of UK Fintech.

The FCA has made changes to the listing regime to remove some of the barriers while still protecting market integrity. The FCA is still considering the feedback provided on the listing regime’s purpose and structure and is expected to lay out next steps shortly. HMT will alter the UK Prospectus Regulation so that prospectuses are not always needed for securities to be admitted to trading on UK markets, for secondary listing and where they have been listed overseas. Once these reforms been implemented the UK prospectus and public offerings regime will significantly diverge from the current EU regime. The reforms should offer companies raising capital in the UK more flexibility. The results of the HMT commission Secondary Captial Raising Review are also likely to prompt further changes to the regulatory framework to make secondary capital raising easier, and more efficient and a Digitisation Taskforce has been established to drive forward the modernisation of the UK’s shareholding framework.

LIBOR

From 1 January 2022, 24 of the 35 LIBOR settings, relating to specific currencies and time periods, are no longer available. Six sterling and yen LIBOR settings will continue for the duration of 2022 in a synthetic form based on risk free rates – the FCA is seeking market participants views on the timing of the winding down of GBP synthetic LIBOR. Regulators will continue to monitor firms wind-down of legacy LIBOR books, likely reviewing for unfair treatment of customers and impact on markets. Firms also need to be prepared to discuss with regulators their preparations for the end of the US LIBOR in June 2023 and evidence that they have ceased new use of US dollar LIBOR. Regulators expect firms to use the most robust alternative reference rates to LIBOR and expect any firm considering the use of credit-sensitive rates to assess the risks carefully. In the US, a federal LIBOR law was enacted on 15 March 2022 providing a solution for legacy contracts that have no workable fallbacks and a safe harbour for lenders who choose SOFR in relevant contracts.

Considerations for firms

• Are our existing governance arrangements keeping pace with regulators’ evolving expectations and incoming requirements?

Culture

Although regulators don’t prescribe what a firm’s culture should be exactly, supervisors view poor culture as a driver of harm. In response, they are aiming to address poor conduct and culture through day to day supervision (as seen in some of the FCA’s portfolio letters) as well as through newer, broader proposals. In the UK, the FCA’s proposed Consumer Duty seeks to bring about a more consumer-focused approach with outcomes that set expectations for firms’ cultures and behaviours. Similarly, the proposed EU Corporate Sustainability Due Diligence Directive will establish a duty to identify, bring to an end, prevent, mitigate and account for negative human rights and environmental impacts in a company’s own operations, its subsidiaries and its value chains. It will also introduce duties for directors of in-scope EU companies, including setting up and overseeing the implementation of due diligence processes and integrating due diligence into corporate strategy.

Accountability

The UK Government and regulators are expanding the scope of the UK Senior Management and Certification Regime to CCPs and CSDs and considering whether to expand it further to credit rating agencies and exchanges. The continued focus on full implementation and use of the regime is shown by the regulators consistently assigning relevant senior managers to be responsible for remediation work in their ‘Dear CEO’ letters.

In the EU, the ECB is showing an increased focus on ‘fit and proper’ assessments of ‘senior managers’ and the EBA and ESMA have updated their joint guidelines on the assessment of the suitability of members of the management body and key function holders.

Other jurisdictions are taking forward the implementation of their accountability regimes with developments in Ireland, Singapore, Hong Kong and Australia. Firms working across these jurisdictions face challenges in mapping the interaction and overlaps in their governance structures.

Oversight

The shift to remote and hybrid working has led to opportunities and challenges for all companies including regulated firms. Supervisors have also been considering their expectations in this context. In addition to setting out specific expectations regarding market abuse controls, the FCA has published general expectations for how firms operate their business and engage with the FCA and for notification requirements in the context of hybrid working. In the WAM sector, regulators continue to scrutinise fund governance and oversight. For example, in both the UK and the EU, regulators have reviewed the capabilities of third party fund management companies and investment managers. Depositary oversight is also a priority, most recently as set out in the FCA’s March 2022 portfolio letter and in ESMA’s planned 2022 discretionary peer review of depositary obligations, which was set out in ESMA’s annual work programme.

Diversity & Inclusion

Having consulted on changing the listing rules for company boards and executive committees in 2021, the FCA issued a Policy Statement in April 2022 mandating targets and disclosures for standard and premium issuers. In July 2021, the FCA, PRA and Bank of England published a Discussion Paper on improving diversity and inclusion in regulated firms. More is expected on this topic including a consultation in autumn 2022 and final policy in 2023. The FCA has cautioned that firms that do not embrace diversity of thought will struggle to serve the needs of a diverse customer base and manage risks effectively.

In the EU, the ECB consulted on revising its guide to fit and proper assessments and published an updated document that includes taking gender diversity into account as an element of collective suitability. Separately, the EBA published its final guidance on benchmarking the gender pay gap (including data collection from 2022). More broadly, the European Commission put forward proposals in 2021 on pay transparency.