Avoiding the Impending Storm - Financial Risks from Climate Change

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In recent years, the effects of climate change have become more apparent, attracting attention from financial regulators globally. In a recent speech Sabine Lautenschläger, Member of the Executive Board of the ECB,  stated “climate change is not an issue for next century. It’s an issue for now, and it’s a topic not only for other sectors but also for the financial sector and for central bankers and supervisors”.1

The regulatory response to a transition to a greener economy is currently accelerating rapidly. A number of EU initiatives put climate change at the forefont of the financial regulatory agenda, and it is clear that the UK regulators will take an active lead.

Against a backdrop of institutional investor pressure and industry actions, central banks and regulators are placing a greater focus on the financial risks that arise from climate change. Banks and insurers incresingly need to think about how to adapt their business models and how the transition to a low-carbon economy may affect the business models and creditworthiness of the companies to which they are exposed.

The timeline below shows this regulatory response and the expected developments. We foresee regulators will continue to clarify their approach over the course of 2019.

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Posted on 20/05/2019 | 0 Comments

EU regulators recommend fresh legislation on cyber and IT risk in the financial sector

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In April, the Joint Committee of the European Supervisory Authorities (ESAs) published their advice to the European Commission on the strengthening of EU cyber and IT security regulation in the financial sector.

These recommendations are an early signal of what we believe will be increased activity by EU financial authorities on cyber risk from 2020 onwards. Going beyond cyber risk, they show an interesting convergence of thinking with UK authorities in recognising that all forms of IT operational disruptions increasingly threaten the stability of the financial sector. The recommendations also note that the emergence of various approaches to cyber and technology risk across countries in the EU could benefit from added facilitation, harmonisation and cooperation. While a number of regulatory challenges could arise from a strengthened EU approach to cyber risk in the financial sector, greater alignment between countries in addressing this risk area should be welcome news for cross-border financial services firms.

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Posted on 10/05/2019 | 0 Comments

FCA Business Plan 2019/20: continuity prevails, but the FCA also looks to the future of regulation and its interaction with wider social policy

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The FCA recently published its 2019/20 Business Plan, whose sector and cross sector priorities are summarised in the annex to this blog together with a timeline of key planned publications and pieces of work.

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Posted on 09/05/2019 | 0 Comments

EMIR Refitted?

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EMIR Refit, also referred to as EMIR 2.1, was signed off in the European Parliament plenary on 18 April, paving the way for it to enter into force, potentially as soon as this month.

Refit makes some targeted revisions to the clearing, risk mitigation, reporting and trade repository rules in the European Market Infrastructure Regulation (EMIR). It should not be confused with EMIR 2.2, which makes revisions to EMIR CCP supervision rules and was also signed off at the European Parliament plenary. While some of the Refit revisions aim to make rules simpler and more proportionate, others in effect are likely to increase the regulatory burden already faced by firms. How significant the impact of these modifications is likely to be will depend on a firm’s derivatives trading model, as well as other factors, such as whether it transacts with non-financial counterparties (NFCs), is a clearing member, or has EU-established Alternative Investment Funds (AIFs) in the group.

This blog provides an overview of some of the key requirements in Refit and the potential impact they will have on firms. Please see here for a more comprehensive look at the EMIR Refit changes.

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Posted on 08/05/2019 | 0 Comments

What lies in store for third-country firm access to the EU in a post-Brexit world?

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Despite the uncertainty that still surrounds the final date and terms on which the UK will leave the EU, many firms are already looking ahead to how they might optimise their post-Brexit business. Future EU market access, and the associated equivalence regimes, will be a fundamental consideration in this.

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Posted on 02/05/2019 | 0 Comments

Liquidity risk management for insurers – the challenge of CP4/19

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The PRA’s consultation paper on liquidity risk management for insurers (CP4/19), released in March 2019, represents a significant enhancement to the regulator’s expectations around the ways in which insurers should assess and manage liquidity risk. The expectations apply to firms across the UK insurance industry, whatever their business model.

Liquidity risk is already an explicit consideration which firms should evidence in their compliance with the Prudent Person Principle (PPP) section of Solvency II (article 132) which requires firms “to ensure the security, quality, [and] liquidity…of the firm as a whole”. The PRA is placing more emphasis on the PPP when engaging with firms, and the degree of compliance with CP4/19 will be an important piece of evidence.

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Posted on 25/04/2019 | 0 Comments

The FCA highlights the importance of firm culture and customer vulnerability as part of its debt management thematic review

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The FCA recently published the findings of its thematic review of the debt management sector (TR19/01), following up on its first review of the sector in 2015.

The first review found that the quality of debt advice received by consumers was often “very poor” and that “firms were treating customers unfairly.” These poor practices led the FCA to include the debt management sector as a priority area as part of its 2017/18 Business Plan.

This blog explores the main findings from the most recent review and sets out the wider lessons that can be drawn both for debt management firms and the consumer credit sector more generally.

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Posted on 24/04/2019 | 0 Comments

The EU ratifies its flagship bank capital package – but the story is far from over

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On 16 April, the European Parliament formally ratified the EU’s Risk Reduction Measures (RRM) package on bank capital and liquidity, clearing the way for the finalisation of one of the most significant pieces of EU-level banking regulation in years.

This has been more than two-and-a-half years in the making, with a long period of difficult political negotiations following the RRM’s proposal by the European Commission in November 2016. The RRM is a combination of the EU’s fifth Capital Requirements Directive (CRD5), the second Capital Requirements Regulation (CRR2), and the second Bank Recovery and Resolution Directive (BRRD2).

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Posted on 23/04/2019 | 0 Comments

Boosting Pillar Strength: PRA consults on enhancements to the Pillar 2 Framework

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In March 2019, the Prudential Regulation Authority (PRA) published consultation paper (CP 5/19) to update the Pillar 2 capital framework and to reflect on-going enhancements in setting the PRA buffer (Pillar 2B).

As the CP states, its key objective is to “...bring greater clarity, consistency and transparency to the PRA’s capital setting approach. In promoting a greater level of transparency, the PRA seeks to promote financial stability, the safety and soundness of PRA-authorised firms, and facilitate more informed and effective capital planning for banks.”

This CP is relevant to PRA-authorised banks, building societies and PRA-designated investment firms (‘firms’). This CP is not relevant to credit unions, insurance and reinsurance firms. It is open for review, question or comment by 13 June 2019 and the PRA proposes to implement it from 1 October 2019.

 

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Posted on 17/04/2019 | 0 Comments

Is post-Brexit regulation taking the high road or the low road?

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Two years ago, the Governor of the Bank of England made a speech warning of a fork in the road in terms of the global approach to financial services (FS) regulation and supervision. The high road - founded on a shared commitment to markets, common minimum global standards, strong regulatory cooperation and resilient institutions and markets - would likely lead to benefits for all. By contrast the low road would involve countries turning inwards and reducing reliance on each other’s financial systems, leading to fragmented markets, less competition and disrupted cross‑border investment.  

Two years on, and with Brexit looming, which road are we on?

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Posted on 10/04/2019 | 0 Comments

EIOPA embraces the latest trends in European conduct regulation on value for money, firm culture and customer vulnerability

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The European Insurance and Occupational Pensions Authority (EIOPA) recently published a framework to help EU national supervisors (also known as National Competent Authorities – NCAs) assess conduct risks throughout the lifecycle of insurance products. The framework is designed to foster supervisory convergence amongst EU supervisors, and to “provide input to the types of risks EIOPA and NCAs should focus on.”

Importantly, EIOPA has highlighted conduct themes that have been of growing importance and visibility across EU markets. These include the need for supervisors to assess firms’ culture; the importance of value for money as one of the key outcomes firms must deliver to consumers; and the need to protect more vulnerable groups of customers. Some of these conduct themes are already being pursued, to varying degrees, across the EU. However, EIOPA’s framework shows that they are also gathering momentum at a pan European level, and that EIOPA will, as part of its convergence remit, increasingly push for these issues to be scrutinised by supervisors across the EU.

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Posted on 09/04/2019 | 0 Comments