Global Regulator & Central Bank News Roundup
Volume 49/2023 (December 18 – December 24)
Your weekly summary of key regulatory updates in an objective bite-size format, drawing on official news and press releases from 700+ financial services regulators, central banks as well as global and regional standard setters. For more current updates, visit Regxplora, Regxelerator’s end-to-end automated and generative AI-powered financial regulatory intelligence platform. Sign up here to receive the roundup via email.
Themes covered in this edition
- Prudential & financial stability
- AML & CFT
- Conduct & consumer protection
- Fintech & ecosystem innovation
- Payments & currency
- Other transversal themes
- Cross-border cooperation
Prudential & financial stability
FSB and IOSCO Issue Revised Policy Framework to Mitigate Liquidity Risks in Open-Ended Funds
The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) have jointly published revised policy recommendations and guidance to address vulnerabilities from liquidity mismatch in open-ended funds (OEFs). The FSB’s Revised Recommendations aim to enhance the regulatory and supervisory framework for OEFs by providing clarity on redemption terms based on asset liquidity and promoting the inclusion and consistent use of anti-dilution Liquidity Management Tools (LMTs). IOSCO’s Guidance supports these objectives by detailing the design and operational considerations for anti-dilution LMTs, ensuring they impose fair transaction costs on investors to mitigate dilution and first-mover advantage. Both organizations will review implementation progress, with a stocktake planned by the end of 2026 and a comprehensive assessment by 2028 to determine if the reforms have sufficiently mitigated financial stability risks.
FINMA Issues Analysis on Credit Suisse Turmoil
The Swiss Financial Market Supervisory Authority (FINMA) has released a comprehensive report on the Credit Suisse crisis, detailing the bank’s trajectory from 2008 to 2023, including its strategic missteps, management failures, and risk management issues that culminated in a significant loss of confidence by clients, investors, and markets. The report also scrutinizes FINMA’s own supervisory actions over the bank, highlighting the extensive measures taken to address deficiencies in corporate governance and risk culture, as well as the preparation for potential crises. Despite these efforts, Credit Suisse faced a risk of insolvency in March 2023, prompting decisive interventions by the Confederation, SNB, and FINMA to ensure solvency and facilitate the bank’s acquisition by UBS, thereby preserving financial stability. The report draws several lessons, advocating for a stronger legal framework, including the introduction of a Senior Managers Regime, the ability to impose fines, and enhanced corporate governance rules. FINMA also plans to refine its supervisory approach, particularly in reviewing the readiness of stabilization measures. The report, which has been shared with the Parliamentary Investigation Committee, underscores the need for improved capital regulation, additional capital charges for heightened risks, and a more rigorous focus on the feasibility of recovery and resolution measures. Thomas Hirschi, head of FINMA’s Banks division, acknowledged the limitations of the supervisory actions in restoring confidence, while Birgit Rutishauser, CEO ad interim, and Marlene Amstad, Chair of FINMA’s Board of Directors, emphasized the importance of integrating the lessons learned into future supervisory work and the necessity of strengthening the legal basis for effective financial supervision.
AML & CFT
EU Council and Parliament Establish Joint Selection Process for AMLA Headquarters
The European Council has announced that it has reached a consensus with the European Parliament on the selection process for the headquarters of the new European authority for countering money laundering and terrorist financing (AMLA). The agreed-upon procedure for choosing AMLA’s seat is designed to be transparent, fair, and equitable, involving joint public hearings for member states to present their candidacies. Applications will be evaluated based on set criteria, the Commission’s assessment, and outcomes from the hearings. The final decision will be made jointly by the Council and Parliament representatives in an informal inter-institutional meeting, with equal voting rights for both. The chosen location will be incorporated into the AMLA regulation. Nine member states have submitted applications, and the Commission’s assessment is expected in January 2024, after which the selection will proceed.
FinCEN Finalizes Rule on Beneficial Ownership Information Disclosure and Protection Measures
The Financial Crimes Enforcement Network (FinCEN) has issued the Beneficial Ownership Information Access and Safeguards Final Rule, which delineates the conditions under which beneficial ownership information (BOI) can be disclosed to authorized recipients and the measures required to protect this data from unauthorized access. This rule is part of the implementation of the Corporate Transparency Act (CTA) and follows the BOI Reporting Rule issued previously, which mandates certain U.S. entities to report their beneficial owners and company applicants to FinCEN. The Access Rule specifies that BOI can be accessed by U.S. Federal agencies involved in national security, intelligence, or law enforcement; State, local, and Tribal law enforcement with court authorization; foreign law enforcement and judicial entities under certain criteria; financial institutions for customer due diligence (CDD) compliance; and Treasury personnel. Each category of authorized recipients must adhere to strict security and confidentiality protocols. The rule also outlines the circumstances under which BOI can be re-disclosed by authorized recipients and the penalties for unauthorized disclosure or use of BOI. FinCEN plans a phased implementation of BOI access, starting with a pilot program for key Federal agencies in 2024, and will develop compliance and guidance documents to assist authorized users. Additionally, FinCEN will engage in a third rulemaking to revise its customer due diligence rule and will seek public comment on forms for law enforcement agencies and financial institutions to request BOI.
GAFILAT Concludes XLVIII Plenary with Key AML/CFT Developments and Approval of Mutual Evaluation Reports
During the XLVIII Meeting of the Plenary of Representatives of the Financial Action Task Force of Latin America (GAFILAT) in Punta del Este, Uruguay, key developments in the realm of financial regulation and anti-money laundering/counter-financing of terrorism (AML/CFT) were addressed. The meeting, which included both in-person and virtual participation, saw the approval of the Mutual Evaluation Report (IEM) of Bolivia, which will be published post the quality and consistency review with the FATF Global Network. Additionally, requalification reports for Cuba and Costa Rica were approved, pending the same review process. Furthermore, progress reports from Ecuador, Guatemala, Panama, Paraguay, and the Dominican Republic were acknowledged, with encouragement for continued enhancement of their AML/CFT systems. Besides these updates, GAFILAT also approved and will publish reports on good practices for parallel financial investigations and a document on international trends and regional best practices for updating National Terrorist Financing Risk Assessments.
Conduct & consumer protection
ESMA Reports Decline in EU Retail Investment Product Costs in Latest Market Report on the Costs and Performance of EU Retail Investment Products
The European Securities and Markets Authority (ESMA) has released its sixth market report on the costs and performance of EU retail investment products, highlighting a decline in average investment costs by the end of 2022, though cost disparities remain across Member States. ESMA Chair Verena Ross emphasized the importance of cost and performance as determinants of retail investor benefits, especially in a challenging environment marked by lower returns and high inflation in 2022. The report’s key findings include a decrease in UCITS costs with active equity funds remaining costlier than passive funds and ETFs, resulting in lower net performance. It was noted that an investment of 10,000€ in UCITS over ten years would cost investors about 2,000€, leading to a net value of 14,850€, or 13,500€ after inflation. ESG UCITS funds underperformed non-ESG equivalents in 2022, likely due to the energy crisis, but outperformed over a three-year horizon, with ongoing costs comparable or lower than non-ESG funds. The AIF market continued to be dominated by professional investors, with retail investors mainly in funds of funds, “other” AIFs, and real estate funds, the latter being the only category with positive returns in 2022. Finally, Structured Retail Products saw increased costs, particularly entry costs, with substantial variation by payoff type and country, and performance scenarios indicating potential negative returns.
Fintech & ecosystem innovation
FINMA Issues Guidance on Cryptoasset Staking Services
The Swiss Financial Market Supervisory Authority (FINMA) has issued guidance on the regulatory treatment of staking services. Specifically, the guidance clarifies FINMA’s supervisory stance, addressing the legal ambiguities surrounding the custody of staked cryptoassets and their protection in the event of a staking service provider’s bankruptcy. According to FINMA, unless legislative or case law developments provide further clarity, staked cryptoassets should be segregated from the bankrupt estate and returned to customers. The guidance stipulates that staking activities will not trigger additional capital requirements for regulated entities if they have taken appropriate risk mitigation steps and have transparently communicated the associated risks to customers. Additionally, the document outlines various forms of staking, the risks involved, and the necessary risk mitigation measures that institutions must implement.
IOSCO Publishes Final Report with Policy Recommendations for DeFi Sector Regulation
The International Organization of Securities Commissions (IOSCO) has published its Final Report with Policy Recommendations for Decentralized Finance (DeFi). The report outlines nine Policy Recommendations that focus on six key areas: (1) understanding DeFi arrangements and structures, (2) achieving common standards of regulatory outcomes, (3) identification and management of key risks, (4)ensuring clear and comprehensive disclosures, (5) enforcement of applicable laws, and (6) fostering cross-border cooperation. The recommendations are aimed at enhancing market integrity and investor protection in the DeFi space and complement the earlier Policy Recommendations for Crypto and Digital Assets (CDA) Markets, aligning with IOSCO’s Crypto-Asset Roadmap 2022/2023. IOSCO is now moving towards monitoring the implementation of these recommendations, while also addressing the capacity building and technical assistance needs of its members. IOSCO Chair Jean-Paul Servais highlighted the organization’s swift action in addressing crypto-asset market risks in a coordinated manner, with the goal of consistent implementation across member jurisdictions to protect investors worldwide.
Payments & currency
European Banking Federation Publishes Analysis on Digital Euro’s Implications for Financial Stability and Consumer Welfare
The European Banking Federation has released a study by Copenhagen Economics analyzing the potential impact of a digital euro on financial stability and consumer welfare. The study highlights the banking industry’s support for increased European strategic autonomy in payments and acknowledges the need for new digital currencies and payment methods to support the digital economy. However, it also outlines significant concerns, such as the risk of bank deposit displacement, increased funding costs, reduced credit availability, and the erosion of banks’ revenue streams. The study examines the effects of different holding limits for a digital euro on bank deposits, finding that a limit of 3,000 euros could result in a 10% loss of household deposit base and a 3% loss of total bank liabilities, while a 500 euro limit could significantly reduce this impact. Smaller banks, which are more dependent on retail deposit funding, could be disproportionately affected, especially during financial stress, potentially exacerbating deposit runs. The study also considers the investment and operational costs for banks to implement the digital euro, comparing it to large-scale projects like SEPA and TARGET, and raises concerns about the potential for the digital euro to crowd out existing payment means and hinder private innovation. The EBF calls for a comprehensive impact assessment and a balanced approach to address these issues, emphasizing the importance of a constructive dialogue between co-legislators, the ECB, and banks to ensure the success of the digital euro while mitigating risks.
Norges Bank Advances to Fifth Phase in CBDC Exploration, Evaluating Benefits and Systemic Impacts
The Norges Bank has released a report detailing the progression of its central bank digital currency (CBDC) working group into a new phase aimed at providing a foundation for determining whether to pursue the introduction of a CBDC. The working group has completed its fourth phase, which involved experimental testing of technical solutions, scenario analysis for the payment system, evaluation of impacts on liquidity management and monetary policy, and a review of necessary legislative changes. Governor Ida Wolden Bache highlighted the well-functioning current payment system in Norway but acknowledged the relevance of a CBDC in light of declining cash usage, new forms of money, payment platforms, and international CBDC developments. The fifth phase of the project will focus on analyzing the potential benefits and impacts of a CBDC, testing solutions, and considering new forms of central bank money settlements to foster financial system innovation. The project will continue to engage with Norwegian payment system stakeholders, other central banks, and international organizations.
EU Council Sets Terms for ESG Rating Regulation
The Council of the EU has established its negotiating mandate on a proposed regulation for environmental, social, and governance (ESG) ratings, aiming to enhance investor trust in sustainable products by bolstering the reliability and comparability of ESG ratings. The mandate focuses on improving transparency and integrity among ESG rating providers, who will be required to obtain authorization and supervision from the European Securities and Markets Authority (ESMA), adhere to transparency obligations, and implement measures to prevent conflicts of interest. The Council has specified the regulation’s scope, detailing exemptions and aligning ESG ratings with the corporate sustainable reporting directive, encompassing environmental, social, human rights, and governance factors. Providers operating within the EU must meet certain criteria, including ESMA authorization or an equivalence decision for non-EU providers. A temporary, optional registration regime for small ESG rating providers exempts them from ESMA fees and mandates adherence to organizational and transparency principles, while allowing for ESMA’s investigative powers. The Council also permits ESG rating providers to conduct certain activities without a separate legal entity, given clear activity distinctions and conflict of interest avoidance measures, excluding consulting or audit services for rated entities. This agreement sets the stage for interinstitutional negotiations expected to commence in January 2024, following the European Parliament’s establishment of its negotiating stance in December 2023. The regulation proposal, presented by the Commission in June 2023, addresses authorization, supervision, conflict of interest management, organizational requirements, transparency, and fee structures for ESG rating providers, including provisions for non-EU providers to operate in the EU market.
ECB/ESRB Joint Report Stresses Banks’ and Insurers’ Roles in Mitigating Climate-Related Systemic Risks
The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) have jointly published a report highlighting the critical role of banks and insurance companies in mitigating climate-related financial stability risks within the EU financial system. The report emphasizes that banks are disproportionately lending to high-emitting sectors and households, which are currently underpriced and underinsured for future climate risks. It underscores the need for a macroprudential strategy to manage systemic risks, which would complement microprudential efforts and could utilize existing EU macroprudential tools such as systemic risk buffers or risk concentration limits. The report also extends its scope to include nature-related risks, revealing that a significant portion of bank loans and insurer investments are tied to sectors heavily dependent on ecosystem services. This publication is part of the ECB’s broader response to climate change, which includes climate stress tests and risk management expectations for supervised banks, and builds upon three previous ECB/ESRB reports on climate risk.
ESMA Publishes Articles on Climate Risk Stress Test Methodology and Explores Financial Impact of Greenwashing Controversies
The European Securities and Markets Authority (ESMA) has published two articles addressing the financial sector’s response to climate-related risks and the monitoring of greenwashing risk. The first article details a methodological approach for dynamically modelling climate-related shocks in the fund sector, considering factors such as investor inflows and outflows and portfolio rebalancing. This work aligns with ESMA’s mandate for climate stress testing, as required by the European Commission, which includes developing methods for supervisors and conducting a coordinated climate change stress test by the first quarter of 2025. The second article examines the use of ESG controversies data to monitor reputational risk related to greenwashing. The article underscores the importance of clear regulatory guidance and supervisory efforts to maintain the credibility of sustainability claims, as greenwashing undermines consumer and investor trust essential for transitioning to a low-carbon economy. ESMA has also announced a public webinar scheduled for February 7, 2024, to discuss the findings.
HM Treasury Seeks Feedback on Phase 2 TCFD-Aligned Financial Disclosure Draft
HM Treasury has released a Phase 2 Exposure Draft for public consultation regarding the enhancement of climate-related financial disclosures in annual reports to align with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, specifically focusing on the Risk Management and Metrics and Targets pillars. This draft builds upon the previously published Phase 1 application guidance, which addressed the Governance pillar and is applicable to central government bodies from the 2023-24 reporting period. Stakeholders, including preparers and experts from central government and the wider public sector, are invited to provide feedback on the proposed public sector adaptations and the clarity of the guidance. The draft, which applies to the entire UK public sector within the Whole of Government Accounts boundary, does not override individual jurisdictional processes for reporting changes. The proposed effective date for central government bodies to comply with or explain deviations from the Phase 2 disclosures is set for the 2024-25 annual reports and accounts, starting from 1 April 2024. Other public sector entities are advised to adhere to guidance from their respective authorities and may voluntarily apply the guidance in full or in part. The consultation is open for comments until 26 February 2024.
Other transversal themes
FSB Reports First Decline in Global Non-Bank Financial Intermediation Assets Since 2009
The Financial Stability Board (FSB) has released the Global Monitoring Report on Non-Bank Financial Intermediation 2023, which assesses global trends and vulnerabilities in the sector, focusing on developments during 2022. The report, which analyzes data from 29 jurisdictions representing about 85% of global GDP, indicates that the non-bank financial intermediation (NBFI) sector experienced a contraction for the first time since 2009, primarily due to the rising interest rate environment. The total financial assets of the NBFI sector fell by 5.5% to $217.9 trillion, with the decline largely reflecting valuation losses in investment funds’ mark-to-market asset portfolios. The narrow measure of the NBFI sector, which includes entities that may pose bank-like financial stability risks, decreased by 2.9% to $63.1 trillion, with collective investment vehicles such as fixed income, mixed, and credit hedge funds being the most affected, while money market funds saw growth. Despite these declines, banks remained net recipients of funding from NBFI entities, although the proportion of this funding to bank assets has been on a downward trend since 2013. Vulnerability metrics for NBFIs, which include credit intermediation, maturity transformation, liquidity transformation, and leverage, remained stable overall, with high metrics for maturity transformation in fixed income funds and liquidity transformation across most funds. The report also highlights data enhancements on interconnectedness, sources of funding, and vulnerability metrics, and discusses policy tools to address liquidity transformation and leverage in collective investment vehicles, including a case study on private finance in the euro area, Hong Kong, the UK, and the US. Notably, market prices have rebounded since the period analyzed in the report, particularly after the banking sector turmoil in March 2023, with implications for NBFI vulnerabilities to be assessed in the following year’s report.
EIOPA Outlines 2024 Strategic Priorities for EU Insurance Supervisory Convergence
The European Insurance and Occupational Pensions Authority (EIOPA) has released its Supervisory Convergence Plan for 2024, outlining its strategic priorities to foster a robust and uniform supervisory culture within the EU’s insurance sector. The plan reiterates EIOPA’s commitment to three core areas: the practical implementation of a common supervisory culture and the enhancement of supervisory tools, addressing risks to the internal market and ensuring a level playing field, and the supervision of emerging risks. A key initiative includes a review of the Guidelines on the Supervisory Review Process under Solvency II, aiming to incorporate lessons from Solvency II’s implementation and to promote high-quality supervision that balances the need for flexibility with the avoidance of overly prescriptive measures. EIOPA will also focus on refining the supervisory assessments of conduct risks and its approach to Environmental, Social, and Governance (ESG) risks, as well as continuing the development of Supervisory Technology (SupTech) tools. To safeguard the internal market’s integrity, EIOPA plans to enhance convergence through benchmark studies on internal models and guidance for National Competent Authorities on supervising private equity-owned insurance firms. Additionally, the plan includes priorities such as implementing the new Digital Operational Resilience Act (DORA) framework and monitoring the digital transformation of insurance undertakings, with a particular focus on the use of artificial intelligence. The full list of priorities and further details on EIOPA’s supervisory convergence tools are available in the published plan.
DFSA and HKMA Deepen Partnership to Foster Climate Finance in Middle East and Asia
The Dubai Financial Services Authority (DFSA) has announced a collaborative partnership with the Hong Kong Monetary Authority (HKMA) to enhance policy and regulatory frameworks that support climate finance in the Middle East and Asia. This initiative builds upon a pre-existing relationship and a 2017 Cooperation Agreement between the DFSA and the HKMA, emphasizing innovation in financial services. A key feature of this partnership is the Joint Climate Finance Conference scheduled for autumn 2024 in Hong Kong, which will address the acceleration of transition financing, the role of financial supervisors and central banks in sustainable capital flows, and the utilization of green financing solutions.