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Finance and Capital Markets

Although Covid-19 is by no means a thing of the past, there are good reasons to hope that 2022 will continue to allow us to return, in a sense, to “business as usual”.

We expect that legislators and regulators will re-focus their attention on the European Commission’s flagship Capital Markets Union project, including strengthening the securitisation market, as well as ongoing issues arising such as central clearing.

Key Themes in Finance and Capital Markets

Securitisation Risk Retention

Risk retention provisions have been an important focus since the Financial Crisis. Ensuring that transaction parties retain an economic interest in the outcome of deals is considered important in ensuring the integrity of the market. The minimum retention requirement of 5% of the material net economic interest is intended to address the possible misalignment of interest between the originators, sponsors and original lenders and investors. The EU’s plan for capital markets recovery envisages growth of the securitisation market as a major factor in economic strength for the region. The European Banking Authority and the other European Supervisory Authorities stated in their report on the implementation of the Securitisation Regulation in May 2021 that the RTS should be finalised as soon as possible, in order to restore market participants’ confidence in the risk retention regime.

The most substantive modifications in the new risk retention RTS focus on:

  • facilitating the securitisation of non-performing exposures by clarifying the modalities of risk retention and the impact of fees payable to retainers on the risk retention requirement; and
  • providing further clarity on the application of the risk retention requirement to re-securitisations, as well as the treatment of synthetic excess spread as a possible form of compliance.  

“In order to scale-up the securitisation market in the EU, the Commission will review the current regulatory framework for securitisation to enhance banks' credit provision to EU companies, in particular SMEs.”  

European Commission's Capital Markets Union Action Plan 2020.

 

Clearing

In April 2022 the European Commission presented proposals for amendments to the Central Securities Depositories Regulation ("CSDR").

The major amendments are as follows:

  • Improving the passporting regime for Central Securities Depositories (CSDs) by removing costly and duplicative procedures;
  • Improving cooperation between supervisory authorities by requiring the establishment of colleges for certain CSDs;
  • Improving banking-type ancillary services by adjusting the conditions under which CSDs can access banking services, enabling them to offer settlement services for a broader range of currencies and offering businesses the opportunity to obtain financing from a larger pool of investors, including cross-border;
  • Improving the oversight of third-country CSDs through supervisors having better information about the activities of third-country CSDs in the EU;

Various amendments are proposed in relation to the Settlement Discipline Regime (SDR), including providing that in situations where a settlement fail is caused by factors not attributable to the participants to the transaction, or where a transaction does not involve two trading parties, such settlement fail is not subject to the penalty mechanism.

The CSDR proposal will now be submitted to the European Parliament and the Council for their consideration and adoption.

Credit Servicing

The Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022 (the “Act”) was signed into law by the President in April 2022 and commenced on 16 May.

The Act, among other things, brings a number of currently unregulated credit providers into the scope of the Central Bank of Ireland’s (“Central Bank’s”) regulatory remit.

The Act expands the definition of a “retail credit firm” requiring a Central Bank authorisation under the Central Bank Act 1997 (as amended) to also include any person whose business consists wholly or partly of (a) directly or indirectly providing credit to or (b) entering into a consumer-hire agreement or hire-purchase agreement with, a “Relevant Person”.

This will capture many "buy now pay later" and other arrangements previously outside the scope of the credit servicing legislative regime.

Any persons now coming within the broadened meaning of a “retail credit firm” will be required to apply to the Central Bank for an authorisation and to comply with the Consumer Protection Code as well as other codes and standards administered by the Central Bank. 

Read more: Matheson Insight - Central Bank Notice of Intention of Changes following enactment of Consumer Protection (Regulation of Retail Credit and Credit Servicing Firms) Act 2022

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