1. EBA consultation on draft templates and guidance to prepare its one-off Fit-for-55 climate risk scenario analysis
On 20 July 2023, the European Banking Authority ("EBA") published a public consultation on draft templates and accompanying guidance for collecting climate related data from European banks as part of the one-off Fit-for-55 climate risk scenario analysis, which the EBA is carrying out in conjunction with the other European Supervisory Authorities ("ESAs").
This exercise is part of the European Commission's Strategy for Financing the Transition to a Sustainable Economy and aims to:
- assess the resilience of the financial sector in line with the Fit-for-55 package; and
- gain insights into the capacity of the financial system to support the transition to a lower carbon economy even under conditions of stress.
The exercise is supported by the European Central Bank ("ECB") and the European Systemic Risk Board ("ESRB") and requires the ESAs to separately produce sector-specific results, based on three ad-hoc climate scenarios implemented by the ESRB. The results from these exercises will then be used by the ECB to produce cross-sectoral results and to model second round effects.
The EBA notes that the draft templates are designed to collect climate-related and financial information on credit risk, market and real estate risks and the aggregated and counterparty level data is to be provided as of December 2022.
The consultation closes on 11 October 2023.
Shortly after the consultation at the end of November 2023, the EBA will, with the support of the Single Supervisory Mechanism and other national competent authorities ("NCAs"), launch a data collection with the same banks as those included in the 2023 EU-wide stress test. It should be noted however, that NCAs may request other banks in their jurisdictions to also participate.
The one-off Fit-for-55 climate risk scenario analysis is expected to commence by the end of 2023 and the results published by Q1 2025.
2. EBA publishes final guidance on the overall recovery capacity in recovery planning
On 19 July 2023, the European Banking Authority ("EBA") published its final Guidelines on the overall recovery capacity ("ORC") in recovery planning ("Guidelines").
The ORC is the extent to which the recovery options in recovery plans allow institutions to recover in a range of scenarios of severe macroeconomic and financial stress. Under Directive 2014/59/EU (the "Bank Recovery and Resolution Directive" or "BRRD"), institutions are required to determine their ORC and competent authorities then assess the ORC as part of the overall assessment of the institutions’ recovery plan.
The EBA notes that in the absence of a specific framework and specific guidance on the ORC determination, institutions have developed a wide range of different practices and similarly, the ORC assessment by competent authorities is not fully aligned across jurisdictions. The EBA has, therefore, developed the Guidelines to achieve a harmonised approach to the determination and assessment of the ORC.
The Guidelines aim at strengthening institutions’ effective crisis preparedness by:
- establishing a consistent framework for the determination of the ORC by instructions; and
- supporting competent authorities in their assessment of the ORC as part of the overall assessment of institutions recovery plans.
The guidelines will now be translated into the official EU languages and will apply from 3 months after the date of their publication on the EBA’s website in all EU official languages.
Competent authorities are required to report whether they comply with the guidelines within two months after the publication of the translations.
3. European Insurance Updates
EIOPA publishes peer review on product oversight and governance
On 20 July 2023, the European Insurance and Occupational Pensions Authority ("EIOPA") published a peer review on product oversight and governance ("POG") which focuses on how national competent authorities ("NCAs) in the European Economic Area are supervising the application of POG requirements by insurance manufacturers.
The report found that most NCAs had adapted their internal processes to include the supervision of POG requirements introduced by the Insurance Distribution Directive ("IDD") and the relevant Commission Delegated Regulation. The report also noted that some NCAs were still building their supervisory POG framework, and there remains significant differences regarding the level of maturity of POG supervision. In summary, 6 NCAs broadly met expectations, 2 met most expectations, 4 met some expectations and 18 met few expectations.
The report found that Ireland fell into the group of "NCAs broadly meeting expectations" with only one recommended action. EIOPA recommended that Ireland take action within the area of 'Setting and communicating supervisory expectations'. They recommended that the Central Bank of Ireland ("Central Bank") formulate and communicate in a formal manner or via supervisory dialogues, a comprehensive set of supervisory expectations covering all the elements of POG requirements. They also recommended that the Central Bank follow up on these expectations by challenging the effectiveness of POG arrangements by supervised entities based on these expectations.
EIOPA will follow up on this report by monitoring and assessing the extent to which the NCAs implement their recommendations.
Clients will note that the Central Bank in its recent Insurance Newsletter detailed good practices, as observed during its thematic inspection of POG requirements, which insurers should have regard to. It is unclear as to whether this action will be enough to address EIOPA's recommendation or whether the Central Bank will deem a more comprehensive formal communication on the matter, such as a Dear CEO Letter, to be warranted. We will continue to monitor this and will update clients if any new developments occur.
For more details on the outcomes of the thematic inspection and the good practices identified, please see Matheson's Insight " Central Bank of Ireland - Thematic Inspection of Product Oversight & Governance".
EIOPA publishes discussion paper on an Open Insurance use case examining the key features of an insurance dashboard
On 24 July 2023, the European Insurance and Occupational Pensions Authority ("EIOPA") published a discussion paper examining the key features of an insurance dashboard as an open insurance use case.
The discussion paper follows on from an initial discussion paper on open insurance from January 2021. EIOPA determined that while the development of open insurance products will benefit consumers, industry and supervisors, it also poses risks. Consequently, the development must be monitored for emerging risks and what regulatory adjustments may be necessary. EIOPA concluded that in order for consumers, industry and supervisors to better understand the implications of open insurance, further work on more concrete, specific and detailed open insurance cases was needed.
The aim of this discussion paper is to facilitate discussions by providing technical input and providing a forum to encourage discussion. The use case approach is a theoretical example and aims to explore technical issues. EIOPA clarified that
- it will not build the insurance database set out in the Discussion Paper;
- it is not proposing to build it now or in the future;
- and it is not identifying it as a good or bad example of open insurance.
The idea of an insurance dashboard is to collect, and, in a user-friendly way, display to consumers their insurance policies and other related information in one place. This acts as a central contact point which combines all the information from various insurance companies that each consumer has business with. It would also enable other insurance companies to include information on their products which enables consumers to compare products and prices between insurance providers.
The use case within the Discussion Paper provides a specific example as to how an open insurance service might function in practice and outlines
- data flows;
- stakeholder roles and responsibilities;
- standardisation and interoperability;
- data protection and ethical considerations;
- the application of existing legal frameworks;
- data sharing challenges, and;
- potential benefits and risks.
The focus is on the consumer journey and consumer touchpoints and risks.
The discussion paper is open to feedback until 24 October 2023. As already mentioned, EIOPA does not intend to build the insurance dashboard set out in the paper, or identify it as a good or bad example. The purpose is to use the insights of this consultation to shape supervisory views and enhance consumer protection and innovation. It should be noted that the discussion paper does not mention the proposal for a new Financial Data Access ("FiDA") as the discussion paper was finalised before the proposal was adopted, but the feedback may provide future technical input on supervisory perspectives on FiDA.
4. EBA publishes updated report on the monitoring of Additional Tier 1, Tier 2 and TLAC/MREL eligible liabilities instruments of EU Institutions
On 21 July 2023, the European Banking Authority ("EBA") published its updated report on the monitoring of Additional Tier 1, Tier 2 and total loss absorbing capacity ("TLAC") and minimum requirement for own funds and eligible liabilities ("MREL") instruments of European Union ("EU") institutions.
The report merges the contents of the AT1 monitoring report published in June 2021 and the monitoring of the TLAC/MREL eligible liabilities instruments published in October 2022. The purpose of this is to reflect the commonalities of eligibility criteria between own funds and eligible liabilities instruments. The report also makes a number of additional recommendations detailed below.
The EBA has found that there are some divergences in the documentation of issuer. Some documentation includes specific provisions on the interaction between ESG requirements and requirements for own funds or eligible liabilities instruments, and others remain silent. More recent issuances have been more explicit.
The EBA welcomes explicit provisions within the documentation regarding loss absorbency, status of the notes and early redemption or accelerated rights. These reinforce certainty on the nature of the bonds from a regulatory perspective and clearly outline the difference between more common bond types such as senior debt and bonds that can be used for ESG financing purposes.
The EBA also discourages step up or fees based on missing ESG targets or other performance indicators as they could be regarded as incentives to redeem which would contradict the eligibility criteria for own funds and eligible liabilities.
The report also set out a number of recommendations including:
- TLAC/MREL disqualification events clauses in own funds can be accepted as a logical consequence of amendments to the CRR with regard to eligible liabilities instruments, as it allows for consistency between TLAC/MREL frameworks and own funds;
- RAC Tier 2 instruments, i.e. instruments which include particular features such as a 'trigger event' and a 'rating methodology event', are discouraged as they pose risks in terms of the eligibility of the instruments. In addition, provisions which create a link with some credit rating agencies methodologies need to be avoided as they give rise to legal uncertainty and No Creditor Worse Off risks in resolution;
- alignment event clauses are allowed under certain conditions;
- institutions should be able to demonstrate that interest rate reset mechanisms do not entail incentives to redeem, and it must be made at the moment of the issuance of the instrument; and
- a certain degree of supervisory flexibility has been introduced on tap issuances from small issuers, particularly where market conditions are volatile and where the issuer can demonstrate to the competent authority that the credit spread for the tapped amount remained stable compared to the initial issuance.
5. EBA consultation on Guidelines on the application of the group capital test for investment firm groups
On 25 July 2023, the European Banking Authority ("EBA") launched a consultation on the draft guidelines ("Guidelines") on the application of the group capital test ("GCT") for investment firm groups. The purpose of the Guidelines is to address the diversity in the application of the GCT across the European Union by setting harmonised criteria.
The criteria for the application of the GCT, set out in the Investment Firms Regulation ("IFR"), have been interpreted differently by various supervising authorities, leading to inconsistent and uneven application across jurisdictions. In order to ensure a level playing field, the EBA believes a more harmonised application is needed, and more clarity around the conditions necessary to meet the IFR criteria.
The Guidelines take account of the large variety of group structures utilised by investment firms by allowing some deviations from the given thresholds. The Guidelines are comprised of five parts:
- Part 1 sets out a simplified and proportional approach to investment firm groups which consist of small and non-complex investment firms and ancillary undertakings;
- Part 2 sets quantitative and qualitative criteria that the competent authority should assess when considering whether the investment firm group structure is 'sufficiently simple';
- Part 3 sets out conditions to assess the significance of the risks posed to the market and the clients from the investment firm group, and other criteria to be considered such as any clearing members in the group, unlisted financial instruments on a regulated exchange, and any enforcement proceedings on any of the group's undertakings. It also introduces a ratio between own funds calculated in line with GCT and the prudential consolidation under Article 7 of the IFR;
- Part 4 outlines additional criteria which should be assessed by competent authorities when authorising a reduction of own funds requirements. It also further clarifies 'notional own funds' and 'satisfactory level of prudence'; and
- Part 5 sets out the minimum information required by competent authorities when assessing if an investment firm group meets the criteria, while also considering the proportionality principle for small and non-interconnected investment firms and ancillary service undertakings.
The EBA is accepting comments on this consultation until 25 October 2023.