August 2023 Regulatory roundup

EBA report on competent authorities approaches in the fight against financial crime

On 11 July 2023, the European Banking Authority (EBA) published a report on the findings from its 2022 review of competent authorities’ approaches to tackling money laundering and terrorist financing (ML/TF) risks in the banking sector. For this Report, the EBA staff assessed 12 competent authorities from nine Member States.

Overall, the EBA’s findings suggest that supervisors are making progress in the fight against money laundering and terrorist financing. Some competent authorities in the EBA’s sample have made far-reaching changes in recent years, and their approach to Anti-Money Laundering and Counter Terrorism Financing (AML/CFT) supervision of banks is now broadly effective.

Thanks to the EBA’s ongoing efforts to foster a holistic approach to AML/CFT, many competent authorities have made tangible progress in tackling ML/TF risks through prudential supervision and most are on track to embed cooperation and information exchange in their supervisory processes. Nevertheless, most supervisors in the 2022 sample were asked to do more to tackle ML/TF risk in their banking sector.

As it was the case in the previous rounds of reviews (2020, 2022), competent authorities find assessing ML/TF risk difficult. Several competent authorities in the 2022 sample did not use their ML/TF risk assessments to inform their supervisory strategy and inspection plans. A general lack of formalised processes and targeted training for AML/CFT and prudential supervisors meant that opportunities for intervening at an early stage, before risks crystallise, were sometimes missed. The EBA staff provided advice to competent authorities on the steps they should take to strengthen their approach.

The findings and recommended actions summarised in this report will be relevant to all competent authorities responsible for tackling ML/TF risks in credit and financial institutions across the single market and can help them in their ongoing effort to prevent the use of the EU financial system for ML/TF purposes.

EBA publishes fourth Opinion on money laundering and terrorist financing risks across the EU

On 13 July 2023, the European Banking Authority (EBA) published its fourth biennial Opinion on the risks of money laundering and terrorist financing (ML/TF) affecting the European Union’s financial sector.  It also sets out what competent authorities and EU co-legislators can do to mitigate those risks.

The EBA issues this Opinion against the background of a changed risk landscape, which has an impact on institutions’ anti-money laundering and countering the financing of terrorism (AML/CFT) compliance and competent authorities’ approaches to supervision. Examples include geopolitical events like Russia’s invasion of Ukraine and legislative developments, such as the publication of a comprehensive ‘AML Package’ and the Markets in Crypto-Assets Regulation (MiCAR). They also include emerging risks such as corruption, and the laundering of proceeds from both environmental crime and cybercrime.

Some of the ML/TF risks identified in this Opinion, such as those associated with crypto assets, innovative financial services, the identification of beneficial owners and terrorist financing, had already been identified in previous Opinions on ML/TF risks and continue to be relevant today. Other risks that were highlighted in 2021, including those associated with Covid-19 and de-risking, are starting to decrease.

Awareness of ML/TF risks is increasing across all sectors under the EBA’s AML/CFT remit with small but tangible improvements in credit institutions and investment firms.  At the same time, the AML/CFT systems and controls institutions have put in place are not always effective, with significant challenges in institutions’ approaches to transaction monitoring and reporting of suspicious transactions in particular.

AML/CFT supervision is improving overall, with more AML/CFT supervisors carrying out formal ML/TF risk assessments in line with EBA Guidelines. The frequency and intensity of supervisory engagement is increasing, with a small but tangible impact on levels of inherent and residual risk. Nevertheless, as highlighted in the EBA’s reports on ML/TF risk in payment institutions and on competent authorities’ approaches to the AML/CFT supervision of banks, AML/CFT supervision is not always commensurate to perceived levels of ML/TF risk or effective overall.

Cooperation of AML/CFT supervisors with other authorities has improved thanks to EBA initiatives such as AML/CFT Colleges, Supervisory Colleges, EBA’s Guidelines on cooperation and information exchange and relevant EBA prudential guidelines. This cooperation can be further improved with tax authorities for tax-related crimes.

ESMA seeks first input on detailed rules for crypto markets

On 12 July 2023, ESMA has published its first consultation package under the Markets in Crypto-Assets Regulation and invites comments from stakeholders by 20 September 2023.

In this first of three consultation packages, ESMA is seeking input on proposed rules for crypto-asset service providers (CASPs), in particular related to their authorisation, identification and management of conflicts of interests and also how CASPs should address complaints.  

In addition, ESMA aims to gather more insight on respondents’ current and planned activities, as a fact-finding exercise to better understand the EU crypto-asset markets and their future development. These questions relate to elements such as the expected turnover of the respondents, the number of white papers they plan to publish and the use of on-chain vs off-chain trading. The input to this part of the consultation will remain confidential and will serve to calibrate certain proposals to be inserted in the second and third consultation package.

In parallel to this consultation, ESMA will continue working on its remaining mandates with the objective to publish a second consultation package in October 2023. More information regarding the ESMA approach to MiCA implementing measures can be found here.

ESMA will consider the feedback received to this consultation and expect to publish a final report and submit the draft technical standards to the European Commission for endorsement by 30 June 2024 at the latest.

UCITS and AIFs

ESMA report on marketing requirements and marketing communications under regulation on cross-border distribution of funds

On 3 July 2023, ESMA published its second report on national rules governing the marketing of investment funds under the regulation on cross-border distribution of funds.

The report provides an overview of the marketing requirements across Member States, and analyses the effects of national laws, regulations and administrative provisions governing the marketing communications for investment funds. The report is based on responses provided by NCAs to two questionnaires prepared by ESMA.

Key findings from the report include:

1. the transposition of the directive on cross-border distribution of funds and the entry into force of the ESMA guidelines on funds’ marketing communications helped reach a greater level of harmonisation in areas where national divergences existed; and
2. despite the powers NCAs have under the regulation, only a limited number of NCAs carried out any ex-ante verifications of marketing communications, while an increasing number of NCAs reported carrying out ex-post verifications.

ESMA will submit a new iteration of the report to the European Parliament, the Council and the Commission in two years.

ESMA publishes 2022 UCITS and AIFMD sanction reports

On 18 July 2023, ESMA published its 2022 reports on use of sanctions under the UCITS Directive and AIFMD.

The reports set out an overview of the applicable legal framework, and information on the penalties and measures imposed by national competent authorities (NCAs) from 1 January 2022 to 31 December 2022. Besides a limited number of NCAs issuing an increasing number of sanctions, the level of sanctions issued at national level remains stable and generally low, in particular when it comes to penalties.

Moving forward, ESMA will continue its work to foster supervisory convergence in terms of the application of the UCITS Directive and AIFMD, and to develop a common EU outcome-focused supervisory and enforcement culture.

The European Commission welcomes political agreement on enhanced regulatory framework for investment funds

On 20 July 2023, the European Commission welcomed the political agreement reached the day before  between the European Parliament and the Council on the Commission’s proposal to improve the regulatory framework applicable to the EU investment funds industry, which the Commission adopted as part of the capital markets union (CMU) package presented on 25 November 2021. The capital markets union is the EU’s initiative to create a truly single market for capital across the EU. It aims to get investment and savings flowing across all member states for the benefit of citizens, businesses, and investors.

The reform is amending both the Directive on Undertaking for Collective Investment in Transferable Securities (UCITS), and the Alternative Investment Fund Managers Directive (AIFMD). It covers funds that are easily accessible to retail investors and those which are designed primarily for professional investors, such as private equity and hedge funds.

The revised regime harmonises the rules governing liquidity management tools, in line with international recommendations to support financial stability. It also increases transparency on the so-called “delegation rules”, by ensuring that supervisors are well-informed about the extent to which fund managers rely on expertise from third parties. Furthermore, the new rules establish a harmonised framework for funds that originate loans especially to companies in the EU, offering new funding opportunities to the real economy while safeguarding investor protection.

Other key components of the agreement include enhanced data sharing and cooperation between authorities, and new measures to identify undue costs that could be charged to funds, and hence their investors, as well as on preventing possible misleading names to better protect investors. 

The agreement is provisional as it still needs to be confirmed by the Council and the Parliament before it can be formally adopted.

Money Market Funds Regulation

The European Commission report on the prudential and economic adequacy of the MMF Regulation

On 20 July 2023, the European Commission published a report on the adequacy of the Money Market Funds Regulation (MMF Regulation) on money market funds from a prudential and economic point of view.

The report shows that the MMF Regulation successfully passed the test of liquidity stress experienced by MMFs during the COVID-19 related market turmoil of March 2020, the recent interest rate increases, and related financial asset re-pricing. These observations indicate that the safeguards in the MMF Regulation have been working as intended. The report found that while the MMF Regulation has significantly strengthened the regulatory framework for MMFs in the EU, there were also some shortcomings which require further assessment, which show that there could be scope to further increase the resilience of EU MMFs – notably by decoupling the potential activation of liquidity management tools from regulatory liquidity thresholds.

Sustainable finance

ESMA and NCAs to assess disclosures and sustainability risks in the investment fund sector

On 6 July 2023, ESMA launched a Common Supervisory Action (CSA) with National Competent Authorities (NCAs) on sustainability-related disclosures and the integration of sustainability risks.

The goal is to assess the compliance of supervised asset managers with the relevant provisions in the Sustainable Finance Disclosure Regulation (SFDR), the Taxonomy Regulation and relevant implementing measures, including the relevant provision in the UCITS and AIFMD implementing acts on the integration of sustainability risks.

Using a common methodology developed by ESMA, NCAs will share knowledge and experiences on how to foster convergence in how they supervise sustainability related disclosure. Among the main objectives:

• to assess whether market participants adhere to applicable rules and standards in practice;
• to gather further information on greenwashing risks in the investment management sector; and
• to identify further relevant supervisory and regulatory intervention to address the issue.

Ensuring greater convergence in the supervision of risks stemming from incorrect and misleading disclosures is central to the effort to foster transparency and is identified as one of the Union Strategic Supervisory Priorities for NCAs. The CSA will promote this goal by improving the comprehensibility of ESG disclosures by asset managers across key segments of the sustainable finance value chain. In addition, the preliminary findings on the identification of greenwashing risks at entity and product level will provide input to ESMA’s Final Report on greenwashing.

In 2023 and until Q3 2024, NCAs will undertake their supervisory activities and share knowledge and experiences through ESMA to foster convergence in how they supervise sustainability-related disclosures and sustainability risk integration in asset managers.

The European Commission recommendation on facilitating finance for transition to a sustainable economy published in the Official Journal

On 7 July 2023, the European Commission published a recommendation aimed at supporting market participants that wish to obtain or provide transition finance by offering practical suggestions on how to approach transition finance.

The recommendation explains that transition finance should be understood as the financing of climate- and environmental performance improvements to transition towards a sustainable economy, at a pace that is compatible with the climate and environmental objectives of the EU.

The recommendation is addressed to undertakings that want to contribute to the transition to climate neutrality and environmental sustainability, while enhancing their competitiveness and are seeking finance for investments for this purpose.

It aims to explain the use of sustainable finance tools for this purpose. The recommendation is also addressed to: (i) financial intermediaries and investors that are willing to provide transition finance to undertakings; and (ii) Member States and financial supervisory authorities, to raise awareness of the topic and provide technical assistance, to encourage the uptake and provision of transition finance to the real economy.

ESMA provides insights into the expected sustainability disclosures in prospectuses

On 11 July 2023, ESMA issued a Public Statement on the sustainability disclosure expected to be included in prospectuses.

The statement sets out ESMA’s expectations on how the specific disclosure requirements of the Prospectus Regulation in relation to sustainability-related matters in equity and non-equity prospectuses should be satisfied considering the Environmental, Social and Governance (ESG) transition. This will help to:

• ensure that national competent authorities (NCAs) take a coordinated approach to the scrutiny of sustainability-related disclosure in prospectuses;
• provide issuers and their advisors with an understanding of the disclosure that NCAs will expect them to include in their prospectuses; and
• support investors’ ability to make an informed investment decision considering the importance of disclosure relating to sustainability-related matters.

Expected ESG disclosure in prospectuses

The Statement draws attention to the sustainability-related disclosure necessary to satisfy the relevant provisions of the Prospectus Regulation (PR).

ESMA emphasises the importance of an issuer’s non-financial reporting under the Non-Financial Reporting Directive and the future sustainability reporting under the Corporate Sustainability Reporting Directive, especially because such disclosure may be material under the PR and included in an issuer’s prospectus.

In addition, regarding non-equity securities advertised as taking into account a specific ESG component or pursuing ESG objectives, the statement clarifies the disclosure required in relation to ‘use of proceeds’ bonds and ‘sustainability-linked’ bonds.

The Public Statement also notes that sustainability-related disclosure is sometimes included in advertisements but not in prospectuses themselves and highlights that this disclosure should be included in prospectuses if it is material under the PR.

ESMA and NCAs will continue to monitor the market to determine whether this guidance should be modified, for instance, in cases where new products are introduced to the market or there are changes in the legislation.

ESMA sustainable finance implementation timeline

On 3 August 2023, ESMA updated its sustainable finance implementation timeline for the SFDR, TR, CSRD, MIFID, IDD, UCITS and AIFMD. The timeline covers a number of implementation dates for measures under this legislation from 2021 until 2028. European Commission sustainable finance package.

Sustainability reporting

The European Commission adopts the European Sustainability Reporting Standards

On 31 July 2023, the European Commission adopted a Delegated Regulation supplementing the Accounting Directive as regards European Sustainability Reporting Standards (ESRS) for use by all companies subject to the Corporate Sustainability Reporting Directive (CSRD).

The ESRS will be mandatory for use by companies that are obliged by the Accounting Directive to report certain sustainability information. By requiring the use of common standards, the Accounting Directive, as amended by the CSRD in 2022, aims to ensure that companies across the EU report comparable and reliable sustainability information.

The standards cover the full range of environmental, social, and governance issues, including climate change, biodiversity and human rights. They provide information for investors to understand the sustainability impact of the companies in which they invest. They also take account of discussions with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) in order to ensure a very high degree of interoperability between EU and global standards and to prevent unnecessary double reporting by companies.

The reporting requirements will be phased in over time for different companies.

Circular C585: ESMA Guidelines on further specifying the circumstances for temporary restrictions in the case of a significant non-default event in accordance with Article 45a of EMIR

On 3 July 2023, CySEC issued Circular C585 which reminds Regulated Entities that that the European Securities and Markets Authority (ESMA) has published the Guidelines on further specifying the circumstances for temporary restrictions in the case of a significant non-default event in accordance with Article 45a of EMIR (the ‘Guidelines’) on 2^nd June 2023, translated in all official languages of the EU.

The Guidelines provide CySEC with guidance on the circumstances under which it should consider requiring the Central Counterparty (CCP) to refrain from undertaking certain restricted actions to protect their capital resources. The Guidelines identify indicators and elaborate on the circumstances prompting the consideration of whether to require the CCP to refrain from undertaking these actions. CySEC will therefore use these indicators to identify the cases in which it would be necessary for a restriction to apply.

CySEC has adopted these Guidelines by incorporating them into its supervisory practices and regulatory approach. The Guidelines shall be applicable from the 2^nd of August 2023.

Circular C586: ESMA Guidelines on the application of the circumstances under which a central counterparty is deemed to be failing or likely to fail (Article 22(6) of CCPRRR)

On 3 of July 2023, CySEC issued Circular C586 which reminds Regulated Entities (CIFs, AIFMs and UCITS Management Companies) that ESMA has published the Guidelines on the application of the circumstances under which a central counterparty is deemed to be failing or likely to fail (Article 22(6) of CCPRRR).

The Guidelines apply to competent authorities and resolution authorities and aim to promote the convergence of supervisory and resolution practices regarding the application of the circumstances under which a central counterparty (CCP) is deemed to be failing or likely to fail.

Additionally, the Guidelines clarify the different circumstances under which a CCP is deemed to be failing or likely to fail, one of the three cumulative conditions set out in Article 22(1) of CCPRRR for triggering a resolution action. In particular, they aim to promote the convergence of supervisory and resolution practices with respect to how and when resolution should be triggered with respect to the circumstances under which a CCP is deemed to be failing or likely to fail. For these purposes, the guidelines list a set of objective elements that should support the determination that a CCP is failing or likely to fail, in accordance with the circumstances laid down in Article 22(3) of the CCPRRR.

ESMA has produced the final two guidelines (Guidelines 8 and 9) in accordance with Article 16(1) of the ESMA Regulation. It has issued these guidelines given the need to provide guidance on the consultation and information exchange between the Member State competent authority and the resolution authority for the purposes of making a determination if a CCP is failing or likely to fail.

CySEC has adopted these Guidelines by incorporating them into its supervisory practices and regulatory approach. The Guidelines are applicable from 1^st of August 2023.

Circular C587: ESMA Guidelines on the consistent application of the triggers for the use of Early Intervention Measures (Article 18(8) of CCPRRR)

On 3 July 2023, CySEC issued Circular C587 to inform Regulated Entities that it has adopted the ESMA Guidelines on the consistent application of the triggers for the use of Early Intervention Measures (Article 18(8) of CCPRRR) (the “Guidelines”), published on June 1, 2023.

These Guidelines aim to provide guidance on the situations under which the application of early intervention measures to CCPs should be considered.

The Guidelines are applicable from 1^st of August 2023.

Circular C588: EBA’s Opinion on the risks of money laundering and terrorist financing (ML/TF) affecting the EU’s financial sector

On 18 July 2023, CySEC issued Circular C588 to inform the Regulated Entities that the European Banking Authority (‘EBA’) has published its fourth Opinion on the risks of money laundering and terrorist financing (ML/TF) affecting the EU’s financial sector (the ‘Opinion’).

The Opinion constitutes an important source of information which Regulated Entities must consider when identifying and assessing ML/TF risks on the basis of section 58A of the Prevention and Suppression of Money Laundering and Terrorist Financing Laws of 2007- 2021, in order to improve the effectiveness and efficiency of their AML/CFT systems and controls.

CySEC expects Regulated Entities to take due account of and consult the Opinion.

Circular C589: MONEYVAL’s report on money laundering and financing of terrorism risks in the world of virtual assets

On 18 July 2023, CySEC issued Circular C589 to inform the Regulated Entities that the MONEYVAL has published a Report on money laundering and financing of terrorism risks in the world of virtual assets (the ‘Report’).

The Report presents an overview of the money laundering and financing of terrorism risks in the world of virtual assets (VAs) and virtual asset service providers (VASPs). It also integrates and analyses data obtained from MONEYVAL members across multiple issues in relation to a variety of subjects such as:

1. how members regulated the activity of issuance of VAs and the operation of VASPs
2. the types of VA platforms used for financial support of criminal activity
3. examples of cases investigated by the relevant authorities with a description of criminal schemes involving the VA elements that have been identified
4. other data relevant to the goals of the study.

CySEC considers the Report to be of assistance to the Regulated Entities engaging or seeking to engage in VA activities, in understanding their AML/CFT risks and obligations and how they can effectively comply with these obligations.

Circular C590: Further guidance regarding prudential and remuneration reporting of CIFs via CySEC’s XBRL portal

On 21 July 2023, CySEC issued Circular C590 (following Circulars C546 and C576) to provide further guidance regarding the remuneration practices, gender pay gap and high earners submissions via CySEC’s XBRL portal.

Specifically, and as per the provision of the circular:

1. CIFs can either submit directly on XBRL format or use the excel form taxonomies created by CySEC which can be found under the ‘Taxonomies’ section of the portal (Visualization file (custom language) should be used);
   The new requirement for submission will appear under the open fillings section of the portal;
2. Where a CIF does not have any high earner during the year under review, it is not required to submit the respective template; and
3. Even though the excel forms contains various tabs, CIFs should only complete the tabs mentioned in the Appendix of this Circular.

Further to the above, Circular C590 also provides further details regarding the new taxonomy with respect to the prudential reporting requirements as per the Article 54 of the Investment Firms Regulation.