News Update Financial Regulatory
Crowdfunding, climate risks and more
6 December 2021
In this News Update, we discuss new European regulations on crowdfunding and regulatory publications on climate risks. We further highlight some other financial regulatory publications issued last month.
European regulations on crowdfunding service providers for businessOn 10 November 2021, Regulation (EU) 2020/1503 on European Crowdfunding Service Providers ("ECSP") for business started applying across the EU. The ECSP lays down uniform rules for the provision of investment-based and lending-based crowdfunding services related to business financing. Compared to the existing regulations in the Financial Services Act (Wet op het financieel toezicht, "Wft") and the Decree on Conduct of Business Supervision of Financial Undertakings Wft (Besluit Gedragstoezicht financiële ondernemingen Wft, "BGfo"), this new regulation considerably increases investor protection, transparency and operational processes. The high-level standards ensure that in all EU countries the same rules apply to crowdfunding service providers.
The ECSP Regulation allows platforms to apply for an EU passport based on a single set of rules, which makes it easier for them to offer their services across the EU with a single authorisation. Existing crowdfunding service providers in the Netherlands, who want to continue their services, must submit a licence application to the Dutch Authority for the Financial Markets ("AFM") between 10 November 2021 and 10 May 2022 so that it can be processed before 11 November 2022. New parties can also apply for a licence from the AFM starting 10 November 2021.
The European Securities and Markets Authority ("ESMA") was mandated to further develop some of the topics in the ECSP Regulation in Regulatory Implementing Standards ("RTS") and Implementing Technical Standards ("ITS"). On 10 November 2021, ESMA published its Final Report on these technical standards. The report covers technical standards in 12 areas, all investor protection aspects under the ECSP: complaint handling; conflicts of interest; business continuity plan; authorisation; information to clients on default rate of projects; entry knowledge test and simulation of the ability to bear loss; key investment information sheet; reporting by crowdfunding service providers; notification to ESMA of national provisions concerning marketing requirements; cooperation between supervisors; and cooperation between supervisors and ESMA. The draft technical standards were submitted to the European Commission for endorsement.
On 19 November 2021, ESMA published Questions & Answers ("Q&As") on the ECSP, including questions on the use of special purpose vehicles, the transitional period, general provisions, provisions of crowdfunding services and organisational and operational requirements, and investor protection provisions.
The European Banking Authority ("EBA") was also mandated to develop RTS to contribute to a sound prudential and disclosure framework for crowdfunding service providers. To that end, on 9 November 2021, EBA published its Final Report on RTS specifying the information that crowdfunding service providers offering individual portfolio management of loans must provide to investors about the method to assess credit risk, and on each individual portfolio. These draft RTS also specify the policies, procedures and organisational arrangements that crowdfunding service providers must have in place for any contingency fund they may offer to investors.
Climate risksIn the past month, regulators have amply published on the topic of climate risks, often related to the UN Climate Change Conference ("COP26") that took place from 1-12 November 2021, bringing together governments, businesses, local authorities and civil society to discuss global climate action.
On 28 October 2021, the AFM published the report 'The impact of climate change on non-life insurance' ('De invloed van klimaatverandering op schadeverzekeringen’, only in Dutch). The AFM wants consumers to be more aware that damage caused by house collapses because of prolonged drought is no longer covered by any insurer and that major floods are also usually not or only partially covered. The AFM believes that insurers must communicate clearly about the terms and cover conditions. Furthermore, the government should contribute to finding solutions for uninsurable damage.
On 3 November 2021, the Dutch Central Bank (De Nederlandsche Bank, "DNB") published the working paper 'Flood risk and financial stability: Evidence from a stress test for the Netherlands', studying when floods would start impairing financial stability by using a stress test framework, and geocoded data on real estate exposures for Dutch banks.
On the same day, DNB also published a statement in which it pledged, within its mandate, to contribute to a decisive policy commitment to implement the Paris Agreement and to mitigate the impact of climate change.
On 5 November 2021, DNB published a message on its website on the impact of climate risks on insurers (only in Dutch), indicating that insurers are paying more attention to climate-related risks in their Own Risk and Solvency Assessment, but the quality needs to improve.
The European Central Bank ("ECB") published the report 'The state of climate and environmental risk management in the banking sector' on 22 November 2021, concluding that banks have taken initial steps towards incorporating climate-related risks, but none is close to meeting all supervisory expectations. In general, banks have made efforts to meet ECB expectations regarding management bodies, risk appetite and operational risk management. However, they lag behind in areas such as internal reporting, market and liquidity risk management, and stress testing. Almost all banks have developed plans to improve their practices. However, the quality of these plans varies considerably, and progress is too slow. In its assessment, the ECB also identified a set of good practices. The ECB sent individual feedback letters to the banks, calling on them to address their shortcomings.
On 3 November 2021, EBA published its environmental statement in the context of the COP26, highlighting its efforts to update and enhance the entire supervisory and prudential regulatory framework in the environmental, social and governance domain.
On 3 November 2021, the European Insurance and Occupational Pensions Authority ("EIOPA") published a statement on its website, highlighting its commitment to support the insurance and pensions sectors in tackling climate change. Along with other activities in the area of sustainable finance, EIOPA aims at finalising the first European-wide dashboard on the natural catastrophe insurance protection gap in 2022.
On 4 November 2021, ESMA published a statement on its website, committing to contribute to a more sustainable financial system as part of the European Green Deal and global efforts to deliver on the COP26 objectives on combatting climate change. ESMA also published its preliminary report on the EU carbon market on 18 November 2021, responding to the European Commission's request to ESMA in its communication on energy prices for a preliminary analysis of European emission allowances (EUAs) and derivatives on EUAs.
On 3 November 2021, the Basel Committee on Banking Supervision ("BCBS") published a statement on its website, welcoming the announcement by the International Financial Reporting Standards Foundation that it is establishing the International Sustainability Standards Board to develop global standards to improve the consistency, comparability and reliability of sustainability reporting.
Further, on 16 November 2021, the BCBS issued a public consultation on 'Principles for the effective management and supervision of climate-related financial risks', following the publication of a series of analytical reports earlier this year. The BCBS seeks to promote a principles-based approach to improving both banks' risk management and supervisors' practices related to climate-related financial risks. The principles aim to achieve a balance in providing a common baseline for internationally active banks and supervisors, while retaining sufficient flexibility given the evolving practices in this area. Comments on the principles can be submitted by 16 February 2022.
Other financial regulatory publicationsWe have highlighted a selection of other publications by legislatures and regulators for the financial markets and financial supervision since our November 2021 News Update was published.
- The Dutch government published the following regulations for consultation (only in Dutch): 'Amendment regulation for attainment levels and test levels for financial services examinations for the 2022 examination year' (Wijzigingsregeling eindtermen en toetstermen examens financiële dienstverlening voor het examenjaar 2022); 'Implementing decree covered bonds directive' (Implementatiebesluit richtlijn gedekte obligaties); 'Bill on strengthening approach undermining crime II' (Wetsvoorstel Versterking aanpak ondermijnende criminaliteit II), including amendment of the Anti-Money Laundering and Anti-Terrorist Financing Act (Wet ter voorkoming van witwassen en financieren van terrorisme); and 'Policy note on maximum credit allowance' (Beleidsnota maximale kredietvergoeding). Also, the Amendment Act Financial Markets 2022 (Wijzigingswet financiële markten 2022, only in Dutch) and the Amendment Decree Financial Markets 2021 (Wijzigingsbesluit financiële markten 2021, only in Dutch) – introducing changes which include active commission transparency in non-life insurance and requirements for automated advice – were submitted to the Dutch House of Representatives.
- The AFM published (only in Dutch) the reports 'Consumer credit default management' ('Achterstandsbeheer bij consumptief krediet'), 'Market impressions 2021' ('Marktindrukken 2021') on financial services providers, and 'Outcomes examination suitability test' ('Uitkomsten onderzoek geschiktheidstoets') on the suitability test for investors.
- DNB launched a consultation on a Draft Q&A on sanctions screening for inbound and outbound crypto transactions.
- The ECB launched a consultation on its draft Guide on the notification of securitisation transactions.
- EBA published its final Guidelines on sound remuneration policies under the Investment Firms Directive ("IFD"), its final Guidelines on internal governance under the IFD, and its final Guidelines on a common assessment methodology for granting authorisation as a credit institution. EBA also launched consultations on its discussion paper on machine learning for internal ratings-based models and its consultation paper on amending RTS for strong customer authentication and common and secure open standards of communication. Together with ESMA, EBA published a consultation paper on draft Guidelines on common procedures and methodologies for the supervisory review and evaluation process under the IFD.
- EIOPA published the European Commission's answers to the Q&As regarding the Insurance Distribution Directive on inter-relationship between Article 29(2) (inducements) and Articles 27/28 (identification/management of conflicts of interest) and on the notion of “directly involved” when applying professional requirements (Article 10).
- ESMA published updated Q&As on the Benchmarks Regulation, the Central Securities Depositories Regulation, the EMIR implementation, MiFID II and MiFIR investor protection and intermediaries topics, and the Securitisation Regulation. ESMA also issued its annual public statement on European common enforcement priorities, covering the impact of COVID-19 and climate-related matters, providing guidance on the measurement of expected credit losses and highlighting disclosure obligations under Article 8 of the Taxonomy Regulation. Further, ESMA issued a public statement on investment recommendations made on social media, making clear what investment recommendations are, how to post them on social media platforms and the consequences of possible breaches of the EU Market Abuse Regulation.
If you have any financial regulatory questions, please do not hesitate to contact Berry van Wijk and Roel Theissen. For questions related to Investment Management, you can also contact our colleagues Oscar van Angeren and Marthe Bollen.