News Update Financial Regulatory

In this News Update, we discuss the ESRB's recommendation for establishing a pan-European systemic cyber incident coordination framework, the AFM's overview on the special purpose acquisition companies market in the Netherlands, including how it is supervised and the risks involved with investing in it and regulatory publications regarding stress testing on climate risks in the banking and insurance sector. We further highlight some other financial regulatory publications issued last month.

ESRB | Recommendation for establishing a systemic cyber incident coordination framework

The financial sector relies on information and communication technology systems, particularly on the confidentiality, integrity and availability of the data and systems it uses. Major cyber incidents have the potential to corrupt information and destroy confidence in the financial system and therefore pose a systemic risk. To effectively respond to such major cyber incidents, a high level of preparedness and coordination among financial authorities is necessary. To achieve this, the European Systemic Risk Board ("ESRB") published a Recommendation to establish a pan-European systemic cyber incident coordination framework ("EU-SCICF").

The ESRB report 'Mitigating systemic cyber risk', published on 27 January 2022, explains in detail how the EU-SCICF would facilitate an effective response to a major cyber incident. The report also concluded that the macroprudential mandate and toolkits of financial authorities need to be expanded to include cyber resilience.

The report proposed a macroprudential strategy that would better mitigate the financial risks stemming from cyber incidents. The ESRB believes that a monitoring and analytical framework for systemic cyber risk needs to be implemented to help design and calibrate this new set of macroprudential tools on cyber resilience. The ESRB and its dedicated European Systemic Cyber Group intend to explore such a framework and the required tools to address this risk in their future work.

In response to the ESRB, the three European Supervisory Authorities – the European Banking Authority ("EBA"), the European Insurance and Occupational Pensions Authority ( "EIOPA") and the European Securities and Markets Authority ("ESMA") – published a joint statement on 27 January 2022 welcoming this recommendation.

AFM | An overview of the Dutch SPAC market

On 28 January 2022, the Dutch Authority for the Financial Markets ("AFM") published the fifth edition of the AFM Market Watch entitled 'The Dutch SPAC market: an overview'. In the publication, the AFM examines the SPAC market in the Netherlands, including how it supervises the SPAC market and identifies the risks involved with investing in it. The AFM notes that, since 2020, capital markets have seen a surge of special purpose acquisition companies ("SPACs"), companies without business activities that raise capital with the intention to purchase non-listed companies (or a part of them) in the relatively near term. Although SPACs provide a relatively cheap and fast way for private companies to go public, the AFM is concerned about the risks and protection for investors. The AFM regards investing in SPACs as highly complex and has substantial risks that investors, namely retail investors, should be aware of. The AFM believes that SPACs are suitable for only a limited group of retail investors.

Although SPACs have no specific legal regulatory framework, the AFM supervises SPACs based on existing regulation. In this context, the AFM states that it supervises investment firms located in the Netherlands that manufacture or distribute securities (units, shares or warrants) of SPACs in the Netherlands. The AFM also supervises the information provided to investors for SPACs having their registered office in the Netherlands. For these SPACs, the AFM approves the prospectus required for listing on the stock exchange and reviews whether the ongoing transparency requirements are being met once the SPAC is listed. The AFM notes that a factor to consider is the country in which the SPAC has its registered office. In general, investors should be aware that the AFM only supervises the information and transparency requirements of SPACs registered or listed in the Netherlands.

In addition, the AFM mentions applicability of inside information requirements to SPACs, such as Market Abuse Regulation, notification obligations under Chapter 5.3 of the Financial Services Act (Wet op het financieel toezicht), financial reporting regulations and possibly – depending on the SPACs' characteristics – the Alternative Investment Fund Managers Directive.

The AFM expects that in 2022, many situations will arise in which SPACs will need to disclose new (inside) information. The AFM states that it will perform its task of real-time surveillance of SPACs’ price movements, publish focused and dedicated press releases and intervene if necessary.

ECB and EIOPA | Stress testing on climate risks

On 27 January 2022, the European Central Bank ("ECB") launched a supervisory climate risk stress test to assess how prepared banks are for dealing with financial and economic shocks stemming from climate risk. The exercise aims to identify vulnerabilities, best practices and challenges banks face when managing climate-related risk. It is not a pass or fail exercise, nor does it have direct implications for banks’ capital levels.

The exercise consists of three modules: (i) a questionnaire on banks’ climate stress test capabilities, (ii) a peer benchmark analysis to assess the sustainability of banks’ business models and their exposure to emission-intensive companies, and (iii) a bottom-up stress test. The stress test targets specific asset classes exposed to climate risk rather than the banks’ overall balance sheets. It focuses on exposures and income sources that are most vulnerable to climate-related risk, combining traditional loss projections with new qualitative data collections.

The results will feed into the Supervisory Review and Evaluation Process ("SREP") from a qualitative point of view. This means that this stress test could indirectly impact Pillar 2 requirements through the SREP scores but will not directly impact capital through Pillar 2 guidance.

EIOPA also published its paper 'Methodological principles of insurance stress testing – climate change component' on 27 January 2022. The paper sets out methodological principles that can be used to design bottom-up stress test exercises that aim to assess the vulnerability of insurers to climate risks. EIOPA indicated that climate stress testing is an important tool to raise awareness of climate-related risks, understand how insurers assess such risks, enhance risk management capabilities, and evaluate potential spillover effects to other parts of the financial sector and to the real economy. Given the increasing importance of climate risks in the insurance sector with no commonly adopted climate stress testing framework in the EU, the paper presents conceptual approaches to assessing the climate risks for insurers under adverse scenarios.

Other financial regulatory publications

We have highlighted a selection of other publications by legislatures and regulators for the financial markets and financial supervision since our January 2022 News Update was published.

• The 'Implementation Act on registration of ultimate beneficial owners of trusts and similar legal arrangements' (Implementatiewet registratie uiteindelijk belanghebbenden van trusts en soortgelijke juridische constructies, only in Dutch) partly entered into force on 28 January 2022 (Official Gazette 2022.38, only in Dutch). The other provisions of the Implementation Act, concerning the register of trusts and similar legal arrangements, will enter into force accordant with the technical realisation of the register.
• The AFM published its 'Procedure for the simplified settlement of penalty cases AFM' (Procedure vereenvoudigde afdoening boetezaken AFM, only in Dutch).
• The Dutch Central Bank (De Nederlandsche Bank) published a news item (only in Dutch) on its website, looking back on discussions in 2021 with six medium-sized and large insurers about the use of advanced data analytics and artificial intelligence.
• EBA launched consultations on updates to its draft Guidelines on the data collection exercises regarding high earners under CRD and IFD; draft Guidelines on the remuneration, gender pay gap and approved higher ratio benchmarking exercises under CRD; and draft Guidelines on the remuneration and gender pay gap benchmarking exercises under IFD. EBA also published its Guidelines on improving resolvability for institutions and resolution authorities; Discussion Paper on its preliminary observations on selected payment fraud data under the Payment Services Directive; and final draft implementing technical standards on Pillar 3 disclosures on environmental, social and governance risks.
• EIOPA launched a consultation on retail investor protection on the sale of insurance-based investment products.
• ESMA launched a consultation on certain aspects of suitability requirements under MiFID II, updating its guidelines following MiFID II amendments relating to sustainability. ESMA also published an updated Questions and Answers on the following topics: the Benchmarks Regulation, the European crowdfunding service providers for business Regulation, MiFID II and MiFIR transparency topics, and SFTR data reporting.
• The ESRB published 'Will video kill the radio star?' on the reports of its Advisory Scientific Committee on digitalisation and the future of banking.

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.