Regulatory Update: the focus areas for Q4 2022

Retrospective

EBA Guidance on AML/CFT role for compliance officers

On June 14, 2022, EBA published its Final Report containing guidance on the role, duties and responsibilities of AML/CFT compliance officers. For the first time at EU level, this guidance comprehensively addresses the whole set-up of AML/CFT governance. The guidelines set clear expectations about the role, duties and responsibilities of the AML/CFT compliance officer.

The guidelines explain:

• that AML/CFT compliance officers should be employed by the same organisation long enough to be able to take (on their own initiative) all necessary measures to ensure compliance and effectiveness of internal AML/CFT measures;
• the duties and role of the board member responsible for AML/CFT;
• what role the AML/CFT compliance officer fulfils in the group;
• when a group AML/CFT compliance officer should be appointed in the parent company to ensure the establishment and implementation of effective group-wide AML/CFT policies and procedures; and
• what information should be included, at a minimum, in the AML/CFT compliance officers’ activity report to the management.

Integrating environmental risks into the prudential framework (IFR)

On June 26, 2021, the Investment Firm Regulation (IFR) entered into force. Five months later, the Dutch implementation decree of the Investment Firm Directive (IFD) also entered into force. However, not all obligations became effective immediately. For example, Article 53 IFR does not enter into force until December 26, 2022. Also, on May 2, 2022, the European Banking Authority (EBA) published a discussion paper on the inclusion of sustainability risks when calculating minimum capital.

The regulation applies to investment firms with a MiFID II license. In addition, the Dutch legislator has chosen to apply this directive and regulation in terms of capital requirements also to managers of investment institutions and/or UCITS providing MiFID II services. The lower regulations relating to capital requirements therefore also apply to these managers.

Does the firm meet any of the following requirements?

• The value of on-balance-sheet and off-balance-sheet assets averages €100 million or more. Calculated over the four-year period immediately preceding the fiscal year in question.
• The organisation employs individuals whose annual variable compensation exceeds €50,000 and whose compensation represents more than one-fourth of total annual compensation.

Then the organisation must disclose information on environmental, social or governance (ESG)-related risks by December 26, 2022. This must distinguish between physical risks and transitional risks. In 2022, the information only needs to be published once, then every six months thereafter.

Level 2 regulations on the inclusion of sustainability risks in the calculation of minimum capital

Chapter 9 of EBA’s discussion paper is relevant to category 2 and 3 investment firms. Pillar 1 deals with minimum capital requirements. An analysis was conducted to see to what extent environmental risks are already captured in Pillar 1. This is assessed through internal and external values, valuation of financial instruments and collateral or scenario analyses.

The discussion paper also examines differences and similarities between the CRR prudential framework and the IFR prudential framework and whether there may be solutions for environmental risks.

Furthermore, the main focus is on K-factors (only relevant for category 2 investment firms). K-factors are divided into 3 categories:

• RtC (Risk-to-Client),
• RtM (Risk-to-Market), and
• RtF (Risk-to-Firm).

It examines the relationship between environmental risks and RtC K factors. Investment firms can suffer reputational damage if this is not taken into account.

EBA would like feedback from all stakeholders and aims to deliver the final report on this topic in 2023. Therefore, it is expected that the new regulations will not take effect before 2024.

Updated guidance on collecting data on large earners (CRR/IFD)

EBA has updated its guidelines on data collection on large earners. The purpose of data collection on large earners is to analyse and publish annual trends in the number of individuals within these institutions earning at least €1 million.

The EBA guidelines focus on national regulators, but include explanations on the information these supervisors should request from banks and (Category 1 and 2) investment firms. The updated guidelines were published on June 30, 2022, and apply from December 31, 2022 to data to be collected in 2023 for the 2022 fiscal year. The data must be sent to the regulator by August 31, 2023. The existing Guidelines on Collecting Data on Large Earners dated July 16, 2014 (EBA/GL/2014/07) are thus superseded.

For fiscal year 2021, data collection for large earners will be conducted according to the existing guidelines for both banks and investment firms, unless they are small and unrelated.

The Guidelines contain two templates for submitting information, one for bank and category 1 investment firm staff (Appendix I) and one for category 2 investment firm staff (Appendix II). The Guidelines should be read in conjunction with the applicable “EBA Guidance on Sound Remuneration Policies under Directive CRD” and the “EBA Guidance on Sound Remuneration Policies under Directive (EU) IFD.

Data on large earners should be reported at the consolidation level. The information should cover all large-earner data for all entities and branches within the highest level of prudential consolidation. In the case of stand-alone banks or investment firms, large-earner data should be reported on an individual basis.

The information must:

• be presented in payment brackets of 1 million euros (e.g., 1 million euros to less than 2 million euros);
• be based on the total remuneration granted to the staff member during the financial year; and
• amounts must be displayed in non-rounded numbers.

Among other things, the following information must be published:

• the number of large earners;
• the manner in which the fixed and variable is distributed (cash, financial instruments, otherwise);
• the responsibilities of large earners and the department in which they work;
• the gender of the big-earner;
• information on the number of big earners in control positions/senior management/other positions;
• the Member State of the large earner; and
• whether the large earner qualifies as identified staff.

New remuneration rules for financial enterprises

The Financial Institutions Remuneration Policy Act (Wbfo) is being amended. The bill applies to banks, managers of investment institutions and UCITS, investment firms, payment service providers, financial service providers, mortgage providers, PPIs and insurers. The Act will take effect on January 1, 2023.

Important elements of this Act are:

• a statutory retention period: directors and employees of financial organisations are obligated to retain shares (or other financial instruments which value depends on the company’s performance) that are part of the fixed remuneration for at least five years after being acquired.
• an obligation for financial organisations to account for the relationship between remuneration and the role and position of the organisation in society; and
• a tightening of the possibility of derogation from the bonus ceiling for non-CAO staff.

UBO registration for trusts and FGRs

A bill introducing a register of beneficial owners (UBOs) of trusts and similar legal entities was introduced on April 26, 2021. The latter includes, for example, Funds for Joint Accounts (FGRs).

The Dutch trust register is intended to make transparent who the ultimate stakeholders are of trusts and similar legal arrangements of which:

• the trustee is domiciled in the Netherlands, or
• for which the trustee enters into a business relationship or acquires real estate in the Netherlands.

The Act is now final and published on December 16, 2021. The Implementation Decree associated with the Act will enter into force on November 1, 2022. From then on, trustees have three months to register the UBOs of trusts and FGRs in the trust register. This must be done no later than February 1, 2023.

Technical standards for performance-related triggers in STS on-balance-sheet securitisations

EBA has developed technical standards (RTS) in accordance with Article 26 quarter (5) Securitisation Regulation (Regulation (EU) 2017/2402). The RTS are relevant to holders of securitization positions (more specifically, STS on-balance-sheet securitisations). On September 20, 2022, the EBA published its final report containing the RTS. The report is submitted to the European Commission for approval.

The RTS should specify the minimum performance-based triggers for simple, transparent and standardised on-balance-sheet securitisations (STS on-balance-sheet securitisations).

The Securitisation Regulation as amended by Regulation (EU) 2021/557 provides that STS on-balance-sheet securitisations must have a sequential redemption system to qualify for the STS label. A sequential redemption system means that losses are allocated to the holders of a securitisation position according to the ranking of tranches, starting with the last rank. Sequential payment is applied to all tranches to determine the outstanding amount of the tranches on each payment date, starting with the tranche with the highest rank.

Non-sequential repayment and performance-based triggers

By way of derogation, an STS on-balance-sheet securitisation with a non-sequential redemption system may still qualify for the STS label. This is possible provided the transaction contains performance-related triggers to switch from a non-sequential to a sequential redemption system. The draft RTS prepared by EBA details the three performance-related triggers mentioned in the law.

Calibration of triggers

In addition, EBA had the authority to set specific levels “where relevant” where the above triggers enter. However, the regulator has not exercised this authority. EBA indicates that the level of triggers should be determined by the parties to the securitisation, as they are transaction specific and depend on the parties’ assessment of the risk of the underlying exposures at inception.

Parties should set their own criteria for determining trigger values. Those trigger values should ensure that for all STS on-balance-sheet securitisations with a non-sequential amortization provide adequate credit protection. This should ensure that even significant losses at the end of the transactions can be absorbed by the tranches that provide credit protection.

Non-sequential STS transactions that were reported to ESMA before the RTS entered into force are subject to a transitional regime. These transactions do not have to comply with the new requirements until December 31, 2024. The delegated regulation is expected to enter into force in early 2023.

Proposal ITS and RTS to conduct cross-border marketing and management activities

The purpose of the proposed new regulations is to facilitate the process for reporting cross-border marketing and management activities relating to UCITS and investment funds. This requires the establishment of harmonised information to be communicated to competent authorities (through the RTS). Common templates will also be developed (through ITS).

A consultation was held for the technical standards from May 17 to September 9, 2022. Based on the consultation responses, ESMA will come up with the proposal for an RTS and ITS to be endorsed by the European Commission in the form of a delegated regulation and an implementing regulation. These are expected to enter into force in mid-2023.

Outlook

What other upcoming laws and regulations should you be aware of?

In our next Regulatory Update article, we will explain the following developments in more detail:

• revision of the PRIIPs regulation;
• Dutch Data Protection Authority ruling regarding the use of Google Analytics; and
• Regulation ‘digital euro as single currency’.

Tailor-made Regulatory Update

We hope this article has given you an idea of the regulatory changes in Q4 2022. Do you want to make sure not to overlook any developments? Then you can request a tailor-made Regulatory Update (available in Dutch and English). Each quarter you will receive a comprehensive report with current developments, legislative changes, publications by regulators and consultations. This report will be fully tailored to your organisation and activities. This way, you will never be faced with unpleasant surprises.

Our specialists will discuss with you the possible impact on your organisation and think along about possible next steps and their practical implementation. They can also help you draw up an action plan for the adaptation of your policies and procedures, so that you remain in control at all times. For more information, please feel free to get in touch.