Banking & fintech newsletter – Issue no. 31

In this issue:

  • MFSA: Circular following an assessment on Credit Risk Management in Malta’s Banks
  • EBA issues an Environmental Statement in support of more sustainable finance and economies in light of COP26
  • Banks ought to consider Climate Change Risks in their Business Plans – MFSA
  • EBA provides guidance on how Banks are to be granted Authorisation
  • EBA consults on the proposed amendment to its RTSs on strong customer authentication and secure communication regarding the 90-day exemption for account access
  • EBA replies to the European Commission’s call for advice on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance framework
  • ESAs propose final Draft RTSs on disclosures under the Sustainable Finance Disclosure and Taxonomy Regulations
  • EBA makes its recommendations to the EU Commission consequent to an analysis showing disparities in the protection of client funds by deposit guarantee schemes
  • Guidelines on the security of internet payments established under the former Payments Services Directive (PSD1) repealed
  • MFSA celebrates three years of the Virtual Financial Assets Framework
  • New EU Regulation allows for Crowdfunding Service Providers to offer their services across the Community
  • EBA publishes final draft technical standards on individual portfolio management by crowdfunding service providers

 

MFSA: Circular following an assessment on Credit Risk Management in Malta’s Banks

MFSA has recently published a Circular containing guidelines on the improvement of management of banks’ credit risk profiles after carrying out an assessment on Maltese Banks’ credit risk management throughout 2021. In this circular, the MFSA outlines those areas which the management body of banks ought to review in order to ensure that they are functioning in accordance with expected standards and that their funds adequately reflect the risks demonstrated in their balance sheets. The MFSA’s main observations inter alia include improvements of the quality of data used to support credit decisions and of the means of recognition and treatment of forbearance, the implementation of early warning indicators of credit issues, and the maintenance of corporate credit documentation.

In publishing this circular, the MFSA urges banks to use the guidelines presented and take action where necessary. The MFSA will then be assessing the approach taken by the management bodies of banks in response to these guidelines in line with its supervisory assessments in 2022.

EBA issues an Environmental Statement in support of more sustainable finance and economies in light of COP26

The EBA has published an environmental statement in terms of the 2021 United Nations Climate Change Conference (COP26). In its statement, the EBA emphasizes on its endeavours in updating and improving the whole supervisory and prudential regulatory framework in the environmental, social and governance (ESG) sector. The EBA held that with this it aims to aid the European Banking and Financial regime to transform into a more sustainable financial system and alleviate those risks which arise from climate change and ESG factors.

The EBA’s full statement in the context of COP26 may be accessed here.

Banks ought to consider Climate Change Risks in their Business Plans – MFSA

The Head of Banking Supervision at the MFSA, Mr. David Eacott, has raised his concern as to the effects of Climate Change on banks and the possible exposure to risks that ought to be “properly assessed and incorporated into their business plans, risk quantification and governance”. However, raising awareness is not enough. Following COP 26, while Eacott makes it clear that a lot depends on the policies discussed at the Conference, banks are urged to start taking action now before it is too late, where the damage would be too “costly and disruptive”. Inter alia, Eacott suggests that banks should grasp a good understanding of their risk profile and the opportunities that would be brought about through a more sustainable economy, in order to make proper lending and/or investment decisions.

This press release may be found here.

EBA provides guidance on how Banks are to be granted Authorisation

The EBA has published its final Guidelines on a common assessment methodology for granting authorisation to entities operating as credit institutions, which are addressed to all EU competent authorities. The guidelines also outline the authorisation requirements which are originally set out in Directive, the Capital Requirements Directive (the “CRD”).

The EBA’s Guidelines may be found and accessed here.

EBA consults on the proposed amendment to its RTSs on strong customer authentication and secure communication regarding the 90-day exemption for account access

The EBA has launched a public consultation regarding the proposed amendment to its RTSs on strong customer authentication (the “SCA”) and secure communication under the Directive (EU) 2015/2366 (the “PSD II”), particularly concerning the 90-day exemption from SCA for account access. The amendment being proposed tackles several matters already identified by the EBA in the application of the exemption by a number of account servicing payment service providers (“ASPSPs”) across EU MSs and which have led to the services offer by account information service providers (AISPs) under the PSD II, to be negatively impacted.

The public consultation shall run through the 25th of November 2021. For those interested, the Consultation Paper may be found here.

EBA replies to the European Commission’s call for advice on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance framework

The EBA has published its advice in its response to the EU Commission’s request concerning the funding of banks in resolution and insolvency within the crisis management and deposit insurance framework (the “CMDI Framework”). In its advice, the EBA inter alia presented a descriptive and quantitative analysis of banks’ ability to access so called “resolution financing arrangements” and banks’ “loss-absorption capacity” under the current CMDI framework and under various creditor hierarchies, together with an analysis of the issue of market access for minimum requirement for own funds and eligible liabilities (“MREL”) instruments for small to medium sized banks.

The advice, which is not said to be policy advice, may be viewed here.

ESAs propose final Draft RTSs on disclosures under the Sustainable Finance Disclosure and Taxonomy Regulations

The EBA, European Insurance and Occupational Pensions Authority (the “EIOPA”) and European Securities and Markets Authority (the “ESMA”), commonly known as the three European Supervisory Authorities (the “ESAs”) have published and provided the EC with their final Draft RTSs on disclosures under the Regulation 2019/2088 on Sustainable Finance Disclosure (the “SFDR”) as amended by the Regulation 2020/852 on Sustainable Finance Taxonomy (the “Taxonomy Regulation”). The EC has three months from the date of publication of these draft RTSs to endorse them.

Noteworthy is that the ESAs’ objectives in publishing the draft RTSs are twofold:

1. To provide end investors with disclosures and necessary information to be able to make well informed more environmentally stable investment choices; and

2. To establish a single rulebook for sustainability disclosures under the SFDR and the Taxonomy Regulation.

EBA makes its recommendations to the EU Commission consequent to an analysis showing disparities in the protection of client funds by deposit guarantee schemes

The EBA has published an Opinion on the treatment of client funds under Deposit Guarantee Schemes Directive (Directive 2014/49, the “DGSD”). In its opinion the EBA is providing us with a thorough analysis of the current varied approaches to the protection of client funds deposited with banks (the “client funds”) throughout the EU. The EBA found that consequent to having many varied approaches, there is a disparity in how clients are afforded protection. Hence, in its Opinion the EBA is providing the EC with recommendations for a review of the DGSD in order to clarify the law with regards to the protection of client funds by relevant deposit guarantee schemes. This shall bring about further clarity, harmonized treatment and enhanced consumer protection across the Community.

The EBA’s full opinion may be accessed here.

Guidelines on the security of internet payments established under the former Payments Services Directive (PSD1) repealed

The EBA has repealed its Guidelines on the security of internet payments (the “Guidelines”) which were originally issued in 2014 and which provided for the interpretation of the PSD I, the Directive applicable at the time, in order to improve the soundness of payment services and to ensure the mitigation of risks from payments fraud. These Guidelines were superseded by the PSD II upon its coming into force in 2016, which have now been repealed on the basis that the PSD II and the related EBA instruments both encapsulate and go beyond what was found in the Guidelines.

Further information on this may be found here.

MFSA celebrates three years of the Virtual Financial Assets Framework

During a Fintech Panel Discussion hosted to mark the three year anniversary of the Virtual Financial Assets Framework (the “VFA Framework”), the success of this relatively new Financial sector locally was discussed. While Malta was one of the first countries to launch the VFA Framework and license crypto operators back in 2018, all with the aim of protecting investors and guaranteeing market integrity and financial soundness, the Malta Financial Services Authority (the “MFSA”) has registered 23 VFA Agents, published 2 Whitepapers and authorised 15 VFA service providers in total. Discussions were also held on the MFSA’s Fintech Strategy which was launched in 2019.

Presently, the MFSA plans to implement the Digital Finance Package launched in 2020 by the European Commission (the “EC”) which aims to create laws and regulations that shall contribute to having more “sustainable, technology-enabled financial services”. This has been said to be in accordance with the MFSA’s Fintech Strategy and VFA Framework which are already set in practice.

Moving forward, the MFSA shall be placing its focus on three main aspects:

1. Regulation;

2. Monitoring; and

3. Capacity.

All this is intended for the MFSA to follow global practices and exhibit Malta as a so-called “International Fintech Hub” that promotes new technology-enabled financial services based on internationally recognized principles.

New EU Regulation allows for Crowdfunding Service Providers to offer their services across the Community

Regulation (EU) 2020/1503 on Crowdfunding (the “Regulation”) establishes common across the Community concerning the provision of investment and lending based crowdfunding services, the organisation, authorisation and supervision of crowdfunding service providers (CSPs) and applying transparency and marketing crowdfunding services. In terms of the Regulation, CSPs are to obtain authorisation from the National Competent Authority (the “NCA”) of the EU MS in which they are established, after which European CSPs would be able to provide their crowdfunding services on a cross-border basis, without requiring any other form of further authorisation from NCAs of other EU MSs in which they are providing their services. Consequently, the MFSA has set out a new application for CSPs established locally to be authorised in Malta.

While the whole press release may be accessed here, any prospective Maltese CSPs may contact the MFSA on [email protected].

EBA publishes final draft technical standards on individual portfolio management by crowdfunding service providers

The European Banking Authority (the “EBA”) has published its Final Draft Regulatory Technical Standards (the “RTSs”) providing CSPs offering individual portfolio management of loans with several requirements that they ought to provide to investors and have in place to offer such service. The RTSs inter alia concern the information to be provided to investors on the means of accessing credit risk for each individual portfolio, as well as the policies, procedures and organisational arrangements that CSPs must set up with regards to contingency funds they may offer to investors.

Noteworthy is that these RTSs are the first of their kind to be published by the EBA as it plays a part in the prudential and disclosure framework for CSPs.