to the point: financial regulation | 09/2023

The Taskforce on Nature-Related Financial Disclosures released its final Recommendations aiming to promote and facilitate the reporting of nature-related risks and opportunities. This initiative also seeks to increase awareness and consideration among businesses and financial institutions regarding their impact on nature, nature-related risks, and the interconnectedness between nature and climate. It consists of 14 key disclosures, organised into four core pillars: governance, strategy, risk and impact management, and metrics and targets. They incorporate the 11 recommended disclosures and introduce three additional areas of focus:

1. Engagement: This encompasses human rights policies and engagement activities with indigenous peoples, local communities and other stakeholders.
2. Locations: This involves disclosing the locations of assets and/or activities that are either in material locations or sensitive locations, such as areas with high ecosystem integrity or experiencing rapid decline in ecosystem integrity.
3. Value Chain Disclosures: This pertains to the methodology for identifying, assessing and prioritising nature-related dependencies, impacts, risks and opportunities across the entire value chain.

The Recommendations were accompanied by additional Guidance on the identification and assessment of nature-related issues: the LEAP approach and specific guidance for financial institutions.

The TNFD encourages voluntary adoption of these Recommendations, with the first adopters to be recognised in January at the World Economic Forum. This initiative promotes transparency and awareness of nature-related financial issues.

LMA published an information that the Commission has launched targeted and public consultations on the Sustainable Finance Disclosure Regulation (SFDR) and aims to enhance transparency to the financial market, establishing how financial intermediaries, such as asset managers, must communicate sustainability-related information to investors. The targeted consultation is directed at entities and stakeholders well-versed in the EU's sustainable finance framework, including financial market participants, investors, NGOs, public authorities, national regulators and those subject to SFDR provisions with a deeper understanding of the regulation. On the other hand, the public consultation is intended for those with a more general knowledge of SFDR, such as interest groups, member associations and representative bodies.

The International Organisation of Securities Commissions (IOSCO) released a consultation paper outlining proposed good practices for leveraged loans (LLs) and collateralised loan obligations (CLOs), and concurrently issued a report on emerging risks in private finance. The consultation paper covers:

1. an overview of the evolution of LL and CLO markets since the Global Financial Crisis;
2. the potential impact of market vulnerabilities on IOSCO's objectives;
3. 12 proposed good practices, grouped into themes like origination, transparency, alignment of interests, addressing various participant interests and ongoing disclosure.

Additionally, the IOSCO's report on emerging risks in private finance underscores the inherent opacity of private finance markets. This presents challenges for regulators and market participants in assessing the scale of underlying risk. The IOSCO expresses concerns that the private finance sector may face tests that uncover hidden risks, such as excessive corporate leverage.

The ESAs published a Joint report on risks and vulnerabilities in the EU financial system, in which they warn national supervisors of the financial stability risks stemming from heightened uncertainty and call for vigilance from all financial market participants. The increase in interest rates generated heterogeneous impacts on the financial sector and resulted in increased net interest income for banks, reduced profitability for insurance companies and liquidity risks for the asset management sector. The ESAs advise national competent authorities, financial institutions and market participants to take these actions:

1. closely monitor the broader impact of significant increases in policy interest rates and sudden rises in risk premia and incorporate these factors into their risk management strategies;
2. be prepared for a potential deterioration in asset quality within the financial sector and maintain a close watch on asset quality and ensure adequate loan loss provisioning;
3. be vigilant about the impact of inflation risk. Inflation can affect financial institutions by influencing asset quality, valuation and increasing expenditures; rising funding costs due to higher interest rates and other inflation-related factors should also be monitored;
4. prioritise effective risk management and governance arrangements, particularly concerning liquidity risk and interest rate risk. Recent issues in the US and Switzerland underscore the importance of resilience against significant interest rate changes.

The ESMA published the annual update of its Reporting Manual on the European Single Electronic Format (ESEF), which includes several technical improvements, such as:

1. clarifications regarding the formats of images embedded in an xHTML document;
2. updates to references in the Data Type Registry;
3. clearer guidance on how Calculations 1.1 specifications should be applied in the context of ESEF;
4. corrections for previously identified errors.

The ESMA has also provided additional clarifications on the voluntary use of elements from the 2023 IFRS Taxonomy update using the extension mechanism. This decision comes after the amendment of the ESEF Regulatory Technical Standard (RTS) was postponed until 2024 to formally incorporate the 2023 IFRS Taxonomy update. It also provides further guidance on the ESMA's expectation on the implementation of the block-tagging requirements and on the expected level of readability of the information extracted from a block tag.

The EBA released a revised list of validation rules within its Implementing Technical Standards (ITS) on supervisory reporting, which specifically identifies rules that have been deactivated due to inaccuracies or issues related to information technology. The EBA is notifying national competent authorities across the European Union that data submitted in compliance with these ITS should not undergo formal validation against the set of rules that have been deactivated.

The EIOPA initiated a survey focused on small and medium enterprises (SMEs) to explore their access to cyber insurance. The survey aims to gain a deeper understanding of the challenges faced by SMEs in safeguarding themselves against cyber risks and assess their level of accessibility to cyber insurance, which is vital for mitigating the risks associated with digitalisation, as it helps absorb shocks and manage uncertainties related to income fluctuations. By offering protection, insurance can enhance the resilience of SMEs and contribute to their financial stability. The survey will also collect information about the size and type of businesses participating, their awareness of cyber risks in relation to their operations, and their access, affordability and comprehension of cyber insurance products. Additionally, the survey will provide insights into SMEs' experiences and perceptions regarding cyber insurance, including whether they have considered purchasing such coverage, the factors influencing their decisions and any potential obstacles hindering their access to cyber insurance.

The FAO published a general interpretative opinion  on the issue of inclusion of EU Member States on FATF lists. The opinion focuses the definition of a high-risk third country and the jurisdictions that are such, and the application of AML measures by obliged persons.

The Polish Financial Supervisory Authority (PFSA) published a statement (that applies EBA guidelines dated 22 November 2022) on, among others, the establishment of business relations with new customers without their physical presence and the implementation of policies, internal control systems and internal supervision that supervised entities should put in place when remotely applying financial security measures to customers.

The PFSA released information that the Ordinance of the Minister of Internal Affairs and Administration of 15 September 2021, amending the Ordinance on requirements to be met by the protection of monetary values stored and transported by businesses and other organisational units will be binding from 1 January 2024. It requires that no less than 40 % of cash machines are to be equipped with the Intelligent Banknote Neutralisation System (IBNS). According to the IBNS system, if any unauthorised attempt is made to remove or open the cash machine cassette, the banknotes will be automatically and irreversibly damaged, permanently marked with paint. The possibility of subsequently identifying such banknotes is also ensured. The IBNS system is designed to increase the security of cash machines, prevent theft of money and effectively discourage potential thieves from attacking cash machines.