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Financial Regulatory Developments Focus
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The following posts provide a snapshot of selected UK, EU and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.

  • EU Final Report on Guidelines on Enforcement of Sustainability Information
    July 5, 2024

    The European Securities and Markets Authority has published a final report on the guidelines on enforcement of sustainability information and a public statement on the first application of the European Sustainability Reporting Standards. The documents aim to support the consistent application and supervision of sustainability reporting requirements introduced under the EU Corporate Sustainability Reporting Directive.

    The Guidelines were mandated under the EU Transparency Directive as amended by CSRD and are designed to build convergence on supervisory practices on sustainability reporting. ESMA has aimed to align them with the existing Guidelines on Enforcement of Financial Information, to ensure that enforcement of sustainability information is consistent with enforcement of financial information and is held to be on a par with such information.

    The Standards specify the information that firms subject to the EU Accounting Directive, as amended by CSRD, should report in accordance with sustainability reporting requirements. Through the public statement on the first-time application of the Standards, ESMA intends to support large issuers with the implementation of these new reporting requirements. ESMA will continue to monitor the sustainability reporting practices in 2025 as well as the application of the Guidelines. ESMA will translate the Guidelines into all EU languages and make these translations available on its website. In addition, ESMA will release in Q4 recommendations on the sustainability statements of listed companies in its public statement on the 2024 European Common Enforcement Priorities.
  • Network for Greening the Financial System Reports on Nature-Related Risks
    July 2, 2024

    The Network for Greening the Financial System has published two complementary reports on nature-related risks. The first report is the final version of the Conceptual Framework for nature-related financial risks, which aims to guide policies and action by central banks and financial supervisors. The aim of the framework is to create a common science-based understanding of, and language for, nature-related financial risks among NGFS members that provides greater clarity on the meaning of key concepts and the way these interrelate. The report includes two illustrative cases, which demonstrate how this framework can be applied in practice. The NGFS encourages central banks and supervisors to identify, assess and, where relevant, act on material economic and financial risks stemming from dependencies and impacts on nature and their nexus with climate change. The second report outlines the key emerging trends related to nature-related litigation, including cases concerning biodiversity loss, deforestation, ocean degradation, carbon sinks and plastic pollution. This report argues that nature-related legal actions will likely evolve and grow, taking inspiration from successful climate-related litigation cases, and benefiting from an increasing awareness of the nature crisis. The NGFS considers that, in the coming years, two key categories of nature-related litigation might be expected to develop in particular: (i) an increase in the number of rights-based nature cases against states and public entities; and (ii) an increase in the number of cases based on corporate responsibility. The NGFS encourages central banks, supervisors and financial institutions to closely monitor developments in nature-related litigation.
  • UK Financial Conduct Authority Update on Notification of Use of Investment Labels Under Sustainability Disclosure Requirements Regime
    July 1, 2024

    The U.K. Financial Conduct Authority has provided an update on how firms should notify the FCA when they are using an investment label under the sustainability disclosure requirements and investment labelling regime. Firms must notify the FCA when using an investment label through the form available on Connect. The labels can be displayed from July 31, 2024 and firms must meet the naming and market EU rules from December 2, 2024. The FCA notes that it does not approve labels, but firms are still required to notify it when they use, revise or stop using a label. The FCA provides the specific steps for notification in relation to four scenarios: (i) an authorized fund that the fund manager considers meets the criteria for a label without the need for changes to the pre-contractual disclosures; (ii) an authorized fund that the fund manager considers requires changes to the pre-contractual disclosures to meet the label criteria; (iii) a new fund that the fund manager considers will meet the label criteria; and (iv) an in-scope unauthorized alternative investment fund looking to use an investment label.
  • UK Consultation on the Emissions Trading Scheme’s Free Allocation Methodology

    The U.K. Emissions Trading Scheme Authority has launched a consultation on its approach to free allocations. The ETS is proposing options to amend the free allocation methodology, focusing on its approach to accounting for activity levels, benchmarking and the manner in which carbon leakage risk is assessed. Carbon leakage occurs when production and associated emissions are transferred from one country to another by a business in order to benefit from lower carbon pricing and climate regulation in other jurisdictions. The free allocation policy is intended to reduce a firm's exposure to the carbon price in the U.K.

    Responses to this consultation may be submitted until March 11, 2024. A government response is expected to be published in 2024, with changes implemented in the lead up to the next free allocation period in 2026. The ETS Authority is also consulting on changes to the U.K. ETS markets policy.
  • UK Consultation on Revisions to Emissions Trading Scheme Markets Policy

    The U.K. Emissions Trading Scheme Authority has launched a second consultation on the review of the ETS markets policy. Feedback to the first consultation has been taken into account to prepare the proposals discussed in this second consultation. Responses to this second consultation may be submitted until March 11, 2024. The ETS Authority is also consulting on changes to the U.K. ETS free allocation framework.

    The ETS Authority identifies the most significant risks to effective market functioning and proposes various policy options to address those risks as well as how individual market stability policies could address market risks while minimizing intervention and disruption in the market. The ETS Authority is proposing to: (i) introduce a quantity-triggered Supply Adjustment Mechanism to mitigate the risk of demand shift with long-term market impacts; (ii) retain a re-designed Auction Reserve Price, as well as possible additional mechanisms, to alleviate the risk of sudden, significant and sustained price decreases; and (iii) retain the Cost Containment Mechanism to mitigate against sudden, significant and sustained price increases, including whether to maintain the use of discretion to act upon the trigger or whether some automation could be introduced.
  • Basel Committee Report on 2023 Banking Turmoil

    The Basel Committee on Banking Supervision published a press release in early October in which it announced:
    • That it would consult on disclosure frameworks for climate-related financial risks (in November 2023) and banks' cryptoasset exposures (soon).
    • The publication of its report on the banking turmoil of 2023, which assesses the causes of the turmoil, the regulatory and supervisory responses, and the initial lessons learnt. The Basel Committee states that it will be undertaking some follow-up work, including prioritizing work to bolster supervisory effectiveness globally and assessing whether any aspects of the Basel Framework did not function as intended during the turmoil.
    • That by mid-2024 it would publish a report on developments in the digitalisation of finance and their implications for banks and supervisors.
  • EU Publishes New Sustainable Finance Package

    The EU published a new Sustainable finance package 2023 on June 13, 2023. The package includes:
    • A Proposed Regulation on the transparency and integrity of ESG rating activities, which aims to enhance the quality of ESG ratings. The Regulation will introduce an authorization and ongoing supervision regime for ESG rating providers along with certain obligations, e.g., disclosures on ratings methodologies. The proposal does not intend to harmonize the methodologies for the calculation of ESG ratings, but to increase their transparency. Third-country ESG rating providers may be able to offer their services in the EU under either equivalence, endorsement or recognition. The U.K. is currently consulting on making the provision of ESG ratings a regulated activity.

    Read more.
  • UK Government Publishes 2023 Green Finance Strategy

    The U.K. Government has published the 2023 Green Finance Strategy, its latest plan for mobilizing finance to support the shift to a greener financial system. The U.K. has committed to becoming a net zero economy by 2050.

    The action points in the Strategy are based on two pillars: ‘Align’, which focuses on aligning financial markets with U.K. and global climate targets; and ‘Invest’, which encourages green investment. The proposals will have significant implications for corporates, financial institutions and investment firms, asset managers and financial market infrastructure providers. 

    Read more.
  • UK Government Consults on Regulation of ESG Ratings Providers

    As part of its new Green Finance Strategy, HM Treasury has published a consultation paper on proposals to regulate providers of environmental, social and governance ratings. Such ratings providers offer assessments on a firm’s exposure to ESG risks or a firm’s impact on ESG matters. HM Treasury has found that these assessments increasingly trigger responses in financial markets and should therefore be subject to regulation. Responses to the consultation should be submitted by June 30, 2023.

    Read more.
  • UK Independent Review of Net Zero Recommendations for Carbon Markets and Financial Services

    The final report of the independent review of net zero has been published: "Mission Zero: Independent Review of Net Zero".  The review was established in September 2022 to assess the government's approach to achieving its target of net zero greenhouse gas emissions by 2050. The government published its Net Zero Strategy in October 2021. The review's report makes numerous recommendations across a variety of sectors. Below are those most relevant to the financial services sector.

    Read more.
  • Edinburgh Reforms: Changes to the Laws of the UK Financial Services Sector

    The U.K. Government has announced on a series of initiatives, billed as the Edinburgh Reforms, to reform the laws for the U.K. financial services sector. The proposals cover:
    • Reforms to Ring-Fencing Regime;
    • Implementation of Post-Brexit Financial Regulatory Framework;
    • Growth and Competitiveness Remit for U.K. Regulators;
    • Reforms to Wholesale Markets;
    • Faster Settlement;
    • Senior Manager's and Certification Regime;
    • Changes to Promote Investment and Growth in Financial Services;
    • Sustainable Finance;
    • FinTech and Digital Assets; and
    • Consumer Credit.
    We discuss these reforms in detail and what they might mean for the direction of travel for financial services regulation in the U.K. in our client note, "UK Government Publishes Edinburgh Reforms for Financial Services".
  • International Organization of Securities Commissions Publishes Consultation and Discussion Paper on Carbon Markets

    The International Organization of Securities Commissions has published a consultation on Compliance Carbon Markets and a separate discussion paper on voluntary carbon markets. Compliance Carbon Markets involve the issuance of carbon allowances by regional, national or state bodies. Companies are obligated to participate in the schemes to "pay" for their emissions. These markets are governed by regulations set at regional, state and international levels. The U.K., EU, Switzerland and California, for example, each have national Emissions Trading Schemes (as do some other countries or states). VCMs, on the other hand, involve participants who wish to offset their carbon emissions by buying carbon credits issued in relation to climate change mitigation or greenhouse gas reduction projects. VCMs are largely unregulated and, unlike Compliance Carbon Markets, are not mandatory. Instead, independent certification bodies usually check projects underlying credits for carbon reduction projects. Those credits can then be traded, either over-the-counter (which accounts for the majority of trades) or on exchanges.

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  • FCA Publishes Consultation Paper on Sustainability Disclosure Requirements

    Following its 2021 Discussion Paper, the FCA has published a consultation paper setting out proposals to enhance sustainability disclosure and labeling requirements for sustainability-linked investment products. The majority of the rules will apply only to fund and asset managers, although the FCA is considering expanding this to FCA-regulated asset owners in relation to their investment products and for certain rules to apply to distributors of investment products to U.K. retail investors. The proposals are directed at fund and asset managers and portfolio managers based in the U.K. The FCA will consult separately on how these proposals apply to overseas fund and asset managers. The FCA already has climate-related disclosure rules for premium listed issuers, as well as rules for standard listed issuers and certain FCA-regulated firms (asset managers, life insurers, pure reinsurers and FCA-regulated pension providers).

    Read more.
  • FCA Publishes Policy Statements on Climate-Related Disclosures for Standard Listed Companies and FCA-Regulated Firms

    The FCA has published two policy statements introducing new rules and guidance on climate-related disclosures for standard listed issuers and certain other FCA-regulated firms. The Policy Statements mirror the rule imposed under the FCA's Policy Statement on climate-related disclosures for premium listed issuers.

    Read more.
  • UK Financial Conduct Authority Publishes Environmental, Social and Governance Strategy

    The U.K. Financial Conduct Authority has published an environmental, social and governance strategy to support the financial sector in the transition to a "net zero", more sustainable and more inclusive economy.

    The FCA's strategy is built on five themes supported by key actions that the FCA anticipates taking in the near future. U.K. regulated firms should expect significant engagement by the FCA on these issues.

    Read more.
  • UK Announces Plans to be World's First Net Zero Financial Centre

    The U.K. Chancellor of the Exchequer, Rishi Sunak, has announced the U.K. Government's plans to make the U.K. the world's first net zero financial centre. Under the plans, U.K. financial institutions will need to have robust transition plans describing how they will support the transition to a carbon neutral economy. The U.K. Government intends to introduce legislative measures to make these requirements mandatory with a view to increased adoption by 2023 and will incorporate standards for these transition plans into its proposed Sustainability Disclosure Requirements, announced in October in its policy paper, Greening Finance: A Roadmap to Sustainable Investing, further details of which are set out in our related client note.

    Read more.
  • UK Financial Conduct Authority Publishes Discussion Paper on Sustainability Disclosure Requirements and Investment Labels

    The U.K. Financial Conduct Authority has published a discussion paper on its proposed Sustainability Disclosure Requirements and sustainable investment labels. The FCA is seeking initial views on these proposals with the intention of consulting on fuller policy proposals in Q2 2022. Responses to the discussion paper may be submitted until January 7, 2022. These proposals link to the U.K. government's ambitions on climate change and green finance, detailed in its October policy paper, Greening Finance: A Roadmap to Sustainable Investing, further details of which are set out in our related client note.

    Read more.
  • UK Financial Conduct Authority Publishes Policy Statement on Climate-Related Disclosures by Listed Issuers

    The U.K. Financial Conduct Authority has published a policy statement introducing a new rule and guidance on climate-related disclosures for commercial companies with a U.K. premium listing.

    The new rule, which will apply for accounting periods beginning on or after January 1, 2021, will require premium-listed commercial companies to state in their annual reports whether they have made disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures and, if they have not done so, explain why that is the case. The first financial reports containing these disclosures are expected to be published in Spring 2022.

    Read more.