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As part of our sector-focused series, we have spoken with our in-house PSLs to outline the key legal trends to watch in Financial Services as 2019 draws to a close.
This article focuses on sustainable finance, LIBOR and the new prudential regime.
On 22 September 2019, 13 years after the launch of the United Nations (UN)-supported Principles for Responsible Investment (PRI), the UN Environment Programme Finance Initiative’s (UNEP FI) Principles for Responsible Banking (PRB) were launched.
The PRB aim to strategically align banks with the UN Sustainable Development Goals (SDGs) and the UN Paris Agreement on Climate Change and - like the PRI - contain mandatory reporting requirements for signatories.
Both the PRI and the PRB have a significant number of signatories globally and it is likely that further banks, asset owners, investment managers and service providers will sign up to these principles.
In addition to the global, voluntary PRB and PRI - and a wide range of industry best practice guidance for different asset classes - there are proposals for EU regulations (and amendments to delegated acts under the recast Markets in Financial Instruments Directive 2014/65/EU (MiFID II) and the Insurance Distribution Directive (EU) 2016/97) on:
For further information about these EU regulatory developments, see the European Commission’s webpage on green finance and frequently asked questions and our Sustainable finance timeline.
On 30 September 2019, Bank Overground published an article reminding the market to prepare to transition from the London interbank offered rate (LIBOR) to alternative, more robust benchmarks such as overnight risk-free rates (RFRs) by end-2021, when it is expected that LIBOR will be discontinued.
The article noted that despite progress in establishing RFRs, many new contracts maturing beyond 2021 continue to reference LIBOR. In particular, LIBOR-linked lending continues to dominate in loan markets, and many new long-dated derivative contracts continue to reference LIBOR.
In a speech given in June 2019, the Bank of England (BoE)’s executive director for markets, Andrew Hauser, called the transition from LIBOR ‘as complex a task as any the financial sector has faced over the past decade, involving a global network of market participants and public authorities, and touching most systems, products and markets in some way’.
There are significant regulatory barriers, as outlined in letters to the European Commission, the Basel Committee on Banking Supervision, the Prudential Regulation Authority and the FCA which BoE’s working group on sterling RFRs (RFR WG) published on 23 October 2019. The issues highlighted by the RFR WG include:
For updates on the transition to RFRs, see Benchmarks Regulation – timeline.
In April 2019, the European Parliament and the Council of the EU reached political agreement on a revised version of the European Commission’s 2017 proposal to overhaul the prudential regime for investment firms in the EU.
The intention is to create a framework that is more proportionate and risk-sensitive. Under the new regime, most investment firms will be subject to new, simpler prudential rules, while large, systemic firms that carry out bank-like activities and pose similar risks as banks will be regulated and supervised like banks.
The new regime will take the form of a new regulation, which will include amendments to CRR and MiFIR, and a new directive, which will include amendments to the Capital Requirements Directive 2013/36/EU (CRD IV) and MiFID II. Other changes include:
The Council is expected to adopt the final texts shortly. The new legislation will enter into force 20 days after publication in the Official Journal of the EU and will take effect in 2021. Given the magnitude of changes, however, investment firms should familiarise themselves with the changes and start preparing now.
For more information, see our Practice Notes: Review of the prudential framework for investment firms and Preparing for Brexit: CRR and prudential regulation—quick guide
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Amy is an established writer and researcher, having contributed to publications, such as The Law Society, LPM, City A.M. and Financial IT. Her role at LexisNexis UK involved leading content and thought leadership, as well as writing research reports, including "The Bellwether Report 2020, Covid-19: The next chapter" and "Are medium-sized firms the change-makers in legal?"
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