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Regulatory Radar

Latest issue - June 2019

Overview of the key regulatory changes impacting the financial services industry

Highlights in this issue

European Union’s risk reduction measures (RRM) package

On 7 June the following revised rules have been published in the Official Journal of the European Union (OJ):

The new CRR 2 and CRD 5 introduce important changes to the prudential framework. On the one hand, the legal requirements for the leverage ratio and the NSFR, which until now have only been included as a reporting obligation, become binding. In addition, the package also reviews the way some risks are measured, such as counterparty credit risk or interest rate risk within the banking book. Initially, market risk requirements were also going to be included, but the Basel Committee on Banking Supervision published the final standards in the middle of the negotiations, so EU legislators decided to postpone it. New rules are also introduced for exposures to central counterparties and for large exposures.

On the other hand, another set of reforms respond to technical improvements in the regulatory framework. Among them, an attempt is made to provide greater proportionality to regulatory requirements, mainly in terms of reporting, information disclosure or remuneration. Finally, the Pillar 2 framework is reviewed, in order to make it more homogeneous and comparable between entities, and changes are introduced in the macroprudential capital cushions, making the framework more flexible for large entities.

On the same day, Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending the Bank Recovery and Resolution Directive (BRRD) as regards the loss absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC was published in the OJ. This Directive is widely referred to as BRRD 2. 

The amendments to BRRD include:

  • amendments to the requirement for contractual recognition of bail-in: the EU is introducing an exemption to the requirement where it would be legally or otherwise impracticable to include a contractual recognition of bail-in in a contract. The exemption will not apply where the liability is an Additional Tier 1 instrument, Tier 2 instrument or unsecured debt instrument;
  • new early intervention powers for regulators: National regulators will be able to:
    • suspend any payment or delivery obligations, subject to certain conditions being met, for a fixed period of two business days;
    • restrict the enforcement of security interests; and
    • temporarily suspend termination rights;
  • introduction of a requirement for contractual recognition of resolution stay powers: financial contracts entered into by EU banks that are governed by the laws of a non-EU country will need to include a clause with contractual recognition of the resolution stay powers; and
  • amendments to the Minimum Requirement for own funds and Eligible Liabilities (MREL) calibration: currently, MREL's requirements are based upon own funds and eligible liabilities expressed as a percentage of total liabilities and own funds and this is set for each institution. Under BRRD II, a fixed MREL will apply to EU global systemically important financial institutions (G-SIIs), with institution-specific MREL being applied where appropriate. The global total loss absorbing capacity (TLAC) standard has been implemented for EU G-SIIs in changes to the EU's CRR. 

EU Member States are required to transpose the amending Directive into their national laws and to apply the provisions by no later than December 28, 2020, except for provisions relating to MREL, which apply from January 1, 2024.

Finally, Regulation (EU) 2019/877 of the European Parliament and of the Council of 20 May 2019 amending the Single Resolution Mechanism Regulation (SRMR) as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms was also published in the OJ. This new Regulation is widely referred as SRMR II. SRMR II relates to implementation of the TLAC standard in EU law, which needs to take into account the existing institution-specific MREL that applies to all credit institutions and investment firms established in EU as well as to any other entity as laid down in BRRD 2.

These Regulations and Directives entered into force on 28 June 2019.

Royal Decree approving the Regulation of 13 June 2019 of the National Bank of Belgium (NBB) on the determination of countercyclical buffer rate (CCyB)

On 28 June the Royal Decree approving the Regulation of 13 June 2019 of the National Bank of Belgium (NBB) on the determination of countercyclical buffer rate (CCyB) was pulished in the Belgian Official Journal (NL/FR). 

On the same day, the NBB published a press release, announcing it will increase the CCyB for credit risk exposures to the Belgian private non-financial sector from 0% to 0.5% for the third quarter of 2019. 

In view of the acceleration of the Belgian credit cycle for the private non-financial sector, a precautionary and gradual build-up of CCyBs is justified to ensure sufficient resilience in the Belgian banking sector, to secure the necessary absorption capacity for potential credit losses and to safeguard the continuity of credit supply to the Belgian economy going forward. These buffers will be immediately released in the event of a financial shock. Should cyclical systemic risks decrease and the credit cycle turn, these additional buffer requirements will be relaxed towards a 0 % neutral level, commensurate with the cycle.

The measure entails the build-up of an additional buffer of approximately € 1 billion for the Belgian banking sector. Given Belgian banks’ current solvency position and the relatively limited 0.5 % buffer rate imposed, this measure should not disrupt credit pricing or credit availability to the Belgian economy.

This decision is in line with numerous other European countries, including France, Luxembourg and Ireland, which have activated or increased the CCyB. Moreover, it is subject to a one-year implementation period, which means that the countercyclical buffer rate of 0.5 % will become binding as from 1 July 2020. Lastly, this measure is subject to mandatory reciprocity and hence applies to all EU banks operating in Belgium, at both the individual and the consolidated level..

Publication of the FSMA sectoral report on compliance with the conduct of business rules governing conflicts of interest and inducements by insurers, of the Inducements Code of Conduct and of the Royal Decree on professional requirements

On June 21 the FSMA published its sectoral report on compliance with the conduct of business rules governing conflicts of interest and inducements by insurers. On the same day the Inducements Code of Conduct was also published and a few days later, on 25 June, the Royal Decree (RD) setting out the professional requirements for the insurance distributors was published in the Belgian Official Journal.

Sectoral report on conflicts of interest and inducements by insurers 

On June 21 the FSMA published its sectoral report on compliance with the conduct of business rules governing conflicts of interest and inducements by insurers (NL/FR).

The report provides an overview of the key findings following a transversal inspection at insurance undertakings on the application of the conduct of business rules in relation to conflicts of interest and inducements. The focus was on branch 23 insurance products sold to retail customers. 

The key findings

Based on the outcome of the inspections, the FSMA concludes that current conflicts of interest policies and procedures are often too vague or not tailored enough to the specific situation of the insurer. Insurers need to take additional measures to prevent conflicts of interest and to (better) communicate on those conflicts of interest that cannot be adequately managed. The FSMA also noted that the difference between the conflicts of interests mapping and the conflicts of interests register was sometimes not sufficiently clear. They have also confirmed that, with IDD, also tied agents are required to develop at their own level a conflicts of interest policy.   

Regarding the inducements, the FSMA found that the inducements analysis was often not performed by the insurer or based on irrelevant criteria. With respect to the remuneration of commercial employees and intermediaries, the results show that the remuneration techniques used by the insurance undertakings are mostly focused on promoting sales volumes. In its report, the FSMA urges insurers to be extra vigilant with certain remuneration techniques and non-monetary incentives and promotes the inclusion of qualitative criteria, or clawback regimes. 

Specifically for branch 23 products, additional attention should be paid to the conflicts of interest that are inherently linked to retrocessions, particularly when this amount is not retroceded to the client. 

Overall the FSMA also concludes that insurers insufficiently monitor and control their internal policies and procedures: i.e. insufficient first line controls are in place, and/or the second line is not (soon enough) involved. 

Inducements Code of Conduct

On 21 June the RD of 17 June 2019 approving the Inducements Code of Conduct for life and non-life insurance products was published in the Belgian Official Journal.

The Inducements Code of Conduct has been drafted by the insurance sector but was submitted to the FSMA for advice, as required by the Insurance Act of 6 December 2018.

The code focusses on detailed rules for non-monetary incentives in particular, specifying the conditions for insurers to continue to organise training seminars and events for the benefit of their intermediaries and commercial employees. The code also includes general principles that apply to all types of inducements, i.e. the principle of proportionality and conflicts of interest, as well as a non-exhaustive list of inducements that are considered to have a negative (detrimental) impact on the service provided to the client.

The Inducements Code of Conduct entered into force on 1 July 2019.

RD on professional requirements

On 25 June the RD of 18 June 2019 implementing articles 5, 19° /1, 264, 266, 268 et 273 of the Insurance Act of 4 April 2014 was published in the Belgian Official Journal (NL/FR). 

The new RD replaces the RD of 25 March 1996 implementing the Act of 27 March 1995 on insurance intermediation and distribution. 

Its sets out the requirements with respect to:

  • the registration of (re)insurance intermediaries and ancillary intermediaries;
  • the notification obligation of (re)insurance undertakings (activity, number of persons in contact with public (PCPs), etc.);
  • the number of Responsible(s) for Distribution to appoint;
  • the professional Liability Insurance;
  • the professional competence: the professional knowledge and competence requirements will be determined per types of product: non-life, life and insurance based invemtment products (IBIPs); and
  • ongoing training: the main difference with the AssurMiFID regime is that the number of training hours is now fixed at 15 hours per year instead of 30 hours in 3 years.

The RD also specifies the notion of “professional client” for which reference is made to the definition included in MiFID II (criteria defined in the annex of the RD bearing execution of article 2, al 1, 28° of the Act of 2 August 2002 on the financial sector and services surveillance)

The RD foresees a transitory regime depending on the date of registration of the intermediary.

Furthermore in this issue

Download the full version of this newsletter for more information on:

  • Conduct of Business & Products
  • Consultative documents
  • Financial Crime & Market Integrity
  • Governance & Risk Management
  • Capital & Liquidity
  • Disclosure & Reporting
  • Crisis Management
  • Market Stability and Financial Markets Infrastructure
  • Regulatory Perimeter
  • Technology & Innovation
  • Supervision
June 2019 edition
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