ESBG response to ESMA’s consultation on guidelines of MiFID II suitability requirements
On 27 April 2022, ESBG submitted its response to the European Securities and Markets Authority’s (ESMA) consultation on guidelines on certain aspects of the MiFID II suitability requirements. Published in January 2022, the paper builds on the text of the 2018 ESMA guidelines, which are now being reviewed following the adoption by the European Commission of the changes to the MiFID II Delegated Regulation to integrate sustainability factors, risk and preferences into certain organisational requirements and operating conditions for investment firms.
In our response, we stressed that ESMA should give investment firms more flexibility in implementing the new rules. In particular, we consider that the process for collecting client information is too detailed and impractical for both the client and the investment firm, hence we proposed that it should be optional. We also noted that the two-step approach of the suitability assessment is overly restrictive and time-consuming. For these reasons, we urged that the firm be permitted to collect all information from the customer at once.
Moreover, we understand that Level 2 Regulation allows an investment firm to recommend a product that doesn’t meet the client’s sustainability preferences, if the issue is explicitly stated and explained to the client as well as documented in the suitability report. This practice is contrary to the guidelines which require the client to first adapt his or her sustainability preferences before any further discussion. Additionally, we recommended that collecting extensive client’s information should not always be necessary when, for example, an investment firm does not have any financial instruments included in its product range that would meet the client’s sustainability preferences.
Lastly, we proposed an alternative treatment of investment advice with a portfolio approach in terms of collecting client information on sustainability preferences. We believe it would be more beneficial for the client if firms were allowed to collect such information in each advice session rather than for the entire portfolio as in the case of providing portfolio management.
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Scale2Save brings Ugandan financial stakeholders to commit to financial inclusion
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KAMPALA, 28 April 2022 – Key stakeholders of the Ugandan financial ecosystem came together during a Scale2Save knowledge sharing event, which concluded with a joint call to action with concrete steps to boost financial inclusion in the country.
The signatories of this call to action, and initiative of the World Savings and Retail Banking Institute (WSBI) and its programme for financial inclusion, Scale2Save, are: the Uganda Bankers Association (UBA), Financial Sector Deepening Uganda (FSDU), The Association of Microfinance Institutions of Uganda (AMFIU), The Financial Technologies Service Providers Association (FITSPA), and the Mastercard Foundation.
“We are ready to work with all stakeholders to demonstrate the commitment of the industry, particularly in times of shocks. We are also ready to continue making contributions to the empowerment of low-income customers to seize economic opportunities, build resilience and, ultimately, have a better life”, state the signatories of the document.
This commitment was announced at the end of a 2-day Scale2Save event in Kampala entitled ‘Building resilience and economic empowerment for women and youth’ which brought together some 100 participants. Both the event and the call to action focused on the key drivers of financial inclusion such as customer-centricity, the potential of digital finance and sustainable business models.
Michael Atingi-Ego, Bank of Uganda’s Deputy Governor, described the current state of high financial exclusion of women and youth in the country during his keynote speech at the event.
“When you consider these observations about our lived reality, you start to see the imbalance that Scale2Save is attempting to address here today. This extent of financial exclusion of women and the youth tantamount to trying to balance a three-legged stool on one leg. This is unsustainable in a country that is working towards socio-economic transformation”, he said.
“I am pleased to participate in this event because the Bank of Uganda shares the objective of democratising access to and empowering the users of financial services, not least by championing the National Financial Inclusion Strategy, and through our strategic plan and operations. But like the multilegged stool, it will take the contribution of all stakeholders and partners to bring about universal financial inclusion,” added Mr Atingi-Ego.
Scale2Save is a six-year programme working six African countries including Uganda, where it partners with Centenary Bank, FINCA Uganda and BRAC Uganda Bank. Weselina Angelow is Scale2Save Programme Director. During the event, she presented some of the key lessons learned during the last years implementing financial inclusion initiatives in Uganda.
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Developing a proportionate, fair and efficient IRRBB framework in the EU
On 4 April 2022, ESBG responded to the EBA consultation specifying technical aspects of the revised framework capturing interest rate risks for banking book (IRRBB) positions.
Our response stresses that the current framework is too complex and challenging to implement for smaller institutions with non-complex operations and limited market risk exposure. Although we need a sufficiently prudent management of interest rate risk amongst all EU/EEA banks, the framework should also consider the peculiarities of national banking models and the interest risk inherent in national markets.
As regards the definition of large decline for the purpose of the net interest income (NII) supervisory outlier test, the proposed “Option B” referring to a cost related metric seems more aligned with established internal interest rate risk management methodologies. Yet, the removal of the administrative expenses term, which generates volatility and complexity, is pivotal to favouring this option.
Considering the limited ability of the standardised approach to capture adequately the exposure of each entity to IRRBB, any obligation to use it should be conditional on the competent authority having demonstrated that it would be more relevant than the internal model approach (IMA) it would replace.
In the area of credit spread risk arising from non-trading book (CSRBB), the scope of the framework is too extensive as it includes all instruments. On the contrary, credit spreads, which are based on a market perception, should not apply to illiquid and non-market instruments whose value does not change according to these market spreads. The scope should thus be restricted to instruments that have a clear market price transparency andare easily tradable on a large and deep enough market, because only these assets are subject to the market perception. Moreover, a clear definition of the terms “market credit spread” and “market price of credit risk” is needed.
To avoid different interpretations and ensure a level playing field, it should be stated explicitly in the Guidelines, that non-marketable instruments, such as loans to customers, should be generally exempted from CRSBB as they are covered by the bank’s credit risk management framework.
Finally, the new IRRBB standardised methods for the economic value of equity (EVE) and NII seem to be very calculation intensive but, at the same time, less granular than many banks’ internal models. We therefore stress that both banks and supervisors may lose interest rate risk management insights if banks are required to apply them by their national authorities.
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