Reducing the scope of the EBA NPLs data templates
On 5 September 2022, ESBG responded to the EBA consultation on the draft non-performing loans (NPL) transaction data templates, which seek to improve the functioning of secondary markets for NPLs.
The number of data fields in the proposed templates (especially those marked as “mandatory”) is significantly higher than what has historically been proven necessary to close voluntary NPL deals from a market standards perspective and it should therefore be reduced. Such a high number of data fields would in fact bring a significant costs increase for sellers and may jeopardise the development of NPL secondary markets.
In addition to the fact that most of the required information is too detailed and not relevant for the purposes of loan valuations, the data is also not always available within the banking system. This could lead to a counter-productive effect where sellers could renounce to sales they could execute due to constraining mandatory fields.
Another main impediment for this template to be useful is the issue of data consistency. The template would mainly be populated with management data and internal methodologies that can use different calculations and logics leading to incomparable information among portfolios.
Furthermore, it makes no sense to have common templates for single names or reduced portfolios of single names and massive portfolios of NPLs. Exposures to one single debtor or to a reduced number of corporates or SMEs have historically needed a different set of information, as their potential purchasers perform a deeper financial and legal analysis of the exposures rather than a statistical analysis, which is more adequate for massive portfolios.
Overall, the remaining fields compared to the original templates from 2017 still contain significantly more information than market standards require. For a well-functioning secondary market it is currently possible to sell NPLs by providing mainly 20 data fields.
Against this background, we request that the EBA further streamlines the templates, aiming at simpler, more balanced and effective design in order to achieve a broader application and increase transparency in the NPL market, without having a detrimental impact on EU NPL deals.
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FATF revision of Recommendation 25
The Financial Action Task Force (FATF) aims to better meet its objective of preventing the misuse of legal arrangements for money laundering and terrorist financing (ML/TF) and therefore conducts a review of its Recommendation 25 (R.25) and the Interpretive Note on their transparency and beneficial ownership (BO).
WSBI-ESBG response to the public consultation
General position
• The fragmented regulatory landscape is an issue for obtaining information from other jurisdictions.
• Guidance for implementing R.25 rules would improve the timely availability and accuracy of BO information.
• Resourcing and funding of the implementation of the R.25 requirements pose potential challenges.
Scope of legal arrangements, risk assessment and foreign trusts
• Regarding the potential limitation of the scope of risk assessment and mitigation obligation to such legal arrangements that have sufficient links with the countries, a sectoral risk assessment for legal persons and arrangements should be considered as a “sufficient link”.
• The new suggested risk assessment allows for the application of enhanced due diligence measures and also provides for how best to mitigate risks associated with different products and services.
Obligations of trustees under R.25
• When extending the requirement to obtain and hold information on beneficiaries or classes of beneficiaries to objects of powers of discretionary trusts, who may derive a benefit form a trust in the future, it should be referred to professional service providers such as lawyers, notaries, accountants, etc.
• Regarding the nexus of such obligations based on residence of trustees or location where the trusts are administered, it would be difficult to verify or authenticate information provided by trustees from other jurisdictions. Some trustees may reside from high-risk jurisdictions.
Definition of beneficial owners
• A standalone definition for BO in the context of legal arrangements might create a clear distinction between a BO for legal arrangements and for legal persons, but could lead to confusion. For a harmonised definition, the interpretive note should provide clarifications on, e.g., the element of “control” in a trust.
• Information regarding beneficiaries should be publicly available to promote transparency.
Obstacles to transparency
• Trusts that are owned or controlled by a company with various directors or nominee shareholders in different jurisdictions could be used to obscure ownership in legal arrangements.
• Flee/flight clauses are used as a protective mechanism for members and the interest of the trust. The enforceability of such clauses might be challenging.
• Key obstacles to transparency of trusts and other legal arrangements are the lack of uniform know-your-customer (KYC) standards as well as the use of professional intermediaries. Furthermore, the identification of BO of nominee shareholders, directors or various stocks can be difficult.
Approach in collecting beneficial ownership information
• Incomplete mandatory KYC information collected by other agents or service providers incl. trust and company service providers are observed to be an issue, as well as a fragmented regulatory landscape.
• A multi-pronged approach should be followed for accessing BO information of legal arrangements.
Adequate, accurate and up-to-date information
• The notion of “independently sourced/obtained documents, data or information” in the definition of accurate information poses an issue for the private sector as it is difficult to obtain adequate information
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ESBG submits its position to the International Accounting Standards Board on IFRS 17
On 23 May, ESBG submitted its position paper to the International Accounting Standards Board (IASB) Interpretations Committee (IC)’s on IFRS 17 (standard for insurance contracts).
The IC is the interpretative body of the IASB. Its agenda decisions include explanatory material on how the applicable principles and requirements in IFRS Standards apply to the transaction or fact pattern described in the agenda decision.
The IFRS IC received a request in March about a group of annuity contracts, i.e. written agreement between an insurance company and a customer outlining each party’s obligations. The request questioned how an entity determines the amount of the contractual service margin (unearned profit that an entity expects to earn as it provides services) to recognise in the profit or loss statement in a period in case of survival of the policyholder at the end of the insurance policy term.
The Committee concluded that a method based on the amount of the annuity payment the policyholder is able to validly claim meets the principles of IFRS 17. Consequently, the Committee decided not to add a standard-setting project to the work plan.
On our part, ESBG believes that this does not correctly portray the insurance service provided under these contracts. We are of the opinion that an alternative approach based on the present value of expected future annuity payments would more accurately determine the quantity of insurance contract services provided by their contracts. As the policyholder has exchanged an insurance premium to get protection against the risk of surviving for an unexpected period of time, the value the policyholder obtains from the insurance contract is continuous over time.
In addition to this, IFRS 17 is a principle-based standard and should not prescribe a method for determining the quantity of the benefits provided under a group of insurance contracts. Finally, ESBG questions the timing of bringing a TAD less than one year before the date of first application of IFRS 17. ESBG would recommend this issue to be addressed in a post-implementation review together with other issues that were pending to be addressed as well as others that may arise in the future.
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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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ESBG members waive bank transfer costs to support Ukrainian people
European Savings and Retail Banking Group (ESBG) members are standing in solidarity with people in need in Ukraine by waiving fees on bank transfers to the country already or taking steps towards doing it in the near future.
“Social responsibility is in our members’ DNA. This is why I’ve asked our members to bring financial resources at no cost to people in Ukraine during these difficult times”, said ESBG president Dominique Goursolle-Nouhaud.
The ESBG president has communicated about this topic with all 23 members, who represent over 850 banks in 18 European countries serving more than 160 million customers.
“It is a clear signal of solidarity that many ESBG members have been already waiving fees on bank transfers to Ukraine and others are taking steps towards doing it. Our thoughts are first and foremost with the Ukrainian people and these members are willing to leave profits aside to help”, said Goursolle-Nouhaud.
This meets the intention of a recent call by the European Central Bank (ECB). On 18 March, Andrea Enria, Chair of the Supervisory Board of the ECB, addressed a letter to ESBG and other main EU banking associations asking to suspend or reduce, on a voluntary basis, transaction costs for bank transfers to Ukraine and Moldova. The latter is considered the country for which the intake of refugees is most challenging. The letter followed a recommendation by Members of the European Parliament.
Press contact:
Leticia Lozano, Senior Communications Adviser
Tel. +32 2211 1196
About ESBG
The European Savings Banking Group has 23 members in 18 countries. As some of its members are national organisations, ESBG represents the interests of over 850 banks working responsibly and closely with their communities and SMEs. Together, ESBG members manage assets worth €5,700 billion, serve 162 million Europeans and employ nearly 660,000 people. ESBG is headquartered in Brussels.
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European Commission review of the Mortgage Credit Directive
On February 28, ESBG sent its response to the European Commission questionnaire on what to include in the upcoming Review of the Mortgage Credit Directive (MCD). The consultation, published in November, covered 55 questions. The review of the legislative text is expected to be launched later this year.
In our response, we asked for a limited review on the necessary topics only. Our overall position is that an in-depth review of the Mortgage Credit Directive would be premature, at this time. Since the last review took place in 2016 and it concerns long-term finance, more time is needed to evaluate the impact of the changes included then.
As the mortgage market is not operating much cross-border, we believe that EU level intervention is not necessary. Consumers rely heavily on local expertise of mortgage advisers and working in their own languages and within national legal frameworks.
However, one area we are in favour of a review is the compatibility with other EU texts. For example, the General Data Protection Regulation, the EU Accessibility Act, and the Rome I Regulation will all impact the MCD so alignment is necessary.
As always, ESBG is pleased to see work being carried out on consumer protection. ESBG members have a long history of financial education and welcome the provision in the MCD text to increase financial education for consumers, which is more defined at national level.
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European Commission Banking Package proposal
On February 22, ESBG responded to the European Commission “have your say" consultation on the Banking Package proposal, which transposes the final elements of the Basel III reforms in the EU regulatory framework and pursues other prudential and supervisory objectives.
ESBG supports the application of the output floor at the highest level of consolidation. The envisaged single-stack approach however requires that supervisory powers are more clearly framed and that the arrangements mitigating its impact are of a longer-term nature or permanent. The transitional arrangements for residential real estate, unrated corporates and derivatives should be made permanent or at least phased out based on the actual observation of structural changes in the EU banking market. Moreover, these flexibilizations should be extended also to institutions using the standardised approach to maintain a level playing field.
We recognise the proposal to disregard historical operational losses for all institutions within the calculation of capital requirements for operational risk, meaning that the internal loss multiplier (ILM) is effectively being set equal to one. This is a discretion provided in the Basel framework.
As regard to equity exposures, we support the implementation of a new category with a lower 100% risk weight (RW) for long term strategic equity investments.
Regarding specialised lending, we support the proposal to increase the risk sensitivity for unrated object finance exposures.
With respect to real estate exposures, the proposed requirements for non-income producing real estate should not go beyond the Basel standards. We then support the increased risk sensitivity for acquisition, development and construction (ADC) lending.
The threshold to use the simplified credit valuation adjustment (CVA) method should be aligned with the provision in the Basel framework.
We warn against an excessively restrictive application of the credit conversion factor (CCF) to trade finance instruments and to other exposures.
The proposed centralization of the disclosures is appreciated. Small and non-complex institutions should be exempted from reporting and disclosing requirements in the area of Environmental, Social and Governance (ESG). Further proportionality elements could then be envisaged.
Furthermore, the decision to retain important EU features such as the SME and the Infrastructure supporting factors and the CVA exemptions is appreciated.
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Considerations on the BCBS principles for the management & supervision of climate-related financial risks
The Basel Committee on Banking Supervision (BCBS) has published a public consultation on principles for the effective management and supervision of climate-related financial risks. The document forms part of the Committee’s holistic approach to address climate-related financial risks to the global banking system and aims to promote a principles-based approach to improving both banks’ risk management and supervisors’ practices in this area. This new position paper based on our response to the consultation.
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Access to better technology for (Supervisory) Reporting
On 18 February 2022, the four European banking associations (EACB, EAPB, EBF and ESBG) co-hosted the “Access to better technology for (Supervisory) Reporting” workshop that brought together the entire European banking industry, the European Banking Authority and the international RegTech community to openly exchange views and learn from each other on how RegTech solutions could help banks reduce their reporting costs and what are the hurdles to clear along the way.
300 participants across Europe participated in this half-day, targeted workshop. The presentations delivered by the banking industry clearly revealed the many challenges and complexities the industry has been facing for about 15 years due to the flood of additional data reporting requirements to banks. Data has never been as important as it is now with regulatory reporting having shifted from a simple administrative task in the past to a strategic objective high in the agenda of banks and a steering tool, with supervisors placing increasing focus on data quality. The current situation is the result of a layering of successive regulations, by different authorities at national and EU level, with the added complexities of different definitions and shorter delivery times demanding substantial investment by banks in systems, processes, and specialized staff. Banks have been mastering these challenges very well, generally speaking, but there is always room to become even more efficient.
While there are existing cases where banks are already benefitting from the use of technology either from in-house solutions or by creating a shared utility as result of a joint venture or other forms of pooling of resources by a number of banking groups in a country, the discussion revealed there is still ample room to explore and lot of work ahead to benefit from technology at a large scale.
A dedicated panel composed by RegTechs based across Europe confirmed that technology is available or is being developed to support banks with a wide range of services offering from end-to-end to targeted solutions. RegTechs also confirmed complexity is the most challenging aspect in the current reporting environment identifying standardization, infrastructure, and automation as tools to decrease the complexity.
The different ways regulatory reporting is done in Europe also adds complexity. Creating a more functional and interconnected ecosystem is key to start moving towards a much-needed standardization where RegTechs can play a key role. Replying to questions raised by the banking industry, RegTechs stressed that technology should be seen as innovation that could help banks reach beyond the 15-24% cost reduction as estimated by an EBA study last year, rather than a black box that brings its own complexity. RegTechs are also trying to remove barriers by intensively promoting their services for which forums like the workshop organized by the trade banking associations was an ideal setting to bridge the gaps between RegTech and the banking industry.
With a forward-looking perspective, the EBA provided an overview of how the different recently launched initiatives such as the Integrated Reporting System and the Commission’s supervisory data strategy aim to shape the future of supervisory reporting. The challenge is big, but the benefits are worth. The banking industry, RegTech community and supervisory authority agreed events like the workshop are key to foster collaboration and they will stay in close contact.
