Ukraine: ESBG members reaffirm their social responsibility

Ukraine: ESBG members reaffirm their social responsibility

Russia’s military incursion into Ukraine has caused the largest humanitarian crisis in Europe since the Second World War with millions fleeing their country. At the same time, it has triggered various actions and reactions from the European Commission and EU regulators that heavily affect banks.
ESBG members have raised to the challenges that the crisis in Ukraine has created. On one hand, they are sharing knowledge and best practices in a coordinated way to tackle the challenges as they raise. On the other, European savings and retail banks have reaffirmed their commitment to social responsibility with direct actions and initiatives to support people in need.

Associazione di Fondazioni e di Casse di Risparmio (ACRI) (Italy): On 7 March, ACRI allocated an extraordinary contribution of 2 million euros to support the activities of Non-Governmental Organizations (NGOs) assisting Ukrainian refugees fleeing their country.

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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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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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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

leticialozano@wsbi-esbg.org

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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Customer protection

Proposed Solutions and Actions

Simplification of information

Consumer credit is normally partially executed through the granting of a handful of small operations to consumers. Those operations are of limited complexity and – in comparison to mortgage credit – of small amounts, but are, in turn, regulated by considerably complex rules.

As an example of that, the CCD requires creditors to give excessively detailed information to the consumer prior to entering a consumer credit agreement. Nonetheless, consumers ignore information which is too complex or difficult to remember and there is evidence that simpler information with fewer figures is much more effective at landing critical messages. That information may refer to information that only reflects the specifics of the product and meets with client’s expectations for short and clear information – for example – the repayment periods, the amount of the repayment instalments and the applicable interest rate.

Reduction of information

Regarding the pre-contractual information, it is important to focus on diminishing the number of precontractual documents, which banks are obliged to serve to consumers in any case. This approach has not proved itself to be useful for consumers and for that reason the requirements for serving precontractual information and Standard European Consumer Credit Information aren’t helping in achieving the objectives of the Directive. Bearing digitalisation in mind, the required information can barely be presented in a clear and comprehensive way on mobile devices.

A critical look should also be taken at the amount of mandatory information to be included in the credit agreements themselves. From the consumer’s point of view, the agreement should contain only what is necessary, i.e. in addition to the total amount of credit, above all the repayment plan, the default interest rate and information about the typical consequences for the borrower during the performance of the contract (consequences of overdue payments, rights of withdrawal, early repayment conditions).

The reduction of information may be also observed through the role of the right of withdrawal. The right of withdrawal is an instrument for the consumer’s protection and when it is granted to the consumer it should diminish some of the requirements for the service providers, especially in the field of the pre-contractual information that needs to be provided to consumers. If the amount of information is not diminished, there is not a substantial meaning of the right of withdrawal.

Regulate activities rather than institutions

In ESBG’s opinion, gold plating practices in the implementation of the CCD by Member States have limited its effectiveness. The use of innovative technologies has prompted the arrival of new operators to the consumer credit market. Unregulated entities can take advantage of the consumer trust that regulated entities have gained through the years, and even put that trust at risk if they fail to deliver fair and transparent results, increasing regulated entities’ reputational risk. Therefore, a strict implementation of the CCD by all Member States would give consumers better visibility on their level of protection in Europe. In this sense, the CCD should regulate that consumer credit activity should be a reserved activity and should require the application of policies on responsible lending, transparency and customer protection. Any revision to the CCD should be based on the principle “same activity, same rules”.

Creditworthiness assessment requirements should be flexible and preserved for each Member State and each credit institution. There is no need for harmonisation.

In our view an effective creditworthiness assessment can’t be standardised, because of the following nonexhaustive reasons:

  • it should be based on the knowledge of the borrower and on the ability to take into account the specificities of his situation, not on a mechanically applied criterion. This knowledge – inherent to the banker’s job – can’t be standardised.
  • standardising the assessment of risk profile would block the market without taking into consideration the peculiarities of each Member State.
  • it also may lead to a legal risk of not being able to deny credit if the European criteria are met.
  • common indicators wouldn’t allow to take into consideration the economic and cultural background: the same indicators will not necessarily mean the same in different countries (e.g.: savings habits, national rates of divorce, cost of education for children).

Identified Concerns

The CCD evaluation has so far looked at the relationship between the needs and problems in society and the objectives of the Directive.

However, more importantly for us is the impact that digitalisation has had on consumer credit. The emergence of a variety of new technologies has commanded the development of the digital transformation in the commercial and corporate aspects of banking. It is easy to observe a significant upward trend in the budget share dedicated to R&D.

However, the CCD did not anticipate that technological disruption, and new digital means have brought a diverse set of innovative distribution channels, and along with them, new communication means, new ways to access credit and the uniformity of credit agreements.

The use of smartphones, tablets, computers, headsets, and other devices, for not only searching products, but also for entering into credit agreements, is a reflection of the reality that has exceeded the expectations considered by the legislators when agreeing the CCD.

In this regard, special attention needs to be paid to the information to be provided to consumers before entering into the credit agreement. In some Member States, particular attention must be paid to the actual conclusion of the credit agreement when using these devices. Art. 10 (1) CCD, in which the text form of credit agreements is standardised as sufficient, should be harmonised to a maximum in the future, in order to enable a digital conclusion. At present, many Member States have adopted stricter rules (e.g. written form), representing a real barrier for the single market. In our view, in order to adjust the already adopted measures to the new digital technologies it is necessary to assess how much detailed information is required and how it can best be provided to consumers.

We have noticed that new market players such as crowdfunding platforms or SMS loan-providers have not yet played such a major role in the area of consumer loans. Nevertheless, we see a tendency for this role to increase in the future and for considerable changes to be expected in consumer loans as well.

Why Policymakers Should Act

We fully support the principles of the CCD, but we believe that it is reasonable to measure the objectives of the Directive having in mind that:
consumers want to receive clear and manageable information in a short time.

  • it is important not to overburden the consumers with information.
  • its requirements should be suitable for new technology and distribution channels.
  • a clear balance should be created between the objectives of the Directive and the rights of the creditors.​

Background

The EU Consumer Credit Directive (CCD) is designed to strengthen consumer rights and help potential customers make an informed choice when signing up to a credit agreement. Lenders provide standardised information on the product, allowing clear comparison by the consumer with other products available to them. In addition, lenders provide detailed information on the annual percentage rate of change; including the total cost of the credit.

The EU CCD was finalised in 2008. In 2011, an annex was added to clarify the rules on calculating the Annual Percentage Rate of Charge (APR). Finally, in 2014 a report was published in the Implementation of the directive. In 2019, the European Commission launched a consultation on the evaluation of the CCD, following on from an evaluation and fitness check roadmap. The review – still ongoing – aims to assess the effectiveness, efficiency, coherence, relevance and EU added value of the Consumer Credit Directive.​

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Strengthening the quality of corporate reporting and its enforcement in the EU

The EU corporate reporting framework has been developed with the purpose of ensuring that companies publish the right quantity and quality of relevant information with the ultimate purpose of allowing investors and other interested stakeholders to assess companies’ performance and governance and to take decisions based on that.

The consultation aims to evaluate the impact of the EU framework on the three pillars of high quality and reliable corporate reporting: corporate governance, statutory audit and supervision. This position paper is based on ESBG’s response to the consultation.
The European Commission adopted its proposal for a EUGBS in July 2021 and later launched a public consultation. In this context, ESBG has recently finalised a position paper that indicated some of the main concerns with the adopted proposal.

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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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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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