ESBG responds to the Commission consultation on defining violations of Union restrictive measures

Restrictive measures are an essential tool for maintaining international peace and supporting democracy, the rule of law and human rights.

To preserve these values, the EU currently has over 40 sets of restrictive measures in place which are binding on Member States and on any person or entity under their jurisdictions, including banks. While the adoption of Union restrictive measures has intensified over recent decades, national systems still differ significantly in the criminalisation of their violation. Against this background, the European Commission published a proposal for a Directive on the definition of criminal offences and penalties for the violation of Union restrictive measures in December 2022 to support the efficient enforcement of the rules.

In our response to the Commission’s call for feedback on the proposal, ESBG highlighted important points focused on the roles of banks in the sanctions compliance, such as removing the penalization of serious negligent violations. Additionally, a non-punishable voluntary self-disclosure for employees should be introduced to sufficiently protect them when a mistake happens. This shall prevent the criminalisation of human errors in sanction checks. Furthermore, we stressed that criminal liability requires a precise conceptual delineation of rights and obligation of the involved parties, and provided more remarks on the particular provisions.

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ESBG’s letter to the Commission on the EBA RTS and GL on interest rate risk in the banking book

On 20 December 2022, ESBG sent a letter to the European Commission about the draft EBA Regulatory Technical Standards (RTS) on interest rate risks for banking book (IRRBB) supervisory outlier tests (SOT) and EBA Guidelines on IRRBB and credit spread risk in the banking book (CSRBB).

Whilst we support a revision of the framework capturing interest rate risks for banking book positions, we also believe that the 2,5% SOT threshold for the definition of “large decline” in net interest income (NII) suggested by the EBA is not appropriate as it was calibrated in a low interest rate environment. We therefore suggested that the EBA continues monitoring the normalisation of the monetary policy and only re-calibrates the threshold at a later stage more in line with current market conditions. Furthermore, we pointed out that the relative quantitative impact study was performed at consolidated level and only with a small number of large banks, which makes the calibration of the threshold even less appropriate.

Furthermore, in order to avoid different interpretations and ensure a level playing field, we stressed in relation to the EBA GL on IRRBB and CSRBB that non-marketable instruments, e. g. loans to customers, should be generally exempted from the scope of the CRSBB framework. The value of these instrument is not exposed to market fluctuations, moreover they are already covered through banks’ credit risk management processes.

The European Commission is currently reviewing the EBA RTS on IRRB SOT and is allowed to propose amendments to the text, which would eventually need to be assessed by the EBA. The Commission aims to publish the final RTS around mid-2023. For what concerns the EBA GL on IRRBB & CSRBB, the Commission cannot propose amendments but may suggest a revision to the EBA.

Looking ahead, ESBG will continue to remain engaged with the Commission during the review process.

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ESBG responds to the ESAs call for evidence on greenwashing

The European Supervisory Authorities (ESMA, EBA, EIOPA) received a request for input from the Commission relating to greenwashing risks and supervision of sustainable finance policies. Therefore, they asked for input on potential greenwashing practices in the EU financial sector. On 10 January 2023, ESBG provided the ESAs with its contribution.

ESBG welcomes this call for evidence since greenwashing is an issue which must be tackled at the EU-level and would like to recall that banks and savings banks are intensively dedicated to the traceability, transparency and credibility of the sustainability features they have to consider in investment advice and financial portfolio management. The EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR) and the Markets in Financial Instruments Directive (MiFID II) already aims at tackling greenwashing. Nonetheless, ESBG regrets that these different regulations are currently based on a different understanding of greenwashing. The existence of a large amount of complex ESG information and data that needs to be provided to investors and clients can also create a perverse effect through an information overload which can facilitate greenwashing.

Therefore, in the interest of customers, banks, saving banks and issuers of financial products, ESBG assesses that there is an urgent need for a harmonization of the understanding of greenwashing within the framework of European legislations and supervisory practices. ESBG believes that it could be achieved through the following steps:

  • First, there is a need to strengthen transparency through a consistent enforcement of existing EU regulations’ requirements.
  • Then, a clear and scientifically comprehensible, as well as uniform legal definitions of both sustainability and greenwashing for financial instruments must be implemented, keeping in mind the need for practicality and feasibility for banks and saving banks when implementing these requirements.

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ESBG provides input on technical negotiations of the Artificial Intelligence Act

In Q4 of 2022, ESBG staff was invited to three stakeholder info sessions on the technical negotiations on the Artificial Intelligence Act, organized by the offices of MEP Voss (EPP, LIBE Shadow/JURI Opinion), MEP Clune (EPP, LIBE Shadow), and MEP Maydell (EPP, ITRE Opinion). During these info sessions, stakeholders were updated about the articles discussed during the technical meetings that took place in the Parliament and invited to provide concrete input on concrete issues.

The definition of AI remains a highly debated issue. According to ESBG members, the proposed definition is currently too broad. ESBG members argued for a narrow scope, since a scope that is too broad could potentially include more traditional software systems that should not fall under the scope of the proposal The definition of AI needs to take into account the different levels of autonomy and explainability of the system, as well as the level of control and human participation. Furthermore, it must contain the ability to learn and reason as central element.
Stakeholders were also asked for concrete examples of overlap with other pieces of legislation, also of sector-specific legislation. ESBG pointed out a number of articles where overlap with other legislation, notably the GDPR exists. There has also been discussion on the high-risk classification, extraterritorial applications, cooperation mechanisms, and access to data. Therefore, ESBG provided input on those matters as well.

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Crypto-asset Activities: WSBI-ESBG calls for a more consistent regulatory approach

The Financial Stability Board (FSB) which is an international body that monitors and makes recommendations about the global financial system published a proposed framework for International Regulation of Crypto-asset Activities on 11 October 2022. The said framework sets out a) the key issues and challenges in developing a comprehensive and consistent regulatory approach that captures all types of crypto-asset activities that could rise to financial stability risks; b) policy initiatives at the jurisdictional and international levels; c) the FSB’s proposed approach for establishing a comprehensive framework.

The FSB  reports that crypto-assets and markets must be subject to effective regulation and oversight commensurate with the risks they pose. Crypto-asset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.

WSBI-ESBG, for its part, welcomed the initiative of addressing the above-mentioned crucial issues and replied to the call for feedback on this consultative document on a proposed framework for International Regulation of Crypto-asset Activities, in particular calling for a more measured regulatory approach between the several players (i.e.; financial institutions, issuers, and providers of crypto assets) and for consistency between regulations and requirements applicable to traditional finance and crypto-based finance.

Finally, members underlined the importance of having a clear and dynamic regulatory approach to avoid confusion on the categorization of crypto-assets (i.e.; stablecoins, global stablecoins, digital assets), and the need for a higher consistency between local and international regulations.

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WSBI-ESGB members call for aligned approach between regulatory bodies on Cyber incident reporting

On 17 October 2022, the Financial Stability Board (FSB) published a consultative document on Achieving Greater Convergence in Cyber Incident Reporting (CIR). In parallel, the FSB invited feedback on this document. Back in 2021, the FSB already published a report on CIR. The report set out three ways the FSB would take work forward to achieve greater convergence in cyber incident reporting: developing best practices, creating common terminologies for CIR, and identifying common types of information to be shared across jurisdictions and sectors.

To inform on its work, the FSB conducted a survey amongst FSB members to identify the most common reporting objectives and types of reporting performed; understanding the practical issues financial authorities and financial institutions have in collecting or using incident information; identifying the information items authorities collect to meet the common reporting objectives, including a review of existing incident reporting templates; and exploring the mechanisms for financial authorities to share incident information across borders and sectors.

Drawing on the survey findings, the FSB has set out recommendations to address impediments to achieving greater convergence in CIR with a view to promote better practices. This work also helped to inform refinements to the Cyber Lexicon, which resulted in the addition of four terms and revision of three definitions. The FSB also reviewed financial authorities’ incident reporting templates and identified commonalities in the information collected. Leveraging on this work, the FSB presented a concept for a format for incident reporting exchange (FIRE) to promote convergence, address operational challenges arising from reporting to multiple authorities and foster better communication.

In the face of the above mentioned initiative, WSBI-ESBG replied to the call for feedback on this consultative document on cyber incident reporting, in particular calling for a harmonised reporting approach between different regulatory bodies, processes, and data requests. In terms of promoting greater convergence in CIR, financial authorities could offer tools and platforms that minimize operational issues for reporting of incidents.
Finally, members underlined the importance of having clear definitions to avoid confusion and to differentiate between the terms ‘cyber incident’ and the subcategory thereof of ‘cybersecurity incident’.

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Joint Industry letter on the importance of advice and preserving the commission-based model

ESBG toghether with EFAMA, EBF, Insurance Europe, EACB, EAPB and EUSIPA, issued a public letter addressed to Vice-President Dombrovskis, Commissioners McGuinness and Director-General Berrigan, remarking the importance of advice for European retail investors and the need to maintain the coexistence of fee-based and commission-based advice

Joint Industry Letter

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Value for money approach: ESBG position

In September 2022, the European Commission circulated among stakeholders a Discussion Note on a “Value for Money” (VfM) approach with the aim to solicit views on how the retail investor protection framework might be enhanced through the development of an approach aimed at ensuring that products offered to retail investors offer value for money.

ESBG welcomed the intentions of the EC and DG FISMS to assess how the retail investor protection framework may be enhanced through this specific methodology, nevertheless, we believe that it should be made clear that this approach cannot work as one-size-fits-all under the entire product governance requirements. By the same logic, we wanted to stress that existing tools already provide for a “Value for Money” approach.

Therefore, we answered to the discussion note questions and we sent our position to DG FISMA with the aim of explaining why this approach should mainly focus on products distributed under investment advice, if at all. In order to prevent a distortion of the competition between manufacturers, the concept will need to be fine-tuned, taking into account the potential regulatory increasing costs of bureaucracy, calculation and daily reporting obligations.

The new regulatory regime should also contribute to diversify the supply. As it is well known, a broad range of manufacturers and products is essential to guarantee a competitive offer. For example, when EC asked to assess that certain products that are offered to consumers do not offer Value for Money, ESBG believes that there are already current requirements under product governance to address the performance of products and their costs and charges.

These are implemented through various measures taken by the manufacturers and distributors. Moreover, at the level of the distributors, a check is already carried out during the investment advice process as to whether the distributor also offers equivalent products to the product which is intended for recommendation. About which criteria should be used for an assessment of VfM, ESBG agrees that manufacturers already carry out comprehensive inquiries of the costs of their products in order to inform investors (i.e. in the PRIIPs KIDs), so that meaningful data is available on costs and charges. However, the client may take into other considerations like the horizon of investment of a piece of its savings, the level of security etc, so it is not possible to only take into account figures. The investor is usually interested in the most attractive possible return. The future return of a product cannot be predicted when it is launched.

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WSBI-ESBG shares its position on the draft FATF Guidance on the transparency and beneficial ownership of legal persons

In March 2022, the Financial Action Task Force (FATF) adopted amendments to Recommendation 24 (R.24) on the transparency and beneficial ownership of legal persons. A draft update on the Guidance to R.24 was published afterwards, aiming to facilitate the implementation of the new rules.

The FATF Recommendations set out global AML/CFT measures and should be implemented by countries in the best way possible according to their legal, administrative and operational frameworks. The first batch of FATF Recommendations were published in 1990 and lastly updated in 2012. They are complemented by their Interpretive Notes and a Glossary of definitions.

The FATF Recommendation 24 (R.24) addresses the transparency and beneficial ownership of legal persons. Inter alia, R.24 provides advice on preventing the risks of misuse of legal persons for ML/TF, prohibiting legal persons to issue new bearer shares or bearer share warrants, and to take measures against the misuse of nominee shareholders and directors. Moreover, the access to beneficial ownership and control information by financial institutions and designated non-financial businesses and professions should be facilitated when meeting certain requirements.

In our response to the consultation, WSBI-ESBG asks for the following:
• Harmonisation of the rules on identifying senior managing officials when a beneficial owner cannot be identified;
• Verification of company registers by national authorities to foster the reliability of their information;
• Establishing an international beneficial owner register to be used by obligated parties in fulfilling their due diligence obligation;
• Creating a list of stock exchanges, that hold information of listed companies to be used for beneficial ownership obligations;
• Making the tax identification number as accessible as appropriate, in case it will be deemed as a necessary KYC-information;
• Permitting the exchange of beneficial ownership information within the same group of banks and between banks.

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ESBG's response to FATF draft amendments on the transparency and beneficial ownership of legal arrangements

Following a white paper on the revision of the rules on the transparency and beneficial ownership (BO) of legal arrangements, the Financial Action Task Force (FATF) published draft amendments to its Recommendation 25 (R.25) and Interpretive Note (INR.25). The FATF may also amend the definition of BO in the glossary to provide more clarity regarding legal arrangements.

The FATF Recommendations set out global AML/CFT measures and should be implemented by countries in the best way possible according to their legal, administrative and operational frameworks. The first batch of FATF Recommendations were published in 1990 and lastly updated in 2012. They are complemented by their Interpretive Notes and a Glossary of definitions.

The FATF Recommendation 25 (R.25) addresses the transparency and beneficial ownership of legal arrangements. Inter alia, R.25 provides advice on measures to prevent the misuse of legal arrangements for ML/TF, and on facilitating the access to beneficial ownership and control information by financial institutions and designated non-financial businesses and professions when meeting certain requirements.

In our response, we highlighted that a definition of “basic ownership” is needed to provide legal certainty on the use of sources when obtaining beneficial ownership information. As a main challenge, we identified the different regulatory frameworks and transparency regimes that hamper the implementation of the rules.

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