State Aid rules for banks in difficulty

The European Savings and Retail Banking Group (ESBG) welcomes the initiative of the European Commission to launch a targeted consultation aiming at reviewing the State Aid rules for banks in difficulty.

The potential revision will assess the fitness of the current rules regarding burden-sharing, market discipline, financial stability, and the protection of taxpayers among other things. The modernized framework should ensure that the State Aid rules are applied proportionally, are adapted to the crisis management and deposit insurance (CMDI) legislation and are specifically targeted at different kinds of bank crises.

ESBG argues that all DGS measures available under the CMDI framework applied in accordance with the rules established by the DGSD and the BRRD/SRMR, regardless of national specificities in the design, the governance, and the functioning of DGSs, should be exempted from the application of the regular State Aid control rules. It should be made clear that when DGS funds are used for support measures, State Aid rules should not be applicable and no notification to the Commission be required. Exempting the application of the State Aid rules on actions under the CMDI framework will allow the effective and undisturbed use of measures foreseen under DGSD/BRRD/SRMR.
Furthermore, and until such improvements are effectively achieved, ESBG finds it important to avoid any increase in contributions to the national DGS and to the Single Resolution Fund (SRF).

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International Sustainability Standards Board consultation on Sustainability Disclosures

The International Sustainability Standards Board (ISSB) has been established at COP26 with the purpose of developing a comprehensive global baseline of sustainability disclosures for the capital markets. The purpose of the consultation is to develop a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value.

To this end, the consultation includes proposed standards on general sustainability-related disclosure requirements as well as on climate-related disclosure requirements |Position – Executive summary | August 2022 |

CONSISTENCY BETWEEN ISSB STANDARDS AND EFRAG ESRSs
WSBI-ESBG believe that it is crucial to achieve consistency of sustainability reporting at global level and especially a full alignment of reporting requirements between ISSB standards and EFRAG European Sustainability Reporting Standards (ESRSs) to ensure a global playing field in terms of sustainability reporting. This convergence between both standards will address the risk of additional disclosures.

DOUBLE MATERIALITY
WSBI-ESBG highlight that the IFRS sustainability standards are based on an ‘enterprise value creation’ or financial materiality approach, in which sustainability impacts are measured in terms of impacts on the financial position and prospects of the company itself. On the other hand, the EFRAG ESRSs are being developed based on the ‘double materiality’ principle, where disclosure is required both from the point of view of financial impact on the company and on the impact of the company on society and the environment.

TRANSITION PLANS
WSBI-ESBG notes that the EFRAG ESRSs make a clearer reference to alignment with limiting global warming to 1.5°C in line with the Paris Agreement. On the other hand, IFRS sustainability standards allow the entity to choose its own target. By way of consequence, WSBI – ESBG requests that the ISSB takes into consideration including a clear reference to the 1.5°C target of the Paris Agreement in order to ensure comparability between the two standards.

BOUNDARIES AND VALUE CHAIN
Although, WSBI – ESBG considers it essential that sustainability reporting should capture the entire value chain, we ask for clearer and more defined boundaries as it is considered difficult and complicated to obtain information from companies that are not under the control of a financial institution, especially regarding scope 3 GHG emissions.

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For a single market for data to push growth and innovation

ESBG submitted its response to the European Commission (EC) targeted consultation on an Open Finance Framework and data sharing in the financial sector on 15 July.

ESBG and its members highlighted that they share the objectives of the EC’s data strategy and the commitment to create a single market for data that will constitute a potential source of growth and innovation.

A European approach to data is essential to ensure competitiveness, avoid fragmentation, benefit from an effect of scale and guard against windfall effects from which certain non-European players could benefit. A flourishing data-driven market should be based on principles of mutual benefits and right incentives for all market participants. Therefore, a fair share of value and risk is a fundamental prerequisite for the success of data sharing.

In an open finance framework, the principle “same activity/data, same risks, same rules” shall apply to all actors, including third party providers, ESBG said in its response. To ensure customer’s trust, every third party accessing customer data shall ensure privacy rights and data protection in compliance with all applicable rules. As such, we suggest third party within the financial sector be subject to the same licensing requirements and to supervision by competent authorities.

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PSD2 review must seek fair distribution of value and risk among all market participants

ESBG submitted its response to the European Commission (EC)’s targeted consultation on the review of the revised payment services Directive (PSD2) on 15 July. In it, ESBG and its members stated that the core principle of PSD2 – access to data free of charge – did not foster the best outcome and that the PSD2 implementation has been a highly complicated and costly process for the whole market.

For banks, in particular, the investments required for the implementation of PSD2 have been unproportionally high without a chance of a return. More in general, the significant investment levels do not match the limited economic benefits for the market and the end-consumer.

Therefore, the review of the PSD2 should seek a more balanced approach, with a fair distribution of value and risk among all market participants.

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On the EU Commission consultation on Distance Marketing in Financial Services Directive review

The publication of the European Commission proposal amending Directive 2011/83/EU and repealing Directive 2002/65/EC, follows the public consultation carried out last year. The Distance Marketing in Financial Services Directive (DMFSD) has historically provided a legal basis for the distance selling of financial products and a minimum safety net for consumers, when there is no specific text (for example, when new products are introduced or for products outside the scope of a specific directive).

ESBG supports the scenario chosen by the Commission for its proposal to retain the relevant and still valid elements of the DMFSD by integrating them into a broader directive (the Consumer Rights Directive 2011/83/EU which is not currently concerning financial products) and to make some adjustments. Thus, a specific chapter dedicated to “Financial services contracts concluded at a distance” has been added to this directive, making it possible to retain the specificities of the DMFSD.

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Digital euro: ESBG’s response to the European Commission targeted consultation

ESBG stated the need to further assess exactly what gaps in the payments system could be filled by the introduction of a digital euro, and to analyse how the existing solutions could be adjusted to enhance their value to the customer. This in its response to the European Commission targeted consultation on June 15. We highlighted the financial education challenges ahead, which will be key to address in order to continue building the customers’ confidence in the financial sector.

The response also stated that ESBG and its members are in favour of limits to individual holdings of digital euro – ideally in the form of €1,500 cap. It elaborated that a higher limit might cause a deposit outflow that would not be manageable for most banking business models in the EU and would likely force banks to de-leverage massively. The negative impact of this on balance sheet would be particularly severe for savings and retail banks that currently have little to no access to market funding. The deposit outflow would not only impact liquidity, but also the volume of credit provision of deposit-intense banks, which in the past kept the lending stable even in crisis times.

For a digital euro to be successful, it must provide a user-friendly onboarding process and it should be secure, easy to access and use, and adapted to the public. It would also require the acceptance of both the consumers and merchants. Finally, However, any measure aimed at introducing mandatory acceptance – and any eventual exemption – should be carefully assessed and designed at EU level to avoid affecting the level playing field between different means of payment and crowd-out the existing solutions.

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ESBG supports consumer participation in capital markets

ESBG has recently shared its comments with the European Commission on new package of measures to increase consumer participation in capital markets. The upcoming MiFID II Review provides the opportunity to contribute to this goal and in this regard, ESBG highlighted several key priorities that should be addressed as part of the Review:

Keeping the choice between commission-based and fee-based model: no ban on inducements. The current legal framework on inducements is appropriate to protect clients against potential conflicts of interest. A ban on inducements – that would leave room only for the fee-based model – will inevitably lead to an advice gap for retail clients and only a small number of wealthier investors would continue to invest in capital markets whereas the vast majority of retail investors would refrain from it. However, we believe that some adjustment may need to be done in order to achieve a common understanding across Member States on what an inducement is and to avoid different interpretation by National Competent Authorities that undermine the level playing field.

Reducing information overload: The flood of information introduced under MiFID II overwhelms clients. The vast majority of clients would like to have the option to waive some of the mandatory information. (opt-out), which they do not perceive as helpful.

Harmonisation of different investor protection requirements: When providing investment advice or selling financial instruments, investment firms have to comply with several different requirements (MiFID II, PRIIPs, 2 SFDR, etc.) Many of these requirements are not harmonized and it’s a huge problem for both advisors and investors.

Packaged retail investment and insurance products (PRIIPs): ESBG is aligned with the ESAs advice on the review of the PRIIPs Regulation and we call the EC to take into account in order to include these points in the Retail Investor Strategy. The scope should not be extended to new products, at least until it is possible to introduce a more differentiated approach between products under the PRIIPs Regulation and it is necessary to maintain the exemption from the scope of PRIIPs for pension products.

Suitability and Appropriateness assessment: We don’t see any weaknesses in the present suitability and appropriateness regime. Currently, the suitability and appropriateness regimes find themselves to be under extensive development, considering both the requirements from the new ESMA Guidelines on Appropriateness and Execution only as well as the requirements from the implementation of ESG-considerations into the suitability regime.

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ESBG calls for more feasible rules on the new corporate sustainability due diligence

In its response to the European Commission (EC)’s call for feedback on the proposal for a Directive on Corporate Sustainability Due Diligence, the ESBG suggests several changes to make the rules more feasible.

ESBG members support the goal to tackle environmental issues and human rights abuses as they commit to sustainable, responsible and future-oriented banking and support the creation of a coherent legal framework. Nevertheless, ESBG finds that the proposal foresees a role for financial entities that is too ambitious and could create legal uncertainty.

To avoid unfeasible implementation and monitoring costs, accompanied by uncertain legal consequences, we request further clarification on the role of financial entities in the context of the proposed Directive.Rules must be proportionate, feasible and should not restrict competition and innovation. The current environment might not be adequate for requirements that could hamper economic and financial recovery.

The ESBG feedback calls to limit the scope to companies with less than 1000 employees, and for a voluntary common due diligence framework of best practices for regulated financial undertakings that takes into account a specific connection to the provision of services by banks. It also calls for the introduction of a grandfathering provision for the identification of actual and potential adverse impacts and the creation of a uniform standard for the preparation of a Code of Conduct.

ESBG members underline that there is no need to establish new corporate directors’ duties and that existing liability regimes already provide appropriate rules. In consideration of the right to the presumption of innocence, businesses should not be held for damage in their supply chain if they did not directly cause it.

Additionally, several terms need to be further clarified and disproportionate provisions should be eliminated.

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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 welcomes horizontal cybersecurity requirements for digital products

The European Commission launched a public consultation in March to gather views from a wide range of stakeholders to help shaping the Cyber Resilience Act, a regulation on horizontal cybersecurity requirements for digital products and ancillary services. As a response to this public consultation on the Cyber Resilience Act, ESBG submitted its position to the European Commission on 18 May. The ESBG position focuses on the following aspects: I) Cybersecurity of digital products and the users of digital products; II) Improving the cybersecurity of digital products; and III) Stakeholder impact of potential regulatory measures.

Digital products and ancillary services create opportunities for EU economies and societies but they also lead to new challenges because when everything is connected a cybersecurity incident can affect an entire system, and thus disrupt economic and social activities. The initiative for a Cyber Resilience Act aims to address market needs and protect consumers from insecure products by introducing common cybersecurity rules for manufacturers and vendors of tangible and intangible digital products and ancillary services.

On the whole, ESBG welcomes the European Commission’s Cyber Resilience Act as the level of risk of cybersecurity incidents affecting digital products has increased during the last five years. The overall level of cybersecurity of digital products marketed in the European Union could be improved. Subjecting certain products marketed in the Union to cybersecurity requirements would be effective (e.g. hardware or software products subject to higher cybersecurity risks).

Moreover, ESBG members believe that leaving it to hardware manufacturers and software developers to demonstrate compliance with security requirements is insufficient. It would be more valuable to have the opinion of a third party based on a control framework.

All feedback received will be taken into account as the Commission further develops and fine-tunes this initiative, that is tentatively scheduled for the third quarter of 2022. Input will help the Commission analyse cybersecurity-related problems associated with the digital products markets, explore possible ways forward and assess the impact of different types of interventions.

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