Managing large volumes of regulatory change can be overwhelming on wealth management firms and can distract from identifying and tracking the “big ticket” items. This article will help you navigate the change and focus specifically on those items that have tangible impact on wealth managers and private banks and deadlines spanning 2021 and 2022.
EMEA upcoming rules
EU Sustainable Finance Disclosure Regulation (SFDR) is part of an EU legislative package of:
Sustainable Finance Taxonomy Regulation (SFTR), and
Sustainable Finance Benchmarks Regulation (SFBR) with the first leg, namely the disclosure requirements due to apply from 10 March 2021.
The rules have a direct impact on EEA Wealth Management (WM) legal entities but also an indirect impact on non-EEA WM legal entities which market alternative investment funds into EEA or act as delegated investment manager to an in-scope EEA entity.
UK Onshoring: with the end of the Brexit transition period and the onshoring of key pieces of EU legislation into UK law, there have been a number of changes to the UK’s financial services framework. The challenge for the year ahead will be to navigate those changes and identify key publications.
CSSF Reg 20-05 amending 12-02 AML/CFT: These amendments, which came into effect in December 2020 introduce a number of changes to EDD, CDD, risk appetite, UBO declarations, PEP, and sanctions list screening. WM AML teams are expected to carry out a gap analysis with view to identifying and remedying gaps and updating policies and procedures.
EBA Loan Origination Guidelines: These rules aim to clarify the internal governance for the credit-granting process, specify requirements for the creditworthiness assessment of borrowers and set out expectations for the risk-based pricing of loans. For those private banks providing loans to clients, the respective Lending Solutions, Credit Risk and Credit Middle Office teams should start assessing the impact of these rules. The deadlines are:
30 June 2021: application date for newly originated loans and advances
30 June 2022: application date for existing loans and advances (granted before 30 June 2021) and advances that require renegotiation or contractual changes.
MiFID II: ESMA final guidelines on certain aspects of appropriateness and execution only (“XO”) requirements: ESMA is currently consulting on certain aspects of the appropriateness and XO requirements. ESMA feels there is currently insufficient convergence in the understanding and application of several areas of the appropriateness and execution-only requirements by firms in different Member States and often within Member States themselves.
ESMA leverages the existing Guidelines on MiFID II suitability requirements, while adjusting these to the appropriateness and XO framework. These guidelines will impact the private banks performing execution only trades. ESMA expects the final guidelines to be issued in Q3 2021, therefore firms are advised to perform a gap analysis against the rules set out in the consultation paper.
Revision FINMA Circular 2016/7 on video and online identification: FINMA is amending the due diligence requirements for clients onboarding via digital channels to take account of technological developments. To this end it is revising the Circular on “video and online identification” and holding a consultation to seek views from the market participants in February 2021.
The amendments, although not confirmed, are expected to kick in Q3 2021. For private banks, these rule changes should have a positive impact from the client experience and speed on onboarding perspective as long as they can support the technical aspect of it and implement an appropriate level of control.
ESMA final guidelines on outsourcing to cloud service providers (CSPs): these rules, which apply from 31 July 2021 to all new or renewed cloud outsourcing arrangements, carry new landscape on outsourcing to CSPs. The challenge facing private banks is that both the EBA and ESMA have issued guidelines on outsourcing, with latter focusing specifically on outsourcing to cloud service providers. Given some overlap with the guidelines and the differing implementation dates, private banks are encouraged to set up working groups (consisting of Operations, Legal, Compliance, Tech teams amongst others) to address these changes holistically.
Cross Border Distribution of Investment Funds Directive/Regulation: arguably these rules have a greater impact on asset management firms, however private banks are also impacted at the very least by the new marketing communications rules. Amongst a number of items to look out for, private banks should prepare for the upcoming ESMA final guidelines on marketing communications which are due to be released in August 2021.
MIFID II/R quick fix: In December 2020, EU Parliament approved the “quick fix” changes proposed by Commission. The MiFID II/R quick fix is designed to make targeted amendments to MiFID II/R to help facilitate the European economic recovery from COVID-19. The goal is to remove unnecessary regulatory burden on firms. Member States will have 12 months to transpose the revised provisions to their national legal frameworks.
DIFC Data Protection Act: published in July 2020 and took effect in October 2020, this new regulation aims to modernise and harmonise data protection within the Dubai International Financial Centre (DIFC) and is heavily aligned to the principles and concepts of EU GDPR.
This rule will affect your business in so far as your EMEA or Asia based Relationship Managers travel to or engage with Dubai clients. If your entity is already EU GDPR compliant then DIFC rules will not add much to your existing processes, however if your entity is not EU GDPR compliant (e.g., Asia business), then you may need to amend your privacy notices used cross-border when engaging with Dubai.
PRIIPS KID replaces UCITs KIID: existing UCITs KIID will be replaced by the new PRIIPS KID and fund houses will have to produce PRIIPS KID from 1 January 2022. This change would have a considerable impact on asset management industry, however the impact on private banks should not be underestimated. At the very least wealth managers will have to amend Fund Agreements to reflect new documentation requirements as well as amending marketing / internal websites and storage/systems to remove references to the expired UCITS KIIDs.
Amendment of AIFMD regime rules: ESMA published recommendations to the EC for wide ranging reforms of AIFMD regime. ESMA suggests greater harmonisation of UCITS and AIFMD rules. It is unclear at this stage which reforms might be considered and reforms, if any, will be released in 2022.
Revised Swiss Federal Act on Data Protection (FADP): Swiss Legislature is working on revising the existing Federal Act on Data Protection (FADP). It is an uplift to the existing Swiss data protection rules to align with EU GDPR standards.
CSDR (Central Securities Depositary Regulation): this is one of the key regulations adopted in the aftermath of the financial crisis, with a view to improving the functioning and stability of financial markets. Implementation delayed to February 2021. In December 2020, the EU Commission has recently issued a targeted consultation to gather views on the implementation of the CSDR. Wealth managers should form working groups to address these rules changes early on.
EMIR Refit (Trade repository reporting part): In December 2020, ESMA published its final report on draft regulatory technical standards (RTS) and implementing technical standards (ITS) on reporting requirements, data quality, data access and registration of trade repositories. The rules kick in mid-2022, however as these will affect the format and the way in which your Operations teams report to trade repositories, it is an opportune moment for wealth managers to start performing an initial business analysis. From the initial analysis, the new rules have increased the total reportable fields from 129 to 203, with some of the original 129 fields being retired and some existing fields being renamed or assigned to new sections.
UK specific PRIIPS KID: in October 2020, the Financial Services Bill was introduced to the House of Commons. The Bill will make amendments to the UK PRIIPS Regulation regime and will give the FCA the power to stipulate what information should be provided in the PRIIPS KID. This leaves international private banks with an unenviable task of navigating through different PRIIPS KIDs content rules depending on the country. The full impact is yet to be determined.
EC Digital Operational Resilience (DORA): in September 2020, the EC published its draft regulation on digital operational resilience for the EU financial services sector. The new rules focus on firms’ control frameworks on ICT risks and will require firms to implement ICT related incident management process.
At the same time UK FCA has been consulting on changes to how firms approach their operational resilience (FCA Operational Resilience CP19/32). The new rules are expected to be published in Q1 2021 but to be implemented by Q1 2022.