FIG Top 5 at 5 - 08/02/2024

1. MiCA and MiFID Updates

Council of the European Union publishes texts of proposed Directive and Regulation to improve MiFID II market data access and transparency

On 2 February 2024, the Council of the European Union published the texts of the proposed Regulation amending the Markets in Financial Instruments Regulation ("MiFIR") and of the proposed Directive amending the Markets in Financial Instruments Directive ("MiFID").

• text of the proposed Regulation amending MiFIR as regards enhancing data transparency, removing obstacles to the emergence of consolidated tapes, optimising the trading obligations and prohibiting receiving payment for order flow; and
• text of the proposed Directive amending MiFID II.

For more details on the proposed amendments, please see FIG Top 5 at 5 dated 18 January 2024.

Next Steps

In October 2023, the Council announced that should the Parliament adopt its position at first reading, the Council will approve Parliament's position and the act will be adopted.

ESMA launches a new Q&A for MiCA

On 2 February 2024, the European Securities and Markets Authority ("ESMA") launched, for the first time, Q&As for Markets in Crypto Assets ("MiCA"). The first iteration contains the following 5 Q&As:

New CASPs established before (and after) 30 December 2024:

• Does Article 143 allow for new CASPs established between MiCA’s entry into force (June 2022) and 30 December 2024 to continue providing crypto-asset services (under national applicable law) until 1 July 2026 (assuming the MS allows the full duration of the grandfathering period)?

Passporting rights for entities benefiting from grandfathering:

• Are entities benefiting from grandfathering eligible to passport their crypto services to other Member States?
• Can an entity grandfathered to provide crypto services in one Member State provide cross-border activities in another Member State that has elected not to allow grandfathering (i.e., shortened or opted out of the transitional period)?

Prohibition of monetary and non-monetary benefits:

• Does the prohibition set out under Article 80(2) to receive "remuneration, discount or non-monetary benefit in return for routing orders received from clients" apply to the crypto-asset services of receiving and transmitting orders on behalf of clients as well as the execution of orders on behalf of clients?

Provision of crypto-asset services by credit institutions:

• What crypto-asset services can a credit institution provide under the notification procedure set out in Article 60 of MiCA?

Notifications under Article 60:

• To which NCA should the notification foreseen under Article 60 of MiCA be submitted?

Comments

Impacted firms should monitor the new Q&A over the coming months as we anticipate that there will be more additions as we move closer to the implementation deadline.

2. MAR and Retail Investment Strategy Updates

ESMA outlines requirements when posting investment recommendations on social media

In 6 February 2024, the European Securities and Markets Authority ("ESMA") published a document which aims to raise awareness of some requirements established under the Market Abuse Regulation ("MAR") that will apply to people posting investment recommendations on social media. "Finfluencers", technical experts and those with an interest in financial investments must all be conscious of the rules and be able to recognise an investment recommendation.

The document outlines what constitutes an investment recommendation, where to find the rules, the potential consequences of non-compliance, and what the specific requirements are. Any post, video or other form of public communication where a person gives advice or ideas, indirectly or directly regarding the selling or purchasing of a financial instrument or how to compose a portfolio of financial instruments, even if the person uses non-technical language may constitute an investment recommendation. The rules can be found within the MAR Framework and failure to comply may expose a person to administrative or criminal sanctions.

The document contains 2 sets of requirements – general and additional requirements. The general set of requirements require any person providing investment recommendations to:

• include the identification of the producers of the recommendation;
• ensure the presentation of investment recommendations is objective; and
• disclose any conflicts of interest in a clear way.

The additional requirements require professionals and experts to disclose:

• a summary of any basis of valuation and the underlying assumptions used;
• length of time of the investment and an appropriate risk warning;
• the planned frequency of updates to the recommendation;
• if the recommendation has been amended after being disclosed to the issuer; and
• if they hold a net long or short position above 0.5% of the total issued share capital of the issuer.

The document provides 6 practical examples:

• indirect recommendation;
• direct recommendation;
• recommendation by an expert;
• direct recommendation by an expert;
• direct recommendation by a non-professional and non-expert; and
• unlawful disclosure of insider information.

• On 6 February 2024, the Opinion of the European Economic and Social Committee ("EESC") on the proposal for a Directive of the European Parliament and of the Council amending Directives 2009/65/EC, 2009/138/EC, 2011/61/EU, 2014/65/EU and EU 2016/97 as regards the Union retail investor protection rules; and the proposal for a Regulation EU 1286/2014 as regards the modernisation of the key information document ("Opinion") was published.
• Within its Opinion, the EESC made a number of observations and recommendations:
• it noted the European Commission's ("Commission") decision not to propose a full ban on inducements but welcomed statements regarding the potential conflicts of interest in the sale and distribution for investment products;
• it noted that many products do not protect against investments losses, and consumers are confused by the different level of fees and tax status. The Commission's impact statement had noted that only a full ban on inducements will definitely remove consumer detriment and had proposed a review 3 years after the date of entry into force, to assess whether the consumer detriment had been sufficiently removed or whether further restrictions on inducements and other costs would be necessary to protect consumer interests. The EESC recommend that the review period is extended to "3 years of effective application to assess the results of market application", as the change in time period will ensure that the Commission's assessment is based on sufficient market data and developments;
• benchmarking and new warnings for risky investments are increasing the complexity of products, and it recommends that the notion of "basic products" would apply to mainstream retail financial investment products, allowing for improvements, innovation and competition on product features;
• it welcomed the Commission's proposal to align ongoing training requirements under the Insurance Distribution Directive to Markets in Financial Instruments Directive, along with codifying the European Securities and Markets Authority's Guidelines and increasing the number of training hours for sales intermediaries;
• it welcomed the measures to improve sustainable objectives disclosures, and recommended:
  • better alignment with the Taxonomy, Sustainable Finance Disclosures Regulation and packaged retail and insurance-based investment products ("PRIIPS");
  • providing guidance to product manufacturers on how to disclose the actual sustainability impact, rather than green expenditure; and
  • making sustainable products the default option rather than an opt in or out option; and
• it welcomed the proposal to harmonise disclosure requirements but regretted that insurance based products were not fully integrated into the PRIIPs framework. It recommended that the co-legislators align all disclosure rules for insurance based products to PRIIPs to simplify comparisons for consumers and ensure a level playing field for operators. It also recommended a comprehensive "competitiveness check" which considers the consequences of the expected participation of retail investors in the financing of the EU real economy companies.
  

3. ESAs publish joint report on 2023 stocktake of BigTech's financial services activities

On 1 February 2024, the European Supervisory Authorities ("ESAs") published a report setting out the results of a stocktake of BigTech's subsidiaries carrying out financial services in the EU payments, e-money and insurances sectors, and in limited cases the banking sector ("Report"). The following are some key observations from the Report.

Authorisation or registration of BigTech group companies and 'home' and 'host' presence

• 6 subsidiary companies of BigTechs are authorised as e-money institutions in 5 Member States (1 in Ireland);
• 2 subsidiary companies are authorised as payment institutions (1 in Ireland);
• 2 subsidiary companies are authorised as credit institutions;
• 3 subsidiary companies are authorised as insurance intermediaries (1 in Ireland); and
• 2 subsidiary companies are authorised as insurance undertakings.

Compared to results of ESA's 2022 joint response to the European Commission's call for advice ("CfA") on digital finance, the number of entities carrying out e-money activities and payment services has increased slightly, the subsidiaries licensed as credit institutions remain very limited, while more entities appear to be active in the securities and markets sector. Some national competent authorities ("NCAs") also reported the involvement of BigTech in the provision of credit intermediation services in an ancillary capacity, the provision of payment services under PSD2 exemptions, and financing leasing services.

Possible future trends: some NCAs indicated that US trends indicate that BigTech companies are providing financial products to consumers and retailers beyond payment services such as buy now pay later services, crypto-related services in the area of payments and issuance of stablecoins. It was also noted that the introduction of MiCA and the regulatory certainty that it brings may drive new entrants to the market. Other NCAs noted that they expect to see BigTech target professional clients, particularly for insurance products, credit and payments.

Partnerships between BigTech subsidiaries and financial institutions for the provision of financial services

NCAs reported that they were aware of (limited) partnerships between BigTechs and financial institutions and three of them noted partnerships in the form of white labelling.

Possible future trends: this partnership represents a potential opportunity for BigTechs which are able to make products and services available without having to be directly authorised and leveraging on their strong brand and customer base.

Potential Opportunities

Technology Dependence: BigTechs can exploit group-wide capabilities to provide technologically superior services through more uniform, user-friendly and easy-to-use client interfaces. This enables BigTechs to generate improved operational efficiency to leverage economies of scale to build or invest in technology and provide better user experiences at lower prices for consumers.

Financial Dependency: BigTechs can leverage group financial resources, and meet liquidity needs and raise funds for expansion or other investments.

Structural inter-dependencies: BigTechs may leverage these to their competitive advantages. The sharing of governance and regulatory compliance teams may result in opportunities, and data collected in previous relationships allows them to build clear customer acquisition channels.

Strategy Dependencies: BigTechs may find opportunities in a coordinated and strategic approach in several countries to the placement of financial and non-financial services. The use of consumer data will also give a competitive advantage by enabling them to anticipate customers' needs and offer a variety of highly personalised services.

Potential Risks

Potential risks identified related both to intragroup dependencies and external dependencies. Intragroup dependency risks include: operational resilience and intragroup risk; concentration risk within the group; reputational and intragroup financial contagion risks; governance risks; data abuse and mishandling of consumer data; risk of financial exclusion; potential sources of systemic risk; and risks to the strategic autonomy of the EU.

Supervision and Regulatory Issues

Supervisory Issues

• poor notification practices;
• poor visibility over intra-group connections;
• challenges in identifying relevant supervisory counterparts on a cross-disciplinary and cross-border basis; and
• challenges in monitoring BigTechs' direct provision of financial services.

Regulatory Issues

• existing regulatory framework does not take into account aggregated risks arising from interdependencies from new types of mixed activity group and may need revising if BigTech direct financial services activities were to grow; and
• level playing field considerations are relevant as mixed banking and insurance groups are subject to conglomerates supervision, while BigTech groups with different types of financial intermediary in the group are not subject to any similar arrangement.
  

4. Updates on the Instant Payments Regulation

European Parliament adopts proposed Regulation on instant credit transfers in euro

On 7 February 2024, the European Parliament ("Parliament") released a press release announcing that it had adopted the proposed Regulation amending the Single Euro Payments Area Regulation and the Cross-Border Payments Regulation ("Instant Payments Regulation"). The Instant Payments Regulation aims to ensure that retail clients and businesses do not have to wait for their money; and to improve the safety of transfers.

Under the Instant Payments Regulation:

• people will be able to make credit transfers which will transfer money within 10 seconds any time of any day, and the payer must be informed within 10 seconds whether or not the funds transferred have been made available to the intended recipient;
• Member States outside the euro area will also have to apply the rules, although there will be a special derogation from making the payment within 10 seconds outside business hours;
• payment service providers ("PSPs") must have robust, up to date fraud detection and prevention measures, and PSPs operating within the EU must provide a service to verify the identity of the recipient;
• if a PSP fails to fulfil its fraud prevention duties, causing financial damage, a client may demand to be compensated by the PSP;
• PSPs offering instant credit transfers must verify whether any of their clients are subject to sanctions or other restrictive measures; and
• PSPs may not charge more for instant credit transfer transactions in euro than for non-instant credit transfers in euro.

As previously noted in the FIG Top 5 at 5 dated 9 November 2023, a provisional agreement had been reached by the Parliament and the Council of the European Union ("EU") on 7 November 2023.

Next Steps

The Instant Payments Regulation will enter into force 20 days after it is published in the Official Journal of the European Union. Member States will then have 12 months to apply it.

Commissioner McGuinness gives remarks during the Parliament's plenary debate on the Instant Payments Regulation

On 5 February 2024, the European Commissioner for Financial Stability, Financial Services and Capital Markets Union, Mairead McGuinness gave remarks during the European Parliament's ("Parliament") plenary debate on the Instant Payments Regulation ("Regulation").

In her remarks, Commissioner McGuinness noted that while instant payments are not a new idea, they will not be the norm until the Regulation is in place. She commended the Parliament on its timely and effective work which has helped in ensuring that the Regulation is ambitious and introduces changes such as the customer protection improvements against fraud.

Commissioner McGuinness emphasised the need to move to the implementation stage of the Regulation. She noted that the deadlines were short, but also observed that the payments sector had already begun to carry out the work needed to be done. She stressed that the Commission supported the payments sector and would provide additional clarifications as is needed during the implementation of the Regulation. The Commission is committed not only to support the EU payment sector, but also the international work on instant payments. Finally, she reiterated the adage that "cash is king" noting that consumers want to be able to choose between cash and digital payments, and hoped that the Parliament, in its plenary debate, will adopt rules requiring all Member States to abide by those requirements.

As noted above, the Instant Payments Regulation has now been adopted. For more details on the Instant Payments Proposal, please see FIG Top 5 at 5 dated 9 November 2023.

5. Council and Parliament reach provisional political agreement on proposed Regulation on ESG rating activities

On 5 February 2024, the Council of the European Union ("Council") published a press release announcing that that it had reached a provisional political agreement with the European Parliament ("Parliament") on the proposed Regulation on the transparency and integrity of environmental, social and governance ("ESG") rating activities. The new rules aim to improve the reliability and comparability of ESG ratings, and will require all ESG rating providers to be authorised by the European Securities and Markets Authority ("ESMA") and to comply with transparency requirements.

The main elements of the provisional agreement include:

• further details on the circumstances under which ESG ratings will fall under the scope of the regulation and the exclusions;
• clarification on the territorial scope of the regulation;
• if financial market participants of financial advisers disclose ESG ratings as part of their marketing communications, they will include the information regarding the methodologies used on their website;
• separate E, S and G ratings should be provided rather than an aggregate rating. E ratings should include information on whether that rating takes into account alignment with the Paris Agreement or other international agreements; and S and G factors should also provide information on what account the rating takes of relevant international agreements;
• provisions have been added to address the material impact on the environment and society, i.e double materiality;
• ESG rating providers established outside the EU must obtain an endorsement of their ESG ratings by an EU authorised ESG provider, "a recognition based on a quantitative criterion or be included in the EU registry of ESG rating providers on the basis of an equivalence decision in relation to the country of its origin and following a dialogue held between ESMA and the relevant third-country competent authority";
• for small undertakings and groups providing ESG ratings, a temporary, lighter registration regime for the first 3 years will be introduced;
• ESMA may also decide, for small ESG rating providers, to exempt an ESG rating provider from some of the requirements if conditions are met; and
• a separation of business and activities has been introduced. This will mean that it may be possible for ESG rating providers not to set up a separate legal entity for certain activities, where there is a clear separation between activities and adequate measures are put in place to avoid conflicts of interests.

Next Steps

The provisional agreement must be approved by the Council and the Parliament and will then go through the formal adoption procedure. Once it enters into force, it will apply 18 months later.