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Sustainable Finance in Europe: Regulatory State of Play - Key impacts for banks and capital markets
22 Nov 2021
A new report by the Association for Financial Markets in Europe (AFME) and Linklaters titled, “Sustainable Finance in Europe: Regulatory State of Play” provides a practical guide to the significant number of initiatives which make up the regulatory framework for sustainable finance in the EU, UK and Switzerland. It highlights how the banking sector is impacted and makes recommendations to further the goal of developing sustainable finance in Europe. The report provides analysis and identifies key milestones and actions for the banking industry in the five key elements of the European sustainable finance regulatory framework including: Sustainability reporting and disclosures; The development of taxonomies for sustainable activities; The development of market standards; Incorporation of ESG into banks’ risk management; and Initiatives relating to sustainable corporate governance. AFME assesses the current state of play of the European regulatory framework and highlights three priority areas to facilitate the flow of capital to help achieve sustainability objectives: Finalising effective foundations Significant progress has been made over a short space of time, but it is important to finalise and implement effective regulatory building blocks as enablers of sustainable finance including (a) developing a disclosure framework for sustainability reporting; (b) providing a common classification system of sustainable economic activities; and (c) ensuring that ESG risks are effectively integrated into banks’ risk management. Ensuring coherence and consistency Due to the urgency of the task to tackle climate change, a very large number of initiatives have been put in place in a short space of time. While recognising the urgency of the task at hand, it is necessary to ensure that the framework is coherent and consistent, particularly as many aspects are complex and interconnected. As the foundations are finalised, AFME calls on policymakers and regulators to carefully consider the coherence of the framework as a whole to ensure that it is meeting its goals of facilitating the allocation of investment to meet sustainable objectives, avoids undue complexity and overlapping, duplicative or inconsistent requirements. Further enhancing the consistency, understanding and usability of the framework would facilitate its implementation and help support well-functioning sustainable finance markets. Strong international coordination Climate change and other sustainability objectives are a global challenge which necessitates an internationally coordinated response. In order to maximise the benefits of sustainable finance, it is vital to leverage international capital markets and to provide a coherent approach for multinational businesses and financial institutions which are key to supporting the transition.
Introducing a New Hybrid Recapitalisation Instrument for Smaller EU Corporates
18 Nov 2021
The Association for Financial Markets in Europe (AFME), with support from PwC and Linklaters, has today published a new report, which provides a practical guide for European authorities and Member States looking to introduce a new hybrid recapitalisation instrument that could help provide funding for smaller corporates post-COVID. The report, “Introducing a New Hybrid Recapitalisation Instrument for Smaller EU Corporates” builds on an earlier January 2021 report which examined the recapitalisation needs of smaller EU corporates following the pandemic and found that a hybrid equity instrument could enable a greater number of SMEs to gain access to equity-like funding without relinquishing control of their organisation – one of their chief concerns. However, such a solution needs to be tailored to the local accounting, legal framework, and tax and insolvency treatment in individual EU Member States, to achieve the key attributes necessary for creating an instrument which meets the needs of both investors and corporate issuers. Existing domestic frameworks in Germany, France, Italy, Spain and the Netherlands are presented as examples which officials in other Member States can refer to in developing structures which work in their own countries and preferably at EU-wide level. The report presents the following analysis: An overview of the key hybrid instrument attributes required to achieve the desired equity accounting, tax deductibility and insolvency treatment. A summary of state aid considerations that are likely to be taken into account in assessing the introduction of such equity-accounted hybrid instruments for the purposes of compliance with EU state aid requirements. A generic sample term sheet outlining the proposed instrument features which can be used as a reference for discussion with officials, investors and mid-cap/SME corporate issuers. AFME believes the report will provide a useful reference for policy makers and key stakeholders in order to bring the idea of a new hybrid instrument for SMEs to reality and that officials, corporates and investors can continue to work together to design solutions adjusted to the needs of companies seeking investment capital in the phase of economic recovery. This report follows AFME’s January 2021 report, which estimated that Europe could face a funding gap of €450-600bn in equity and hybrid capital to prevent business defaults with the gradual reduction of state support measures.
Guiding Principles for Data Sharing - A Perspective for European Capital Markets
3 Nov 2021
AFME is pleased to publish “Guiding Principles for Data Sharing: A Perspective for European Capital Markets”, which has been developed with input from members of the AFME Data Strategy Working Group. Data sharing is an essential function within European capital markets, in which firms see opportunities for further data sharing to support common objectives such as greater security and resilience, sustainability, innovation and compliance and monitoring. European authorities have also similarly identified the value of data, both within and across sectors. For example, the European Data Strategy, published by the European Commission in February 2020, sets out an ambitious horizontal strategy for promoting data-driven innovation across multiple industry sectors and providing clear rules for data access. However, barriers to data sharing remain, with high costs, security and data protection risks and a lack of standardisation, all of which currently reduce incentives for sharing between market participants. We believe these issues must first be addressed as part of any further data sharing initiatives in order to be cost-effective and bring value to the market and end users. This paper examines these opportunities, barriers and risks in further detail, and concludes by providing nine guiding principles to support European policymakers in addressing the risks and barriers identified when implementing future data sharing policies. These principles are also applicable in a global context, and we welcome further collaboration between public authorities and the industry across jurisdictions to support the development of global data standards and cross-border data sharing arrangements.
Capital Markets Union Key Performance Indicators - Fourth Edition 2021
21 Oct 2021
Press releaseavailable inEnglish,French,German,Italian,Spanish. Individual country analysis available forUK,France,Germany,Italy,Spain. Record levels of capital markets funding supported EU businesses in the first half of 2021, reflecting significant recapitalisation needs in response to the pandemic and favourable conditions for raising capital; Capital markets funding to European SMEs grew at a record rate,with the increase predominantly driven by venture capital and private equity growth funds; In spite of these record growth rates, absolute levels of market-based financing remain below those of other major jurisdictions. Additionally, securitisation issuance levels continued to decline; The increases observed may be influenced by the extraordinary conditions of the past year, public support programmes and other factors; ESG issuance in Europe continues to expand in Europe, up 69% compared to 2020; Inefficient withholding tax collection procedures continue to be a barrierto cross-border integration in EU securities markets. European capital markets activity has surged in the past year as businesses emerging from the pandemic have sought to raise capital according to a report published today by the Association for Financial Markets in Europe (AFME) in collaboration with 10 other European and international organisations. The fourth edition of the “Capital Markets Union Key Performance Indicators” report tracks how individual Member States have progressed against 8 key performance indicators on metrics such as access to market finance, levels of bank lending, transition to sustainable finance and a supportive fintech environment. Key findings: European primary capital markets continued to expand during H1 2021for the third consecutive year, with the proportion of markets-based funding for EU corporates rising to 16.8%; Many European SMEs have benefited from funding availability from private markets. Europe is the fastest-growing major region by private capital investment with investment in European SMEs growing by 2.4 times year-on-year in the first half of 2021. European households have increased the amount of capital markets savingsover the last 2 years, although this is predominantly driven by valuation gains of existing products. Countries that entered the COVID-19 crisis with low capital markets savings have increased the most their bank deposit holdings, which suggests that investment vehicles and household incentives could be enhanced in some Member States; The depth of the EU securitisation market has declined over the last 3 years.Unlike in the US, the proportion of EU securitised products and loan disposals relative to total loans outstanding has consistently declined over the last 3 years. This remains an area of concern as securitisation facilitates risk transfer and enables the banking sector to transform loans into tradeable securities, thereby allowing banks to continue lending to corporates; The EU continued to improve the local FinTech ecosystemwith the launch of new regulatory sandboxes in Austria, Spain, Hungary, and Greece over the last year. The EU has also benefitted from a record increase in funding which has also resulted in a rapid surge in the number and valuation of FinTech unicorns (i.e. growth companies valued above $1bn); EU ESG debt markets have expanded rapidly during H1 2021, with total issuance of ESG-labelled bonds reaching EUR 201.4 bn, representing 19.6% of total EU bond issuance during the first half of 2021; As a special feature of this edition, we have included an analysis of the current variations between Member States in their procedures forwithholding tax relief,which have a significant negative impact on cross-border investment, cost of capital and GDP. In 10 of the 27 EU Member States there is a lack of a relief-at-source mechanism which frequently results in long delays in tax reclaim reducing investor returns. The report was authored by AFME with the support of the Climate Bonds Initiative (CBI), as well as European trade associations representing: business angels (BAE, EBAN), fund and asset management (EFAMA), crowdfunding (ECN), retail and institutional investors (European Investors), stock exchanges (FESE), venture capital and private equity (Invest Europe), private credit and direct lending (ACC) and pension funds (Pensions Europe).
Anti-Money Laundering Transaction Monitoring in the Markets Sector
20 Oct 2021
AFME is pleased to publish “Anti-Money Laundering Transaction Monitoring in the Markets sector” in collaboration with EY. A key challenge that the industry faces is how to best identify money laundering activities. This has intensified in recent years following high profile cases in the capital markets space which has, understandably increased regulatory scrutiny of firms’ Anti-Money Laundering (AML) controls. Firms do already have established Anti-Financial Crime programmes, designed to detect suspicion of money laundering, supported by AML transaction monitoring (TM). In this paper we consider the effectiveness of the processes that make up a firms AML TM control framework and provide a road map to support firms in designing and operating the most effective solution. To enable this, we have explored several key themes in the preparation of this paper. We consider how effective the current AML TM approaches in the markets sector are and we review the results that they yield. We identify how existing AML TM systems can be enhanced and we consider the evolving skillset that is needed to support this. We also look at the use of data, technology, and enhanced analytics to further drive improvements, building stronger more efficient solutions and leveraging opportunities for intelligence-led investigations. We also review the processes around the submission of Suspicious Activity Reports (SARs) and explore the advantages to the sector as a whole in establishing greater collaboration between private and public sector bodies. We conclude by considering the benefits of convergence, between market abuse surveillance function and the AML TM function.
AFME / Latham & Watkins Recording requirements for Mobile Devices, Electronic Communications and Videoconferencing
14 Oct 2021
MiFID II introduced obligations to record telephone conversations and any electronic communications that are intended to lead to a transaction. Records must be kept for at least five years. The Covid-19 pandemic, which began in 2020, saw the majority of AFME member firms move towards a predominantly home-based model of remote working. Firms also saw a significant increase in their use of electronic communications and videoconferencing tools; for providing training and onboarding of new staff, as well as for communicating with employees and certain clients. European regulators acknowledged the disruptive effects of Covid-19 and introduced measures to alleviate some regulatory obligations. In particular, ESMA recognised that, considering the exceptional circumstances resulting from the Covid-19 outbreak and despite steps taken by firms, the recording of relevant conversations required by MiFID may be impracticable in some scenarios. However, many also maintained that firms should continue to meet regulatory requirements for the recording of telephone conversations or electronic communications. Notably, Julia Hoggett, FCA Director of Market Oversight, clarified in her speech ‘Market abuse in a time of coronavirus’ that the FCA expects that, going forward, office and working from home arrangements should be equivalent. Firms are expected to update their policies, refresh training and issue reminders on firms’ policies. Firms must also ensure adequate oversight and surveillance of their firms use of electronic communications and identify and mitigate any new risks the new remote working environment may create. Regulators are clear that use of privately owned devices where recording is not possible, should be prevented. Firms must formally approve the use of new communication channels ensuring that controls are in place to prevent market abuse and protect the firm’s data. With this in mind, members of AFME’s Compliance Issues working group worked with Latham & Watkins to produce this key industry considerations paper. The paper focuses on the legal and regulatory framework, identifies the risks that firms are facing – including the impact of remote and hybrid working, which was amplified as a result of Covid 19 - and provides examples of good practice to manage and mitigate those risks. It also provides recommendations for industry and regulators in adapting to the changing environment, be that hybrid working or in embracing innovation and new technology. The paper is also intended to be used within firms to support discussions between legal, compliance, surveillance, and board level committees, to help firms to understand, and potentially harmonise, the industry’s approaches towards mobile devices and e-comms. The paper will also be used to support discussions with European regulators. Please note that this Paper is intended for general informational purposes only, and does not provide, and does not constitute, investment, tax, regulatory, business or legal advice to any individual or entity.
Conduct Analytics - Insights-led and Data-driven: The Future of Conduct Risk Management
8 Oct 2021
The Association for Financial Markets in Europe (AFME) and PwC have published a new report “Conduct Analytics - Insights-led and Data-driven: The Future of Conduct Risk Management”. One of the challenges consistently highlighted by our Members is the need to develop better data and analytics relating to conduct to identify and (ideally) pre-empt conduct risk. This paper explores how firms can address this by evolving their Conduct risk management frameworks to make better use of Conduct Analytics, supported by a clear and effective Conduct Analytics framework. For many banks, the use of Conduct Analytics is a journey, with some firms further advanced than others. In recognition of this, we provide a blueprint for firms to use as they develop and review their frameworks, focusing on an “insights-led and data-driven approach”. There are several key factors that will underpin the success of the advanced use of Conduct Analytics; Firstly, it is important for firms to recognise the value in using Conduct Analytics to efficiently identify patterns and trends which in turn provide valuable insights across their entire business. Secondly, approaches should be agile and evolve in line with the needs and progression of the business, calibrated to identify new risks as they emerge and periodically reviewed to ensure their effectiveness. Thirdly, the paper encourages firms to strengthen their efforts to measure and monitor culture and suggest that in doing so, firms will be able to reduce the additional policing of individuals.