UK/EU Investment Management Update (July 2021)
2. UK Investment Firm Prudential Regime (IFPR)
3. FCA Compliance Matters
4. UK Post-Brexit MiFID and Other Regulatory Changes
5. UK Securitisation Regulation
6. EU AIFMD
7. EU Short Selling Regulation
8. EU and UK PRIIPs Regulations
10. Anti-Money Laundering
FCA consultation paper on climate-related financial disclosures
On 22 June 2021, the FCA published a consultation paper on proposals to extend climate-related financial disclosure requirements to asset managers, life insurers, and FCA-regulated pension providers. This consultation comes off the back of the UK Government’s 2019 Green Finance Strategy, which set an expectation for large asset owners to make disclosures in line with the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (TCFD) by 2022.
For a detailed discussion of the implications of the proposed new rules, see our recent Update ESG – UK FCA Consultation on Climate-Related Disclosure Requirements – Implications for Asset Managers.
IOSCO consultation on sustainability-related practices in asset management
On 30 June 2021, the International Organization of Securities Commissions (IOSCO) published its Consultation Report on Recommendations for Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management.
The report focuses on asset managers and investor protection issues and aims to improve sustainability-related practices, policies, procedures, and disclosures in the asset management industry. This includes encouraging asset managers to take sustainability-related risks and opportunities into account in their investment decision-making and risk management processes and addressing the risk of greenwashing through improving transparency, comparability, and consistency in sustainability-related disclosure.
FCA policy statement PS21/6 on implementation of IFPR
On 29 June 2021, the FCA published its policy statement PS21/6 in response to the first of its three consultations on the UK IFPR, which concluded in February 2021. For detailed insight on the second of the three consultations, see our Update UK Investment Firm Prudential Regime — FCA’s Second Consultation — Implications for Investment Managers.
PS21/6 contains the near-final rules on consolidation, own-fund requirements, and concentration risk, which will apply to UK-authorised MiFID firms.
The FCA has noted that in general, it has implemented the rules as consulted on. The policy statement addresses issues raised by respondents and, in particular, provides clarification in the following areas:
- Categorisation of investment firms. The quantitative threshold for small and non-interconnected firms (SNIs) has not been raised. The FCA has also confirmed that firms dealing on own account should be considered as non-SNIs.
- Prudential consolidation. The FCA has clarified that for the purposes of group consolidation, an “investment firm group” should be taken to mean subsidiaries and connected undertakings downstream from a UK parent entity; non-UK entities above the UK parent entity will not be caught. The FCA has also confirmed that the definition of “connected undertaking” is not intended to enlarge the scope of prudential consolidation. The UK parent of an investment firm group will be responsible for meeting the consolidation requirements of the UK IFPR. The FCA notes a drafting omission in the original consultation and clarifies that alternative investment fund managers (AIFMs) are to be considered as “financial institutions,” and so included with the scope of an investment firm group where they are subsidiaries or connected undertakings. However, where prudential consolidation applies to the group, the consolidated K-factor calculation applies only in relation to MiFID (or equivalent third country) activities.
- Reporting. The FCA is not amending its proposal for reports to be submitted on a quarterly basis, even though some respondents requested a change to biannual reporting. This requirement goes beyond the reporting obligations under the EU’s Investment Firm Regulation, although the FCA points out that the EU reporting obligations require larger volumes of data and are more detailed than those under the UK’s IFPR.
The FCA is due to publish its third and final consultation paper on the IFPR over the course of the next month, covering matters including the methods of calculating a firm’s likely capital requirement, as well as rules on remuneration.
FCA review finds weaknesses in host Authorised Fund Managers (AFMs)
On 30 June 2021, the FCA published the results of its review of host AFMs. Host AFMs take on regulatory responsibility for funds, whilst delegating portfolio management to investment managers.
An AFM is defined in the FCA Handbook to mean an authorised corporate director, an authorised contractual scheme manager, or an authorised unit trust manager, which are concepts applicable to authorised UK funds (primarily UK undertakings for the collective investment in transferable securities, or UCITS) rather than AIFMs. However, the FCA notes in its statement that AIFMs should also consider the implications of the review for their business.
The FCA’s review found that some host AFMs were not meeting its standards. In particular, it highlighted weaknesses in governance structures, conflicts of interest management, and operational controls. Overall, the FCA found that many host AFMs had inadequate due diligence procedures in this area, and poor oversight of delegated third-party investment managers and funds. The FCA raised the concern that some AFMs considered their third-party delegates as “clients,” pointing out that this does not correctly describe the relationship.
The FCA also observed some host AFMs operating at relatively low margins with a lack of resources, and under fee pressure from delegates. This indicates that some host AFMs are not charging enough to be able to provide an effective service.
The FCA is considering whether to require some host AFMs to increase their financial resources and is also now considering rule changes in this area.
UK MiFID II “Quick Fix”
On 28 June 2021, the Markets in Financial Instruments (Capital Markets) (Amendment) Regulations 2021 (the Regulations) were published, amending certain obligations under MiFID II for UK MiFID firms. This set of amendments is referred to as the UK’s MiFID II “Quick Fix.”
Some of the changes introduced by the Regulations (as might be of interest to investment managers) include:
- From 1 December 2021 – removing the requirement for investment managers to publish RTS 28 best execution reports (i.e. the top five investment firms in terms of trading volumes where orders were transmitted or placed for execution in the preceding year and information on the quality of execution obtained);
- From 26 July 2021 – removing the requirement for trading venues to publish RTS 27 best execution reports (i.e. reports on execution quality);
- From 26 July 2021 – removing the requirement to provide detailed costs and charges disclosures to professional clients and eligible counterparties, except where providing portfolio management or investment advice;
- From 26 July 2021 – simplifying the content of periodic reports provided by investment managers to professional clients (retail clients continue to get detailed reports); and
- From 26 July 2021 – amending the requirement for investment management firms to inform their client whenever the overall value of the portfolio depreciates by 10% and thereafter at multiples of 10% – this requirement is removed in relation to professional clients.
Note that, in relation to the removal of the requirement to publish RTS 27 and RTS 28 best execution reports, there is a corresponding change that the FCA has consulted on so as to remove the relevant texts of RTS 27 and RTS 28 (which are currently reflected in Schedules of the FCA Conduct of Business Sourcebook (COBS)). For more information on this consultation, see our May 2021 Update.
The changes above are similar to the changes being introduced to MiFID II via the EU’s MiFID “Quick Fix” (as discussed in our March 2021 Update). However, there are some important differences, including that, while the obligation for trading venues to produce RTS 27 reports under MiFID II in the EU has been suspended (for two years), the requirement for investment managers to produce RTS 28 reports remains. We will be publishing a separate Update to compare the outcome of the UK’s and EU’s respective “Quick Fixes.”
UK Wholesale Markets Review
On 1 July 2021, HM Treasury published its Wholesale Markets Review (the Review). The launch of this public consultation was accompanied by a speech from the UK Chancellor, Rishi Sunak, who set out a roadmap for the future of the UK financial services sector post-Brexit.
The consultation addresses potential areas of regulatory reform within wholesale capital markets. Its stated aim is to improve standards of regulation as well as to remove impediments to a functional and competitive market. Notably, the consultation contains proposed areas for divergence from EU-derived MiFID rules, a sign that the UK is willing to go its own way where it sees a need for reform. The Review aims to “create a simpler and less prescriptive regime in the most cost-effective way,” suggesting a move towards a more “principles-based” regulatory approach from the UK.
As well as regulatory changes, the Review sets out higher-level questions about longer-term priorities for the UK’s financial markets, such as capital raising for small companies.
The questions set out in the consultation cover issues related to a wide range of rules across areas such as trading venues, transparency, MiFID reporting, and position limits, with several questions relating to recalibration of scope. Notable issues raised include:
- whether a new type of platform may be needed for small and medium-size enterprise issuers;
- whether the MiFID II Double Volume Cap mechanism continues to be appropriate in equity markets; and
- whether the UK’s share trading obligation should be removed.
There is also a broad question as to whether any conduct rules in the MiFID-delegated regulation should be made to reduce costs whilst continuing to offer meaningful investor protection.
The consultation closes on 24 September 2021.
Taskforce on Innovation, Growth, and Regulatory Reform report
On 16 June 2021, the UK Government published a report by the Taskforce on Innovation, Growth, and Regulatory Reform, which was commissioned to identity potential areas of regulatory reform.
Amongst other things, the report recommends reforms relating to financial services, in particular:
- MiFID II position limits: introducing greater flexibility with a view to making the UK market more appealing by reducing the costs and complexities associated with position limits.
- MiFID II disclosure and transparency requirements: removing the requirement to provide costs and charges reports to professional investors and eligible counterparties under MiFID II.
- Market Abuse Regulations (MAR): removing “investment recommendation” disclosure requirements from MAR for wholesale clients.
- Packaged Retail and Insurance-Based Investment Products (PRIIPs) Regulation: confining the key-information document (KID) requirement to genuinely complex packaged products that require special explanation to the retail market.
This is an independent report, and it is interesting to see that the Government is already considering some of the wholesale market issues identified via its Wholesale Markets Review (see above).
HM Treasury review of the UK Securitisation Regulation
On 24 June 2021, HM Treasury announced a Call for Evidence as part of its review of the UK Securitisation Regulation. As part of its review, due to be completed by 1 January 2022, HM Treasury is considering legislative changes to the UK Securitisation Regulation, which is derived from the EU Securitisation Regulation.
Of particular relevance to investment managers is the proposal to amend the UK Securitisation Regulation’s definition of “institutional investors” as it relates to AIFMs. Under both the EU and UK Securitisation Regulations, institutional investors are required to perform due diligence prior to holding a securitisation position. This requirement applies to AIFMs that manage and/or market AIFs in the UK. HM Treasury notes that, as currently drafted, the due diligence requirements would appear to apply to an unauthorised, non-UK AIFM marketing an AIF in the UK. HM Treasury is proposing that the definition of institutional investor should be amended so that unauthorised, non-UK AIFMs are outside the scope of the UK Securitisation Regulation.
HM Treasury’s proposal thus contrasts with the position of the European Supervisory Authorities (ESAs), which suggested in a joint opinion of April 2021 that non-EU AIFMs should be inside the scope of the EU Securitisation Regulation. More information on the ESAs’ opinion on this can be found in our April 2021 Update.
ESMA report on national fund marketing rules
On 1 July 2021, ESMA published its first report on national rules governing the marketing of investment funds under the new EU Cross-Border Distribution of Funds (CBDF) Regulation. See our Update EU AIFMD — New Rules on the Cross-Border Distribution of Funds From August 2021 — Implications for Non-EU Managers for further information on the new CBDF regime.
In this report, ESMA provides an overview of the marketing requirements across EU Member States and analyses the effects of national laws, regulations, and administrative provisions governing the marketing of investment funds.
The report is a useful summary of the AIFMD and UCITS marketing rules across the EU as presented by the EU national competent authorities.
ESMA updates list of market-makers and authorised primary dealers relying on exemption under the Short Selling Regulation (SSR)
On 6 July 2021, ESMA published an updated list of market-makers and authorised primary dealers who are using the exemption available to these types of entities under the EU SSR. The list is compiled from notifications of Member States’ competent authorities to ESMA.
Delay in application of revised regulatory technical standards and UCITS exemption
On 3 February 2021, the ESAs proposed revised Regulatory Technical Standards (“revised RTS”) pursuant to the EU PRIIPs Regulation. As well as making a number of amendments to the required content of KIDs, the revised RTS would introduce requirements for KIDs that are tailored to UCITS.
The revised RTS had been due to enter into force on 1 January 2022, the same point at which UCITS manufacturers are required to begin producing KIDs. However, in a letter dated 10 May 2021, the European Commission stated that it will now delay both the application of the revised RTS and the general requirement for UCITS providers to produce KIDs until 1 July 2022.
On 1 June 2021, the UK Treasury announced its intention to delay the application of the UK PRIIPS Regulation to UK UCITS providers until 31 December 2026.
FCA restricts Binance Markets Limited’s regulated activities
On 26 June 2021, the FCA published its Consumer warning on Binance Markets Limited and the Binance Group.
The FCA stated that due to the imposition of requirements by the FCA, Binance Markets Limited was not permitted to undertake any regulated activities without the prior written consent of the FCA.
Of note is the FCA’s reminder that while the FCA does not regulate cryptoassets such as Bitcoin or Ether, it does regulate certain cryptoasset derivatives (such as futures contracts, contracts for difference, and options) as well as those cryptoassets that the FCA would consider “securities.” In this regard, firms should note the FCA’s PS19/22: Guidance on Cryptoassets, published in 2019.
Malta added to FATF “grey list”
On 25 June 2021, FATF, the global money laundering and terrorist financing watchdog, announced that it had added Malta (along with the Philippines, Haiti, and South Sudan) to its so-called grey list of “jurisdictions under increased monitoring.”
It is the first time that an EU Member State has been included on the list; the Cayman Islands, another significant jurisdiction for investment fund business, had been added to that list in February 2021.
The FATF does not itself require enhanced due diligence (EDD) when dealing with individuals and entities from grey-listed countries, but certain countries may specify that firms take appropriate actions to minimise the associated risks when dealing with such grey-listed countries, which may include EDD measures in high-risk situations.
By way of example, in the UK, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 have not to date drawn a distinction between the FATF’s black and grey list jurisdictions and designated all countries on the two FATF lists as at March 2021 (including the Cayman Islands) as high-risk third countries rendering EDD requirements. Firms should, therefore, monitor the possible addition of Malta (as well as the Philippines, Haiti, and South Sudan) to the UK’s list of high-risk third countries.
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