UK/EU Investment Management Update (February 2022)
1. UK — FCA Compliance Matters
FCA guidance regarding competence and capability requirements of prospective heads of compliance and MLROs
On 28 January 2022, the FCA published a webpage containing guidance on how FCA-authorised firms should consider and demonstrate the competence and capability of prospective heads of compliance and money-laundering reporting officers (MLROs) prior to seeking FCA approval for such individuals to perform the senior management functions of compliance oversight (SMF16) and MLRO (SMF17).
The FCA notes that:
• prospective heads of compliance and MLROs should have completed relevant training before FCA approval is sought and attended recent and up-to-date training courses tailored to their industry. The FCA notes that it is less likely to approve individuals who intend to complete necessary courses after FCA approval;
• although applicants need not have held head of compliance or MLRO positions to be successful, previous experience of such positions is a good demonstration that someone may be suitable for these roles;
• an intention to arrange compliance support from third parties may be helpful as long as it is not the firm’s only compliance resource and the individual who is accountable for compliance has sufficient knowledge and experience to make proper use of third party support;
• the time commitment for the role must be proportionate and sufficient, and a full-time applicant is more likely to be successful than a part-time applicant. While applicants may have another role within the firm or externally, the FCA notes that successful applicants tend to be independent from the client-facing side of the business and are typically those working from the firm’s principal place of business in the UK; and
• even where an applicant believes they have sufficient experience or training, it may still request an interview to test this.
Senior Managers and Certification Regime regulatory references
On 27 January 2022, the FCA published its regulatory roundup for January 2022, which contained (among other things) a clarification regarding the requirement for firms to seek a reference from past employers of individuals to whom they intend to assign senior management or certification functions (or appoint as non-approved non-executive directors) (regulatory reference).
Following feedback from firms on challenges they face when obtaining regulatory references, the FCA notes that:
• firms should request, and respond to requests for, regulatory references promptly. Although Systems and Controls Sourcebook (SYSC) 22 includes guidance that references should be provided within six weeks, this is a limit, not a target;
• when providing regulatory references, firms should use the template in SYSC 22 Annex-1, complete the form fully, and check that the information they provide is accurate. Completing the wrong template or providing incomplete or incorrect information can cause delays;
• firms are required to take only reasonable steps to obtain references. Firms should inform the FCA if they experience difficulties obtaining regulatory references, and if they are unable to obtain regulatory references as part of an application, they should set out the steps taken to obtain references; and
• firms should assess regulatory references on a case-by-case basis, and individuals should not be automatically rejected due to a qualification in their references.
FCA confirms approach to European firms temporarily operating in the UK
On 18 January 2022, the FCA published a new webpage setting out its approach to firms currently in the temporary permissions regime (TPR) that do not meet FCA expectations.
The TPR allows certain European Economic Area (EEA) firms that were conducting regulated business in the UK prior to the end of the Brexit transition period (on 31 December 2020) to continue operating in the UK while they seek full authorisation.
The FCA has reiterated that the TPR is designed for, and should only be used by, firms that wish to operate in the UK in the long term and meet the standards to do so. As such, firms in the TPR may be required, among other things, to stop undertaking new business or could be removed from the TPR where they:
• miss their “landing slot”;
• fail to respond to mandatory information requests;
• do not intend to apply for authorisation; or
• their authorisation application is refused or withdrawn.
Where the FCA takes action against a firm, this may result in the FCA’s contacting the firm’s home state regulator and publishing a notice in the UK to that effect.
2. UK — Post-Brexit Regulatory Changes
HM Treasury sets out proposals for central counterparties and central securities depositories
On 17 January 2022, HM Treasury (HMT) published a consultation paper setting out its proposals for central counterparties (CCPs) and central securities depositories (CSDs) as part of HMT’s Future Regulatory Framework (FRF) Review. The FRF Review was established to consider how the financial services regulatory framework should adapt to the UK’s new position outside the EU and how to ensure the framework is fit for the future. For further details on the FRF Review, please see our November 2020 Update.
Both CCPs and CSDs are regulated and supervised by Bank of England (BoE). However, at present, the BoE has very limited powers to set direct regulatory requirements on these firms as these requirements sit in retained EU law. Responsibility to maintain and update the regulatory framework in this area currently falls on government and Parliament.
For the BoE to take on this responsibility for CCPs and CSDs, HMT is proposing granting the BoE general rule-making powers over CCPs and CSDs, modelled on the FCA and the Prudential Regulatory Authority (PRA) rule-making powers under the Financial Services and Markets Act 2000. The new general rule-making power would be underpinned by additional powers that replicate arrangements for the PRA and FCA, including:
• powers for the BoE to take enforcement action in cases of breaches, alongside rights of appeal for the CCP or CSD;
• powers for the BoE to waive or modify rules; and
• investigatory powers and information gathering powers.
The consultation closes on 28 February 2022.
3. UK — Market Abuse
FCA issues warning notice on improper advice to commit market abuse
On 2 February 2022, the FCA published a warning notice statement explaining the circumstances surrounding a warning notice it had issued on 14 October 2021 to Banque Havilland SA and certain individuals previously employed by Banque Havilland SA (the relevant individuals).
The FCA explains that it had issued the warning notice because it considered that between September and November 2017:
• Banque Havilland SA breached (i) the FCA’s Principles for Businesses by creating and disseminating a presentation that contained improper advice for potential clients and set out a number of steps that could be taken to harm the economy of Qatar by using manipulative trading practices aimed at creating a false, or misleading, impression as to the market in or the price of Qatari bonds; and (ii) SYSC 6.1.1R (adequate policies and procedures) of the FCA Handbook because Banque Havilland exposed itself to the risk it might be used to further financial crime; and
• the relevant individuals breached Individual Conduct Rule 1 of the FCA’s Code of Conduct sourcebook (which requires individuals to act with integrity) in relation to the roles they played regarding the creation and dissemination of the presentation.
4. UK — Cryptoassets
UK government to strengthen rules on misleading cryptocurrency adverts
On 18 January 2022, HMT published a response to its consultation paper of July 2020 on the promotion of cryptoassets.
The consultation response confirms HMT’s proposal to bring certain unregulated cryptoassets (e.g., utility tokens and exchange tokens) within the UK financial promotion regime.
The UK financial promotion regime requires (broadly) that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless:
• that person is authorised by the FCA or the PRA;
• the content of the communication is approved by an authorised person; or
• they rely on an exemption within the UK Financial Promotion Order (the FPO).
The FPO sets out, among other things, the list of controlled investments (e.g., debt securities, derivatives) and controlled activities (e.g., dealing in securities) that fall within the scope of the financial promotions restriction.
In the consultation, HMT proposed to add “qualifying cryptoassets” to the list of controlled investments in the FPO. It also proposed to amend the following controlled activities in the FPO to capture activities relating to qualifying cryptoassets:
• dealing in securities and contractually based investments;
• arranging deals in investments;
• managing investments;
• advising on investments; and
• agreeing to carry on specified kinds of activity.
HMT has confirmed that it will, in general, proceed with amending the FPO as consulted on. In particular, HMT intends to define the scope of “qualifying cryptoasset” as “any cryptographically secured digital representation of value or contractual rights which is fungible and transferable.” The definition will exclude other controlled investments, electronic money under the Electronic Money Regulations, and central bank money as well as cryptoassets that are transferable only to one or more vendors or merchants in payment for goods or services.
HMT intends to put in place a transitional period of approximately six months from both the finalisation and publication of the revised FPO regime and the complementary FCA rules (see below).
FCA consults on proposed financial promotions rules that will apply to cryptoassets
On 19 January 2022, the FCA published a consultation paper on proposals to strengthen the financial promotion rules for high-risk investments, including cryptoassets, and for authorised firms that approve financial promotions. The proposals follow the FCA’s discussion paper (DP21/1) of April 2021 on the same topic as well as recent FCA interventions to address consumer harm from high risk investments, including banning the mass marketing of certain speculative illiquid securities.
The proposals in the consultation paper cover:
• the classification of high-risk investments;
• the consumer journey into high-risk investments;
• strengthening the role of firms approving and communicating financial promotions; and
• applying financial promotion rules to qualifying cryptoassets.
In relation to qualifying cryptoassets, the FCA proposes to apply the same rules to cryptoassets as currently apply to “non-readily realisable securities” and “peer-to-peer agreements” (collectively this category will be referred to as “restricted mass market investments” in the FCA Handbook). As such, firms promoting qualifying cryptoassets would be subject to the financial promotion rules in COBS 4 of the FCA Handbook, including the requirements for the promotion to be clear, fair, and not misleading.
The consultation closes on 23 March 2022. The FCA expects to publish its policy statement and final Handbook rules in summer 2022.
5. EU — Short Selling Regulation
Delegated Regulation on short selling threshold enters into force
On 20 May 2021, ESMA issued an opinion to the European Commission recommending a permanent reduction of the notification threshold for net short positions in shares from 0.2% to 0.1% (and each 0.1% above that), and, on 27 September 2021, the European Commission adopted a Delegated Regulation (the SSR Delegated Regulation) permanently adjusting the threshold in line with ESMA’s recommendations. For further details on ESMA’s recommendations, please see our June 2021 Update.
The SSR Delegated Regulation entered into force on 31 January 2022, 20 days after its publication in the Official Journal.
As such, with effect from 31 January 2022, position holders are required to notify relevant EU national competent authorities (NCAs) when their net short positions in shares reach or exceed 0.1% of the issued share capital of an in-scope issuer. An in-scope issuer for these purposes is, broadly, an issuer whose shares are admitted to trading on an EU-regulated market or a multilateral trading facility and whose principal trading venue is located in the EU.
Further, following ESMA’s public statement of 26 January 2022, all position holders with net short positions between 0.1% and 0.2% as at 31 January 2022 were required to notify (by 15:30 on 1 February 2022) relevant NCAs, including where such positions were entered into prior to 31 January 2022. This was to give NCAs the full picture of net short positions above the new 0.1% threshold, which otherwise would be incomplete.
6. EU — MiFID
ESMA publishes supervisory briefing on the use of tied agents under MiFID II
On 2 February 2022, ESMA published a supervisory briefing seeking to ensure convergence across the EU in relation to the supervision of firms using tied agents, including those based outside the EU.
The supervisory briefing sets out ESMA’s and NCAs’ common understanding on the supervision of firms using tied agents to provide investment services and/or activities. The briefing covers supervisory expectations regarding:
• when firms appoint tied agents, and
• firms using tied agents in their on-going activities.
ESMA notes that following the UK’s withdrawal from the EU, it has been monitoring the behaviour of firms to understand whether their interaction with EU-based clients is done in a way that is compliant with MiFIR and MiFID. In this context, ESMA notes that some practices concerning investment firms using tied agents emerged as a potential source of circumvention of the MiFIR and MiFID legal framework.
As such, ESMA recommends that NCAs should carefully examine firms that have a business model that mainly consists of appointing tied agents that are legal persons controlled by or with close links to other entities, especially third-country entities, as such schemes may be used to access EU markets without the relevant MiFID authorisations.
ESMA further recommends that firms should avoid appointing tied agents whose employees (e.g., sale staff) are also at the disposal or under the control of other entities (e.g., third-country entities). This is because such entities could exercise inappropriate influence over the way in which the tied agent carries out the activities on behalf of the firm or may prevent the firm from effectively monitoring the activities of the tied agent. This includes in the case of staff sharing agreements or secondment.
Finally, ESMA notes that allowing a tied agent to carry out activities on behalf of a firm by mainly using the resources of another entity constitutes a serious impediment to the firm’s compliance with MiFID II. Specifically, this raises difficulties in respect of the duty of the firm to monitor the activities of its tied agents. To this end, and also to ensure that firms fulfil their duty of exclusivity to which tied agents are bound, ESMA notes that tied agents should have sufficient substance in the EU and should not mainly rely on resources based outside of the EU in providing activities on behalf of the appointing firm.
ESMA consults on trading venue perimeter
On 28 January 2022, ESMA published a consultation paper (CP) containing a draft opinion on the trading venue perimeter.
This consultation follows ESMA’s final report on the functioning of Organised Trading Facilities under MiFID II in which ESMA committed to publish an opinion clarifying the definition of “multilateral systems” and the trading venue perimeter; that is, guidance on when systems should be considered as multilateral systems and seek for authorisation as trading venues.
ESMA notes the lack of a homogenous view of what should constitute a multilateral system and consequently what types of systems require authorisation as a trading venue. To that end, ESMA provides guidance on three specific areas where the trading venue perimeter is not easily identified and might be subject to different interpretations from market participants and NCAs: new technology providers, request for quote systems, and pre-arranged transactions.
Further, ESMA notes that a clear distinction should be made between the investment service of reception and transmission of orders (RTO) and the operation of a trading venue. More specifically, multilateral systems should not be authorised as RTO but as trading venues. In particular, systems broadcasting trading interests to multiple clients with those clients being able to interact, within the system or through the software, with those trading interests, are likely to constitute a multilateral system, even where the final terms of the contractual agreement are concluded outside of the system or facility.
Stakeholders are invited to submit their input by 29 April 2022. ESMA will consider the feedback received to the consultation and publish a final report in Q3 2022.
7. EU — Investment Firms Directive and Regulation
EBA consults on draft guidelines on remuneration and gender pay gap benchmarking exercise for investment firms
On 21 January 2022, the European Banking Authority (EBA) published a consultation paper on draft guidelines on the benchmarking exercises on remuneration practices and gender pay gap for non-small and non-interconnected (non-SNI) EU investment firms.
The IFD requires the EBA to benchmark remuneration trends and practices of non-SNI firms. The draft guidelines specify certain remuneration and gender pay gap data that non-SNI firms are required to disclose to NCAs under the EU Investment Firms Regulation for the purposes of the EBA’s remuneration and gender pay gap benchmarking exercise.
The guidelines will apply from 31 December 2022. The first data will be collected in 2023 for the 2022 financial year. Non-SNI firms must submit the benchmarking data for the financial year ending in 2022, excluding gender pay gap data, by 31 August 2023, and NCAs must submit to the EBA by 31 October 2023. The first benchmarking exercise regarding the gender pay gap would be for the financial year 2023.
The consultation closes on 21 March 2022.
8. EU — UCITS Directive and AIFMD
ESMA launches common supervisory action with NCAs on valuation of UCITS and open-ended AIFs
On 20 January 2022, ESMA announced the launch of a Common Supervisory Action (CSA) with NCAs to be conducted throughout 2022 on the valuation of Undertakings for the Collective Investment in Transferable Securities (UCITS) and open-ended Alternative Investment Funds (AIFs) across the EU.
The aim of the CSA is to determine the level of compliance of supervised entities with the valuation-related provisions in the UCITS directive and the Alternative Investment Fund Managers Directive (AIFMD), in particular the valuation of less-liquid assets.
The CSA will focus on authorised managers of UCITS and open-ended AIFs investing in less-liquid assets (i.e., unlisted equities, unrated bonds, corporate debt, real estate, high-yield bonds, emerging markets, listed equities that are not actively traded, and bank loans).
NCAs will share information through ESMA to foster the consistent and effective supervision of valuation methodologies, policies, and procedures of supervised entities, ultimately to ensure that less-liquid assets are valued fairly during both normal and stressed market conditions.
9. EU — Securities Financing Transactions Regulation and the Benchmarks Regulation (ESMA Q&A)
ESMA publishes updated Q&As on SFTR and BMR
On 28 January 2022, ESMA published updated Q&A documents in respect of the Securities Financing Transactions Regulation (SFTR) and the Benchmarks Regulation (BMR).
In the updated Q&As on the SFTR, ESMA addresses whether a settlement fail is reportable where the counterparties have been unable to modify the maturity date of a securities financing transaction (SFT) due to a failed settlement that takes place after the day following the maturity date (S+1). ESMA confirms that the counterparties should, in that scenario, report the remaining/outstanding SFT with a new unique trade identifier (UTI) and specify accordingly the complete and accurate details of that SFT, including its maturity date. ESMA notes that special care should be given to the consistent reporting by the two counterparties. In the case where either one or both counterparties do not report the modification on time, both counterparties would be required to report the SFT with a new UTI agreed between them.
In the updated Q&As on the BMR, ESMA confirms that a temporary disruption to the provision of a benchmark does not constitute by itself a cessation of the benchmark. Thus, in case of a temporary disruption of a benchmark, supervised entities (e.g., investment firms) are not required to initiate the written plans established pursuant to Article 28(2) of the BMR.
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