UK/EU Investment Management Update (January 2023)
FCA Quarterly Consultation — Consumer Duty
On 2 December 2022, the FCA published its Quarterly Consultation, which contains certain proposed changes and clarifications with respect to the Consumer Duty (the Duty), including the following:
1. £50,000 exclusion. Under the rules adopted originally by the FCA, there is an exclusion for certain activities linked to financial instruments designed for wholesale investors. In particular, the Duty does not apply to “non-retail financial instruments,” which are (amongst other things) financial instruments with a minimum denomination or otherwise a minimum investment of £50,000. The FCA proposes in its Quarterly Consultation to amend this exclusion so that it is not available with respect to investment funds. The FCA explains that it did not intend for this exclusion to cover instances where firms are designing and distributing funds for retail customers.
2. Firms approving/communicating financial promotions. Where a firm is approving or communicating a financial promotion, only certain parts of the Duty will apply.
3. TMPR firms. The FCA clarifies the applicability of certain parts of the Duty to firms within the temporary marketing permissions regime (TMPR) (the TMPR allows European Economic Area (EEA) fund managers to continue selling funds into the UK post-Brexit).
4. Occupational pension schemes. In the context of occupational pension schemes, the term “retail customer” will be amended to make clear that it includes any client of a firm who is/would be a beneficiary of the scheme (rather than a beneficiary of the underlying investments held in the scheme).
5. “Closed product”. Firms have until 31 July 2024 to implement the Duty for closed products and services (that is, for products and services with existing customers but that are no longer open for sale or renewal). Under the definition, a product cannot be considered a “closed product” if it is still being “distributed.” The FCA proposes to amend the definition so as to clarify when a product is being “distributed.”
The FCA invites stakeholders to provide comments on the proposed changes set out in the Quarterly Consultation. The Quarterly Consultation closes 9 January 2023.
FCA publishes updated list of exempted shares for notification and disclosure of net short positions
On 28 December 2022, the FCA published an updated list of exempted shares for the purposes of the notification and disclosure requirements under the UK Short Selling Regulation (UK SSR). The UK List of Exempted Shares contains all shares admitted to trading on UK trading venues, where their principal venue for trading is outside the UK.
The FCA publishes the UK List of Exempted Shares as required under Article 16 of the UK SSR. This list shall be reviewed and updated every two years from 31 December 2020.
To ensure that firms have the right information to assess whether a short position is reportable to the FCA or not, the FCA published the following:
- the UK list of exempted shares that is valid until (and including) 31 December 2022 (this still includes the ESMA list dated 31 December 2020) and applies to positions reached up to that date
- the updated UK list of exempted shares that will be valid from 1 January 2023 (this does not include the ESMA list dated 31 December 2020) and will apply to positions reached from that date
FCA extends notification relief on 10% Depreciation Rule
On 22 December 2022, the FCA extended its temporary measures not to take enforcement action against firms that do not issue 10% depreciation notifications to investors. Prior to this extension, the temporary measures were supposed to expire on 31 December 2022.
The requirement to issue 10% depreciation notifications to investors arises from Article 62 of Commission Delegated Regulation (EU) 2017/565 (the UK MiFID Org Regulation) as reproduced in COBS 16A.4.3 UK (for details on the requirement, please see our October 2020 Update). However, the Treasury has now laid before Parliament a statutory instrument revoking the requirement. This legislative amendment is expected to come into force in January 2023, and the temporary measures have been extended for the interim period, pending revocation of the requirement.
FCA launches consultation on proposals for the new gateway for firms approving financial promotions
On 6 December 2022, the FCA launched its consultation (CP22/27) on proposals to operationalise the new regulatory “gateway” proposed by the Financial Services and Markets Bill 2022-23, through which authorised persons must pass before being able to approve the financial promotions of unauthorised persons (discussed in our August 2022 Update).
The aim of the proposals is to enhance consumer protection from illegal, unfair, or misleading financial promotions by, amongst other things, requiring firms to demonstrate they have the right expertise for the promotions they wish to approve and ensuring that the FCA can act quickly to put a stop to harmful financial promotions, including in areas like high-risk investments and Buy Now Pay Later.
In particular, the FCA is consulting on the following proposals to operationalise the new gateway:
- how the FCA assesses applicants at the gateway;
- the basis for the granting or refusal of applications;
- a bi-annual reporting requirement for firms that are given permission to approve financial promotions;
- a requirement for firms that are granted permission to approve financial promotions, to notify the FCA when they approve, or amend or withdraw approval of, a financial promotion, within seven days of doing so;
- not extending the compulsory jurisdiction of the Financial Ombudsman Service to the approval of financial promotions; and
- further consequential changes made to the FCA’s non-Handbook guidance for firms that approve financial promotions for investments and additional text on the Consumer Duty.
The FCA is not expecting the proposals in this consultation paper to generally be relevant to authorised persons approving the financial promotions of their appointed representatives or of unauthorised persons within their corporate group. They also do not expect them to apply where an authorised person approves their own financial promotions for onward communication by an unauthorised person.
The consultation is open until 7 February 2023 and is subject to the legislative process that the Financial Services and Markets Bill 2022-23 is currently undergoing. The Treasury has signalled its intention to put in place a transition period for existing authorised firms, enabling them to continue approving financial promotions until their applications have been determined.
FCA publishes report on approaches to diversity and inclusion in financial services
On 13 December 2022, the FCA published findings from a review on diversity and inclusion in financial services, which surveyed a sample of firms across multiple sectors on their diversity and inclusion policy and strategy, their targets or goals, and any data that they used. Firms were sampled based on their gender pay gaps.
The review found a significant degree of consistency among the firms sampled, with all being early in the development of their approach on diversity and inclusion, typically having started serious efforts in 2019 or 2020. Some firms had made more progress than others, but there was generally little correlation between how developed the firms’ approaches were and the scale of pay gap.
The FCA criticised firms for focusing primarily on improving representation at senior leadership level, despite data showing that the biggest drop-off in representation lies between junior and middle management grades. The FCA further noted that very few firms seemed to have understood diversity and inclusion as a fundamental culture issue, and that many firms’ strategies were generic, driven by a compliance approach, rather than a genuine commitment to diversity and inclusion.
The FCA encourages all regulated firms to consider its findings and use them to assess their current diversity and inclusion strategies and practices.
2. UK — Reforms for the Financial Sector
UK government introduces the “Edinburgh Reforms”
On 9 December 2022, the Chancellor of the Exchequer announced a wide-ranging set of reforms for the financial services sector, referred to as the “Edinburgh Reforms.”
The proposals intend to build on the reform agenda the government is taking forward through the Financial Services and Markets Bill 2022-23 (the FSM Bill). For details on the bill, please see our August 2022 Update.
Key matters of the Edinburgh Reforms include the following:
- Smarter regulatory framework. The government is continuing to update the UK’s regulatory framework by repealing EU legislation currently in place and replacing it with new legislation that takes into consideration proposals raised in various consultations such as the Future Regulatory Framework Review. Legislation that will see changes made include the Packaged Retail Investment and Insurance-Based Products Regulation (1286/2014) and the Payment Account Regulations 2015 (SI 2015/2038).
- Wholesale markets reforms. The government has introduced to Parliament the Markets in Financial Instruments (Investor Reporting) (Amendment) Regulations 2022. These Regulations amend the UK MiFID Org Regulation in a manner that will enable changes to the investor reporting regime that the government previously consulted on in the wholesale markets review.
In addition, the government is planning to work alongside the FCA in establishing a regulatory regime by 2024 that will support a consolidated tape for market data. This regime will bring together market data from multiple platforms into one continuous feed to improve market efficiency, lower costs for firms and investors, and make UK markets more competitive.
- Ring-fencing regime. The government will introduce secondary legislation in 2023 to improve the functionality of the ring-fencing regime for banks. This legislation will set out reforms in response to the Independent Review on Ring-Fencing and Proprietary Trading.
Furthermore, the Prudential Regulatory Authority (PRA) plans to consult on removing rules for the capital deduction of certain non-performing exposures (NPEs) held by banks. This would enable the PRA to take a more judgement-led approach towards evaluating the adequacy of firms’ provisioning for NPEs, help to simplify the UK rulebook, and avoid the unnecessary gold plating of prudential standards.
- Senior Managers and Certification Regime. In Q1 2023, the government will launch a Call for Evidence to look at the legislative framework to gather views on its effectiveness and discuss potential improvements and reforms.
- Sustainable Finance. The government will consult in Q1 2023 on bringing environmental, social, and governance (ESG) ratings providers within the regulatory perimeter and publish an updated Green Finance Strategy in early 2023.
3. UK — ESG
HM Treasury statement on UK Taxonomy Regulations
On 14 December 2022, the Treasury published a statement clarifying that the government will not make secondary legislation under the Taxonomy Regulations this year.
Under the current regulations, the government would have to adopt technical screening criteria by the end of 2022. However, with the FSM Bill soon to be put forward for parliamentary approval, the government believes it would be wise to postpone taxonomy development until after the bill has been approved and the government is provided with new powers to restate and modify retained EU law that currently sits in the regulations.
The government will provide a further update as part of its publication of the Green Finance Strategy in early 2023.
4. EU — MiFID II
ESMA provides guidance on supervision of cross-border activities of investment firms
On 14 December 2022, ESMA published a supervisory briefing on ensuring convergence across the EU with respect to the supervision of investment firms’ cross-border activities under MiFID II. The supervisory briefing is relevant to investment firms that provide cross-border services, particularly to retail clients, under the passporting regime set out in Article 34 of MiFID II.
The supervisory briefing was issued in the context of ESMA’s 2021 decision to launch a peer review of the national competent authorities’ (NCAs’) supervision of the cross-border activities of investment firms. Effective supervision of the relevant activities under MiFID II is essential to ensure that retail clients benefit from the same level of protection regardless of where the investment firm providing such relevant activities is based.
The supervisory briefing, which constitutes guidance rather than new policy, addresses the following areas:
- authorisation of firms with cross-border plans;
- processing of passport notifications and their impact on the supervisory approach applied to firms;
- arrangements in place to carry out ongoing supervisory activities;
- carrying out of ongoing supervision; and
- carrying out of investigations and inspections.
Additionally, the supervisory briefing contains indicative questions that supervisors are expected to ask themselves, or a firm, when assessing their approach to the supervision of cross-border activities to retail clients of investment firms.
ESMA promotes coordinated action by NCAs on best execution reporting
On 14 December 2022, ESMA published a public statement to promote coordinated action by NCAs, which advised NCAs to deprioritise supervisory actions with respect to the obligation to publish Regulatory Technical Standards (RTS) 27 reports after 28 February 2023.
The public statement was published in the context of ambiguity among market participants with respect to the suspension of the obligation to publish RTS 27 reports if negotiations by the Council of the EU and the European Parliament related to their review of MiFID II and Markets in Financial Instruments Regulation (MiFIR) exceed the expiration date of the temporary suspension (i.e., 28 February 2023). Note that, as part of their review, the Council of the EU has proposed to delete the obligation under Article 27(3) of MiFID II, which requires in-scope firms to publish RTS 27 reports (as discussed in our October 2021 Update).
ESMA noted in the public statement that the Council of the EU and the European Parliament’s review of MiFID II is unlikely to be completed by 28 February 2023. As such, ESMA does not expect NCAs to prioritise supervisory actions towards execution venues relating to the periodic reporting obligation on them to publish the RTS 27 reports from 1 March 2023 until a forthcoming legislative amendment to Article 27(3) of MiFID II applies.
5. EU — ESMA Q&A
ESMA updates Q&A on the application of AIFMD and on MiFID II and MiFIR market structures
In relation to the application of the AIFMD, this update adds a new Q&A to address whether managers of special purpose acquisition companies (SPACs) are subject to the AIFMD. The Q&A notes that given the lack of formal legal definition of a SPAC under EU law, each SPAC must be assessed on a case-by-case basis as to whether it meets the definition of an alternative investment fund (AIF) under the AIFMD.
In relation to MiFID II and MiFIR market structures topics, this update adds a new Q&A to address whether an investment firm acting as single liquidity provider on a regulated market (RM) and/or a multilateral trading facility (MTF) can operate a systematic internaliser. The Q&A notes that this is possible, but only if the two activities are fully separated. Instances where an investment firm acts as a single liquidity provider on an RM and/or MTF generate a conflict of interest, due to the investment firm having privileged access to order book information when acting in its liquidity provider capacity.
ESMA publishes technical standards on cross-border activities under UCITS and AIFMD
On 21 December 2022, ESMA published a final report outlining the RTS and Implementing Technical Standards (ITS) specifying the information to be provided, and the templates to be used, to inform competent authorities of the cross-border marketing and management of investment funds and the cross-border provision of services by fund managers.
The RTS specify the information to be provided by management companies and alternative investment fund managers (AIFMs) wishing to carry out their activities in host Member States, whilst the ITS contain the templates to be used by management companies. These standards will normalize the content and format of the information being provided by management companies, UCITS, and AIFMs situated in the EU only and look to support the process for notifying cross-border marketing and management activities in relation to UCITS and AIFs as well the cross-border provisions of services by fund managers.
Note that the new template notifications under UCITS and AIFMD apply only to UCITS management companies and AIFMs established within the EU marketing in other EU member states; they do not apply to third-country AIFMs marketing in the EU under the National Private Placement Regime.
ESMA has submitted the RTS and ITS to the European Commission for adoption in the form of a Commission Delegated Regulation and a Commission Implementing Regulation. Following their adoption, both draft regulations will be subject to approval by the European Parliament and of the Council.
7. EU — EMIR Refit
ESMA publishes guidance on EMIR Refit reporting requirements
On 14 December 2022, ESMA published a final report on the Guidelines for reporting under EMIR Refit (the final report). The final report clarifies the reporting and data management requirements applicable under EMIR Refit to (i) counterparties to over-the-counter derivatives contracts, (ii) central counterparties, and (iii) and trade repositories (TRs). The final report has been published with new validation rules as well as outgoing and ingoing reporting instructions.
The final report is designed to ensure consistent implementation of the relevant EMIR Refit rules across all EU Member States. The final report also includes a detailed assessment of the feedback ESMA received to the proposals in its July 2021 consultation paper (as discussed in our August 2021 Update).
In particular, the final report addresses the following aspects of the EMIR Refit rules:
- transition to reporting under EMIR Refit;
- the number of reportable derivatives;
- intragroup derivatives exemption from reporting;
- delegation of reporting and allocation of responsibility for reporting;
- reporting logic and the population of reporting fields;
- reporting of different types of derivatives;
- ensuring data quality by the counterparties and the TRs;
- construction of the Trade State Report and reconciliation of derivatives by the TRs; and
- data access.
The validation rules, which apply to TRs, set out the following information:
- how TRs ought to verify the completeness and accuracy of data reported by counterparties;
- the conditions and thresholds that should be applied by TRs to determine whether the values reported by counterparties to a particular derivatives contract align; and
- templates for TRs to use when notifying national competent authorities (NCAs) of reporting errors and omissions.
Market participants should also take note of the updated EMIR XML schema sets contained in the reporting instructions. By introducing a fully standardised format for EMIR XML messages, ESMA intends to minimise the risk of inconsistent data being submitted to TRs.
ESMA confirmed it will continue to engage with market participants to address any remaining concerns and facilitate a smooth transition to reporting under EMIR Refit. Note that the Guidelines will be effective from 29 April 2024.
8. EU — ESG
Corporate Sustainability Reporting Directive formally approved and published
On 28 November 2022, the Council of the European Union gave its final approval to the CSRD, and, on 16 December 2022, the CSRD was published in the Official Journal of the European Union. It will enter into force on 5 January 2023 (20 days after publication), and member states are required to transpose the CSRD into national law by 6 July 2024.
For further information on the CSRD, please see our Update “EU Corporate Sustainability Reporting Directive — What Do UK- and U.S.- Headquartered Companies Need to Know?”
European Commission issues guidance on environmental performance reporting under green taxonomy
On 19 December 2022, the European Commission issued two draft notices containing guidance on environmental performance reporting under green taxonomy. The first notice contains responses to FAQs on the technical screening criteria for the Taxonomy’s first two environmental objectives of climate change mitigation and climate change adaptation, and the second notice contains responses to FAQs on the disclosure obligation under Article 8 of the Taxonomy Regulation, the details of which are set out in the Disclosures Delegated Act.
A significant number of companies will begin reporting as of 1 January 2023 under the EU Taxonomy framework, which establishes a common language for “sustainable economic activities” for financial market participants and investors. The Commission’s focus is on helping market participants with the implementation of the EU Taxonomy. The two documents will help the companies concerned prepare their first mandatory reporting exercise, which will be used by financial market participants in their own disclosures concerning the sustainability aspects of financial products.
Both documents are currently adopted as draft Commission notices and will be applicable and effective against third parties following the official adoption once all languages are available.
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