UK/EU Investment Management Update (September 2021)
- UK – IFPR
- UK – FCA Compliance Updates
- UK – Cryptoasset Regulation
- UK – Court Case on “Arranging Deals in Investments”
- EU – Transparency Directive
- EU – Market Abuse Regulation
- EU – MiFID II
- EU – AIFMD
- EU – ESMA Report on Trends, Risks, and Vulnerabilities
Sidley 10-Step Plan and Final FCA Consultation Paper
The IFPR is expected to come into force on 1 January 2022. It will apply to FCA MiFID investment firms and UK alternative investment fund managers (AIFMs) with MiFID “top-up” permissions.
We have published a 10-Step Plan for Investment Managers implementing IFPR, which should be a good starting point for most managers, although managers will need to consider the specific structure and activities of their UK investment firm(s).
On 6 August 2021, the FCA published its third of three consultation papers on the IFPR (CP21/26). CP21/26 consults on draft rules for disclosure requirements and on certain technical issues including consequential changes to the FCA Handbook. The Consultation Paper is open for responses until 17 September 2021.
CP21/26 is not expected to make any material changes to the consolidated near-final rules contained in PS21/9 (as discussed in our August 2021 UK/EU Investment Management Update and in our 10-Step Plan for Investment Managers).
Following this consultation, the FCA will consider feedback and publish a Policy Statement and final rules for the whole IFPR in the autumn.
In CP21/26, the FCA proposes to introduce the following disclosure requirements:
- firms that are not small and non-interconnected (i.e., non-SNIs) shall disclose information about their risk management and governance arrangements, and about their own funds, own funds requirements and investment policy;
- small and non-interconnected (SNI) firms that issue additional tier 1 (AT1) instruments shall disclose information about their risk management arrangements; and
- all FCA investment firms shall disclose qualitative and quantitative information on their remuneration policies and practices in a way that is proportionate to the size and type of firm.
CP21/26 does not include any proposals to require firms to make disclosures on environmental, social, and governance (ESG) issues apart from the governance arrangements referred to above; however, the FCA indicates that it will consult specifically on ESG disclosures in a subsequent consultation paper (which will be additional to other FCA consultations on climate-related disclosure).
The FCA proposes to introduce a rule to address the situation where excess drawings can be made by partners in a partnership or members in a limited liability partnership (LLP) and are treated as a loan to partners or members rather than being recorded as a loss.
CP21/26 also contains proposals as to the FCA’s use of new powers to impose obligations directly on non-authorised parent undertakings of FCA investment firms under amendments to the Financial Services and Market Act introduced by the Financial Services Act 2021. The new powers give the FCA scope to take disciplinary action against undertakings that breach these requirements.
FCA register – firm details
The FCA has updated its webpage explaining the process for firms to confirm or update their details with the FCA on an at least annual basis. We are aware a number of investment managers have previously failed to meet the annual deadline with the result that a warning was added to their permissions profile on the FCA’s register.
The FCA’s webpage now indicates that firms that fail to update and/or confirm their details within 60 working days of their accounting reference date will receive a late return notification and a £250 fine. The FCA notes that it may also take enforcement action against firms.
FCA update on delayed processing of applications under the SMCR
On 1 September 2021, the FCA provided an update on processing delays caused by an unexpectedly high volume of applications under the Senior Managers and Certification Regime (SMCR). The FCA indicates that it has since increased resourcing and reduced the volume of cases that breached the FCA’s statutory deadlines but that delays are still expected. Routine applications to be approved to hold a controlled function for an appointed representative may also face delays.
Persons performing senior management functions under the SMCR are required to obtain the FCA’s approval before commencing their duties. Delays at the FCA could therefore affect firms filling senior management roles as promptly as may be desired.
On 3 August 2021, the FCA wrote to the Remuneration Committee Chairs of “Level 1” firms (i.e., dual-regulated banks, building societies, and Prudential Regulation Authority (PRA)-designated investment firms with total assets exceeding £50bn) to set out its approach to remuneration for 2021/22 for this group of firms.
While the specific requirements on remuneration are unlikely to be directly relevant to investment managers that are not PRA-designated investment firms, the FCA’s letter also highlighted some other key areas on accountability, non-financial measures, diversity, and its international work that may be relevant for a broader range of firms.
FCA Annual Public Meeting
The FCA’s annual public meeting will be held on 28 September 2021. The FCA is accepting registrations on its website to attend the virtual meeting.
FCA Chair calls for regulation of cryptoassets promotions
On 6 September 2021, the Chair of the FCA gave a speech warning about the risks of digital assets (also known as cryptoassets).
Charles Randell discussed the possibility of cryptoassets’ becoming subject to regulation by the FCA, noting that for regulation to be effective, any business seeking registration or authorisation with the FCA would need to bring itself within the FCA’s reach, with people and resources that the FCA could supervise. While the FCA has previously stated [PS19/22] that cryptoassets that provide rights and obligations akin to specified investments are within the UK regulatory perimeter, purely speculative tokens (including Bitcoin) are not.
Until such time as the UK introduces a bespoke cryptoasset regime, Randell noted that there are two cases where regulators should have the powers to take action to reduce the potential harm to consumers from purely speculative tokens: cryptoasset promotions, in relation to which the Treasury published a consultation in July 2020 on regulating some cryptoasset promotions; and the risk of contagion of the regulated business of authorised firms by unregulated activities in digital tokens. Randell highlighted that the Basel Committee is consulting on a proposal for speculative digital tokens to attract a full capital charge for banks and noted that FCA-authorised firms must be able to show how they have addressed the conduct and prudential risks that unregulated activities in relation to cryptoassets can pose.
This speech serves as a reminder to firms that while some cryptoassets may be unregulated, authorised firms are still expected to take a prudent approach to risk management when dealing with such investments. More broadly, in recent months the FCA has made a number of statements regarding the cryptoasset sector, highlighting that this sector remains an area of regulatory focus. In our July 2021 Update we noted that the FCA published a consumer warning relating to activities carried on by the cryptoasset exchange Binance, and in our June 2021 Update we noted that the FCA had extended the date for its Temporary Registrations Regime for existing cryptoasset businesses. As part of that announcement, the FCA confirmed that a “significantly high number of businesses are not meeting the required standards under the Money Laundering Regulations resulting in an unprecedented number of businesses withdrawing their applications”.
4. UK – Court Case on “Arranging Deals in Investments”
FCA v. Avacade Limited et al. – Court of Appeal ruling
On 4 August 2021, in the case of FCA v. Avacade Limited et al, the English Court of Appeal (CA) held that Avacade Limited and its directors (the appellants) had engaged in arranging and promoting investments in self-invested personal pensions (SIPPs) without being authorised to do so. More than 2,000 consumers had transferred £91.8 million from their pensions into SIPPs at the advice of Avacade, which had received commissions in excess of £10.5 million.
When interpreting Article 25(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), the CA held that the sourcing of funds from pension pots, transfers into SIPPs, and investment in the products producing commission were all part of one set of arrangements that was indivisible. On this basis, it was held that the exclusion in Article 29 (Arranging deals with or through authorised persons) of RAO did not apply as the appellants had received pecuniary rewards in relation to their “arrangements” viewed in the whole, as one set.
Further, the CA clarified that the exemption in Article 26 (Arrangements not causing a deal) of RAO does not apply to Article 25(2), and breach of Article 25(2) does not require the arrangements to actually or notionally cause a specified activity.
This case may be relevant to investment managers with unregulated UK offices, particularly if such UK offices act as a conduit to the distribution of fund products by third parties or to any firms that rely on the services of unregulated introducers. One way to avoid any issues in this area would be for the UK entity to become an “appointed representative” of a UK-authorised firm as this would permit the UK entity to conduct on the arranging activities (as well as to give investment advice).
ESMA updates practical guide to national rules on notification of major holdings under the Transparency Directive
On 1 September 2021, ESMA published an updated practical guide summarising the main rules and practices across the European Economic Area (EEA) in relation to notifications of major holdings under national law as directed by the Transparency Directive.
Under the Transparency Directive, a shareholder who acquires or disposes of shares that are admitted to trading on a regulated market and to which voting rights are attached must inform the relevant national competent authority (NCA) and the issuer when certain thresholds are reached. The notification obligation also applies in respect of financial instruments with similar economic effect to holding shares or entitlements to acquire shares (i.e., either cash-settled or physically settled derivatives).
ESMA’s guide is intended as an aide to market participants and sets out each member state’s particular Transparency Directive thresholds and notification requirements; however, it is not an effective substitute for local law advice. The latest update incorporates changes in relation to Iceland and Italy and removes information concerning the UK.
In recent months, as the number of EU special purpose acquisition company (SPAC) deals has increased, investment managers may have found themselves within scope of the Transparency Directive’s major shareholding notification requirements in connection with investment in SPACs. Close attention should be paid to whether any warrants held in the SPAC fall within the meaning of financial instruments with similar economic effect under Article 13 of the Transparency Directive. This will likely depend on the particular issuer and the law of the member state in which the SPAC is listed.
ESMA updates to Q&A on MAR
On 6 August 2021, ESMA added further questions and answers in its Q&A on the Market Abuse Regulation (MAR) relating to credit rating agencies.
ESMA confirms that credit ratings, rating outlooks, and information under the Credit Rating Agencies Regulation (CRAR) are presumed to be inside information. However, ESMA also confirms that the disclosure of credit ratings to paid subscribers only nonetheless constitutes “disclosure to the public” such that the information would no longer be considered to be inside information. Accordingly, subscribers to such services are able to trade on the basis of such information without being in breach of MAR.
ESMA publishes final guidelines on MiFID II and MiFIR obligations on market data
As noted in our previous Update, in June 2021 ESMA published its final report containing finalised guidelines on the EU MiFIR market data obligations.
On 18 August 2021, following the translation procedures, ESMA published the final guidelines in the official languages of the European Union. Within two months of the date of publication of the guidelines on ESMA’s website in all EU official languages, NCAs to which these guidelines apply must notify ESMA whether they (i) comply, (ii) do not comply, but intend to comply, or (iii) do not comply and do not intend to comply with the guidelines.
As a reminder, while investment managers will not be directly subject to the guidelines, the guidelines may eventually have a positive effect on how managers in general consume data from EU market data providers and on greater transparency in relation to data costs.
To that end, the guidelines require Market Data Providers to (among other things):
- market data on the basis of cost;
- provide market data on a non-discriminatory basis; and
- inform customers that the purchase of market data is available separately from additional services (“data unbundling”).
The guidelines will apply from 1 January 2022.
ESMA publishes updated list of AIFMD MoUs
On 3 September 2021, ESMA published an updated spreadsheet listing the AIFMD MoUs that have been agreed between the NCAs in the EU member states and their counterparties in third countries. These MoUs serve as the cooperation agreements referred to in, for example, Article 42 of AIFMD and whose existence is a minimum condition for a third-country alternative investment fund (AIF) to be marketed in the EU under the national private placement regimes.
In the updated MoU summary, the UK has been moved to the third-country section, and ESMA notes that the multilateral MoU signed between the UK and EU authorities serves the purpose of an AIFMD MoU.
On 1 September 2021, ESMA published its second TRV report for 2021. ESMA’s TRV reports are published periodically as part of ESMA’s attempts to identify and assess, at an early stage, trends, risks, and vulnerabilities at a micro prudential level, across borders and across sectors. The TRV reports are wide-ranging and cover a broad range of financial-services-related topics.
For the asset management sector, the latest TRV report highlights that, overall, risks have remained elevated in the fund sector, with an increase in credit risk as the impact of the COVID-19 pandemic on corporate solvency is reflected in the quality of fund portfolios.
ESMA notes that while the AIF sector remained stable in terms of size and risk as well as median average leverage, the failure of Archegos raises further concerns regarding leveraged funds. ESMA expresses a concern that an EU family office using similar strategies to Archegos may not fall within the scope of the AIFMD even though such investment strategies are very similar to hedge funds.
ESMA also discusses the impact of the collapse of Greensill and notes that the episode raises concerns about interconnectedness within the financial system as well as potential due diligence, governance, and conflict of interest issues for AIFs that had exposure to Greensill.
On sustainable finance, ESMA notes that ESG fund assets have grown 20% since the end of 2020 and flows into ESG funds accelerated again, with impact and environmental funds the fastest-growing strategies, despite the presence of potential concerns regarding the valuation of “green” firms (as measured by reference to P/E ratios and return on equity, for example).
ESMA refers to some early findings on the application of the Sustainable Finance Disclosure Regulation that show that around 20% of total European funds fall under Article 8 and 9 products. ESMA sees this level of interest as stressing the need for the clear categorisation and disclosure requirements and a harmonised supervisory approach by national authorities.
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