UK/EU Investment Management Update (November 2021)
- UK Investment Firms Prudential Regime (IFPR)
- ESG – UK
- ESG – EU
- UK – FCA Updates
- UK Regulatory Initiatives Grid
- UK Long-Term Asset Funds
- AIFMD2 and MiFIR2?
- EU Investment Firms Regulation
- EU PRIIPs Regulation
FCA publishes IFPR final rules
On 22 October 2021, the FCA published the final rules from its first and second policy statements on the IFPR, which will come into force on 1 January 2022.
Alongside the final rules, the FCA has also published:
- a revised version of its general guidance on the application of ex-post risk adjustment to variable remuneration (FG21/5), providing further detail on its expectations as regards malus and clawback arrangements; and
- a Remuneration Policy Statement (RPS) template and table of material risk takers, which FCA investment firms can use to document their remuneration policies and practices and (where relevant) their material risk takers.
The FCA’s final policy statement on the IFPR, in response to its third and final consultation paper on the IFPR (CP21/26), will be published by the end of 2021. For more information on CP21/26, see our September 2021 Update.
Finally, the FCA has indicated that it will send a questionnaire to all firms within the scope of the IFPR this month (November), asking for key information such as the firm’s expected small and non-interconnected investment firm (SNI) status, “investment firm group” membership/composition, and expected Internal Capital and Risk Assessment (ICARA) reporting date.
UK FCA publishes Discussion Paper on sustainability disclosure requirements for asset managers
On 3 November 2021, the FCA published Discussion Paper DP21/4 on Sustainability Disclosure Requirements and investment labels.
DP21/4 contributes to the UK government’s ambitions on climate change and green finance, in particular as set out in the UK government’s Greening Finance paper discussed below.
In DP21/4, the FCA is seeking initial views on disclosure requirements under the new Sustainability Disclosure Requirements (SDR) for asset managers and certain FCA-regulated asset owners, as well as a sustainable investment labelling system.
The FCA then aims to consult in Q2 2022 on proposed rules to implement the new framework.
The deadline for responses to the consultation is 7 January 2022.
UK government publishes Green Finance Paper
On 18 October 2021, the UK government published its Greening Finance roadmap, which outlines (among other things) its strategy for implementing the new SDR (described in the section above). The SDR regime will apply to asset managers, investment products, pension schemes (including occupational pension schemes), and owners that manage or administer assets on behalf of clients.
Whilst the SDR regime remains in its early stages, the government has provided a general overview of what the disclosure obligations may involve. In particular, the SDR will build upon the UK’s implementation of disclosure requirements that are based on the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations. For a detailed discussion of the FCA’s consultation on new TCFD aligned climate-related disclosure requirements for asset managers, see our Update ESG – UK FCA Consultation on Climate-Related Disclosure Requirements – Implications for Asset Managers.
Disclosures will be required from both asset managers and investment products in regards to sustainability risks, opportunities, impacts, and alignment with the UK’s Green Taxonomy. Separately, the roadmap notes that firms and products that promote ESG will be required to substantiate their “green” claims.
It is pertinent for asset managers to note that the UK rules may go beyond the current EU disclosure framework. For example, the roadmap emphasises the importance of providing transition plans, in response to the TCFD’s recent finalised guidance, which is an aspect that is absent from the EU rules. However, the roadmap also confirms that the UK Green Taxonomy will be based on the EU taxonomy, which we would expect the asset management industry to welcome.
The UK government is expected to publish discussion papers on the SDR regime later this month (November) for public consultation, which will provide further information on the exact scope, timing, and details of the SDR’s requirements as well as its compatibility with the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the EU’s Taxonomy Regulation (TR).
Joint statement by the FCA, Prudential Regulation Authority, Pensions Regulator, and FRC on the Climate Change Adaptation Reports
On 28 October 2021, the FCA (together with the Prudential Regulation Authority and the Pensions Regulator) published a Climate Change Adaptation Report (the Climate Change Report) to set out how climate change affects its responsibilities and how the financial sector is responding.
The Climate Change Report highlights some key actions taken by the FCA to deal with climate-related issues, such as appointing a new director of environmental, social, and governance (ESG) matters; refreshing its ESG strategy to be published this autumn; and working on some major publications on climate risk-related matters, such as finalising rules for disclosure requirements aligned with the TCFD.
The FCA also emphasises that climate considerations will be embedded in everything it does, from how it operates, including its policy choices, to how it supervises firms.
The Climate Change Report also notes that there is a growing commitment to net zero pledges among asset owners, asset managers, banks, and insurance companies, but such commitments will need to be substantiated by appropriate governance arrangements and the adoption of coherent transition plans so as to monitor progress.
The FCA intends to engage with stakeholders in H1 2022 to promote effective transitional plans.
ESAs publish final report on EU SFDR level 2 RTS
On 22 October 2021, the ESAs published their final report on draft Regulatory Technical Standards (RTS) in respect of the content and presentation of taxonomy-related sustainability disclosures under Articles 8(4), 9(6), and 11(5) of the SFDR (TR RTS). The three articles were inserted in the SFDR through Article 25 of the Taxonomy Regulation (TR).
The final report follows the ESAs’ consultation of 15 March 2021 (JC 2021 22) on the draft TR RTS, which we covered in our April 2021 Update.
The TR RTS develops additional taxonomy-related, pre-contractual disclosures relating to the content and presentation of Articles 8 and 9 SFDR financial products as well as additional rules on the content and presentation of information required as periodic disclosures relating to climate objectives and environmental objectives under the TR.
The final report contains a consolidated text of the draft regulatory technical standards submitted on 2 February 2021 (SFDR RTS), which related to Articles 2a(3), 4(6), (7), 8(3), 9(5), 10(2), and 11(4) of the SFDR and the TR RTS. As such, it is designed to function as a single rulebook for sustainability disclosures for the purposes of the SFDR and the TR.
The European Commission (the Commission) has three months in which to adopt the TR RTS, following which the TR RTS will be subject to a further three-month scrutiny period by the European Parliament and Council before being formally adopted.
FCA expectations for firms considering more permanent remote or hybrid working arrangements
On 11 October 2021, the FCA published its expectations in relation to remote or hybrid working arrangements for (i) existing FCA-regulated firms; (ii) firms applying to be authorised or registered with the FCA; and (iii) firms proposing to submit further applications (e.g., variation of permission) to the FCA.
The FCA will evaluate firms considering remote or hybrid working on a case-by-case basis. Such firms will be expected to demonstrate that the lack of a centralised location does not or is unlikely to, among other considerations:
- affect their location in the UK or ability to meet threshold conditions for the regulated activities they have or will have permissions for;
- prevent the FCA’s receiving information about them;
- reduce the accuracy of the Financial Services Register (FS Register) (e.g., clients being able to rely on the FS Register to contact a firm at its principal place of business);
- affect the ability of firms to oversee their functions, including outsourced functions;
- cause detriment to consumers or damage the integrity of the market; or
- increase the risk of financial crime.
Firms will also be expected to prove that there is “satisfactory planning,” which includes proving that:
- there is appropriate governance and oversight, which is capable of being maintained, by senior managers, committees such as the board, and non-executive directors;
- control functions (i.e., risk, compliance, and audit) can perform their functions;
- the firm has considered any data, cyber, and security risks;
- the firm has appropriate recordkeeping procedures in place and can continue to meet any specific regulatory requirements, such as call recordings and order and trade surveillance; and
- the firm has considered the effect on staff, including well-being, training, and diversity and inclusion matters.
Firms will be expected to engage with and notify the FCA of material changes to their working arrangement, including where firms intend to use a private residential address as their principal place of business. The FCA reminds firms that, irrespective of the remote or hybrid working arrangement pursued, the FCA should be able to access firms’ sites, records, and employees, as necessary, to discharge its regulatory objectives.
FCA Perimeter Report 2020/21
On 21 October 2021, the FCA published its 2020/21 Perimeter Report. The 2020/21 report highlights a number of potential perimeter issues, and actions taken to date to reduce or mitigate harm from the same, including:
- Appointed representative (AR) regime. The FCA considers there to be significant shortcomings in how well principal firms understand and comply with their regulatory responsibilities for their ARs, including insufficient oversight of ARs by principals and inadequate controls over the regulated activities for which they had accepted responsibility. The FCA intends to carry out a targeted and proactive supervision of principals’ oversight of ARs where it considers that use of the AR regime is a particular driver of harm. The FCA will consult later this year on specific proposals to address the harm it has identified to date with respect to the AR regime and intends to intensify its scrutiny of all principal firms and applicants seeking to appoint ARs.
- Financial promotions regime. The FCA is concerned that unauthorised persons are increasingly relying on exemptions in the Financial Promotion Order relating to “high net worth” and “sophisticated” investors to market high-risk investments. The FCA notes with the advent of investment-based crowdfunding, ordinary consumers can now easily meet the criteria for “sophisticated” investors (the criteria being, broadly, that an investor had made more than one investment in an unlisted company in the past two years). Similarly, the FCA is concerned that the threshold for qualifying as a “high net worth” investor (currently set as an annual income of £100k or more) is significantly lower than the threshold used in other comparable jurisdictions. As such, the FCA recommends that the thresholds for these exemptions and the ability for consumers to self-certify should be reviewed.
- Cryptoasset business models. There is a concern about the ever-growing complexity of cryptoasset business models, and the FCA expresses the intention to work with HM Treasury to consider the appropriateness of additional regulatory or legislative action. Additionally, the FCA notes that the registration standards it is permitted to apply on cryptoasset businesses under the UK Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) are less demanding than those applicable under the UK Financial Services and Markets Act 2000. The FCA has suggested that the MLR regime could be strengthened if the criteria used to determine fitness or propriety included specific criteria in relation to adequate governance and financial resilience.
FCA’s analysis of firms’ 2017-20 REP-CRIM data
On 7 October 2021, the FCA published its analysis of the annual financial crime data returns (REP-CRIM) submitted by certain firms supervised by the FCA under the MLRs for the period 2017-20. 2,300 firms provided a total of 5,685 REP-CRIM submissions over the three years.
The analysis aims to provide Money Laundering Reporting Officers (MLROs) and industry practitioners insights on trends and developments to help inform the arrangements and risks of their respective firms.
Key points to note from the FCA’s analysis include:
- Politically Exposed Persons (PEPs). There has been a substantial decrease in the number of customers who are PEPs. Firms reported approximately 89,000 PEPs in 2019-20 and 2018-19, down from approximately 111,000 in 2017-18. The FCA attributes this in part to amendments made to its PEP guidance in 2017 that excluded the reporting of certain domestic customers as PEPs;
- Suspicious Activity Reports (SARs). The number of SARs reported to the National Crime Agency has increased by approximately 22% over the three reporting periods;
- Sanctions. The number of firms reporting automatic sanctions screening has increased year on year, with a 16.5% increase over the three reporting periods concerned. The investment management sector was found to have the highest number of firms that do not use automatic screening;
- Staff in financial crime roles. The number of staff employed in financial crime roles has fluctuated with a peak in 2018-19 but has generally increased. It is estimated that firms that submitted the REP-CRIM are collectively spending £1.1bn annually in dedicated staff time to combat financial crime; and
- Customers exited and refused for financial crime reasons. The number of customer relationships refused or exited for financial crime reasons has more than doubled in the last three years. This covers any customers or clients with whom a firm ceased to do business where financial crime or criminal behaviour by a customer or client with a financial element was the principal driver behind the decision.
November 2021 Regulatory Initiatives Grid
On 1 November 2021, the Financial Services Regulatory Initiatives Forum published a revised version of the Regulatory Initiatives Grid (the Grid) setting out key UK financial services regulatory initiatives over an 18-month horizon. This is an update to the previous Regulatory Initiatives Grid covered in our June 2021 Update.
The Grid is a useful reference document to check the anticipated timeframe for reforms in particular areas, including investment management, anti-money-laundering, market abuse, LIBOR transition, and cryptoassets.
Key points to note from the latest version of the Grid include:
- Wholesale Markets Review. FCA policy statement on changes to UK MiFID conduct and organisational requirements expected to be published in Q4 2021 and UK government to respond to industry feedback on HM Treasury’s consultation on Wholesale Markets Reform (which we covered in our July 2021 Update) in due course.
- Bilateral margin obligations Phase 6. The implementation of Phase 6 is expected to occur on 1 September 2022, introducing new requirements for non-cleared over-the-counter derivative contracts.
- Financial Promotion. The rules on financial promotions are to be strengthened for high-risk investments, with a consultation paper scheduled to be published in Q4 2021 and a related policy statement to follow in Q2 2022.
FCA finalises rules on LTAFs
On 25 October 2021, the FCA published its policy statement on the proposed long-term asset funds (LTAF) regime (PS21/14). PS21/14 sets out feedback received in relation to consultation paper (CP21/12), which we covered in our June 2021 Update.
The LTAF is a new category of open-ended FCA authorised fund, designed to facilitate investment in long-term, illiquid assets such as venture capital, private equity, private debt, real estate, and infrastructure. In particular, the LTAF is aimed at defined contribution pension schemes, sophisticated investors, and some high net worth individuals.
The FCA plans to consult in H1 2022 on whether to enable a broader range of consumers, including retail investors, to invest in LTAFs. The new Handbook rules and guidance will come into force on 15 November 2021 in a distinct chapter under the Collective Investment Schemes sourcebook.
Possible items for Commission College meetings from 27 October to 22 December 2021
On 19 October 2021, the Commission published its list of possible items for the College of Commissioners’ agenda for the remainder of 2021. The College of Commissioners, composed of the 27 EU Commissioners, generally meets at least once per week and typically on the Wednesday of each week. The agenda of each meeting is set by the Commission President, and decisions are taken collectively by the College.
Noteworthy items on the agenda include:
- a review of the AIFMD (23 November);
- a review of the MiFIR (23 November);
- a proposal for a Directive/Regulation for a European single access point for financial and non-financial information publicly disclosed by companies (23 November); and
- an initiative to fight the use of shell entities (22 December).
It is thus possible that the texts of AIFMD2 and MiFIR2 could be published on or about 23 November 2021.
EBA publishes final report on draft technical standards for EU IFR
On 19 October 2021, the European Banking Authority (EBA) published its final report on the RTS on disclosure of investment policy by investment firms, pursuant to Article 52 of the EU Investment Firms Regulation (EU IFR). The EU IFR applies to EU MiFID investment firms, not UK firms.
Article 52 of the EU IFR requires certain EU investment firms to disclose information on their investment policy, including:
- the proportion of voting rights attached to shares they held directly or indirectly;
- voting behaviour;
- use of proxy adviser firms; and
- voting guidelines.
The investment policy disclosure obligation applies to EU investment firms:
- that are not SNIs, the conditions for which are set out in Article 12(1) IFR (Class 2 investment firms);
- with on- and off-balance sheet assets on average greater than €100 million over the four-year period immediately preceding a given financial year; and
- in respect only of companies whose shares are admitted to trading on a regulated market and in which the proportion of voting rights exceeds 5% of all voting rights issued by the company.
The objective of the investment policy disclosure is to provide transparency (i) to a firm’s investors and wider market participants on the firm’s influence over the companies in which it directly or indirectly holds shares with voting rights and (ii) on how it exercises its voting rights.
The disclosed information must be published annually, alongside the firm’s financial statements.
The final draft RTS have been submitted to the Commission for adoption. The implementation date (first disclosure date) is expected to be 31 December 2021.
ESAs’ call for evidence regarding the PRIIPs Regulation
On 21 October 2021, the ESAs opened a call for evidence requesting information from stakeholders on a range of topics relating to the EU Packaged Retail and Insurance-Based Investment Products (PRIIPs) Regulation, including the practical application of the key information document (KID) requirement; the degree of complexity and readability of the KID; as well as the scope of the EU PRIIPs Regulation more generally.
The ESAs’ call for evidence follows a call for advice from the Commission on 27 July 2021 to the Joint Committee of the ESAs on certain aspects of the PRIIPs Regulation. For more information on the Commission’s call for advice, see our August 2021 Update.
The call for evidence and call for advice form part of the Commission’s intention to publish a strategy for retail investments in Europe in the first half of 2022. The ESAs’ call for evidence is open until 16 December 2021.
FCA policy statement on LIBOR transition and the derivatives trading obligation
On 15 October 2021, the FCA published policy statement 21/13 containing the finalised amendments to the UK RTS on the derivatives trading obligation (DTO). The policy statement follows the publication of consultation paper 21/22 and contains amendments to the list of derivatives subject to the DTO in line with Articles 28 and 32 of UK MiFIR.
In summary, the policy statement confirms, among other things, that:
- derivatives referencing GBP LIBOR under the current DTO will be removed and replaced by overnight indexed swaps (OIS) referencing Sterling Overnight Index Average (SONIA);
- USD LIBOR derivatives will continue to be subject to DTO in alignment with the fact that USD LIBOR continues to be subject to the derivatives clearing obligation (DCO);
- EURIBOR products will continue to fall under DTO; and
- implementation dates for changes to the DTO will be aligned with changes to the DCO.
The amendments to the RTS will come into force on 20 December 2021.
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