FCA Updates & Developments

The Financial Conduct Authority (FCA) released a new video, in which senior leaders from four financial services firms-, - Dame Jayne-Anne Gadhia, former Chief Executive of Virgin Money; Jon Symonds, Deputy Group Chairman of HSBC; Liz Nolan, Chief Executive Officer of EMEA, State Street; and Vis Raghavan, Chief Executive Officer of EMEA, J.P. Morgan - talk about their experiences of adopting the Senior Managers and Certification Regime (SM&CR). They talk about how the SM&CR has helped improve culture and governance in their organisations and give advice to the firms that will be adopting the SM&CR in 2019.

To discuss how CCL can help with implementing SM&CR in your firm, please contact us.

The FCA has published a policy statement (PS19/4) to address concerns identified in an earlier consultation (CP18/9) on clarifications of fund objectives and benchmarks. This statement contains new rules and guidance on how to describe funds objectives and investment policies in order to make them more useful to investors and it also aims to establish consistent use of benchmarks and performance fee calculations.

The FCA and Prudential Regulatory Authority (PRA) have published a joint consultation paper (CP19/9 / PRA CP2/19) on the Management Expenses Levy Limit (MELL) for the Financial Services Compensation Scheme (FSCS) for 2019/20. Under Section 223(1) of the Financial Services and Markets Act 2000 (FSMA), the FCA and the PRA must set an annual limit for the total management expenses which the FSCS can levy on financial services firms. This ensures that the FSCS has adequate funding beneficial to all consumers.

The deadline for comments was 28 February 2019.

The FCA has published a Memorandum of Understanding (MoU) that establishes a framework for cooperation, coordination and information sharing between the FCA and the Information Commissioner’s Office (ICO). The aims of this MoU are to enable closer working between the parties, including the exchange of appropriate information and assisting them in discharging their regulatory functions. This MoU is purely a statement of intent that does not give rise to legally binding obligations on either party.

The FCA has published a speech by Megan Butler, Executive Director of Supervision: Investment, Wholesale and Specialists, covering an overview of progress made on transition from the London Interbank Offered Rate (LIBOR) to overnight risk-free rates (RFRs). The speech highlighted areas such as a need for ending reliance on LIBOR by the end of 2021, transition of the hedges and positions of asset managers to the Sterling Overnight Index Average (SONIA), and a summary of work that remains to be done.

The FCA’s CEO, Andrew Bailey, has given a speech on the amended Markets in Financial Instruments Directive (MiFID II). The speech highlighted the FCA’s strong support for the reform and fundamental shift within traditional asset management, whereby most firms are funding research from their own revenues instead of using their clients’ funds. Mr Bailey added that the FCA recognises the views of independent research providers and emphasised its role of new framework in promoting competitive market research. He concluded by saying that the FCA will continue engaging with firms and trade bodies to get a full and clear picture of the impact of implementation of MiFID II.  

The FCA has updated its information on ‘Preparing your firm for Brexit’. The website provides information on how regulated firms may be affected by Brexit and possible actions to take. The update contains specific information for the following sectors:

To discuss how CCL can help your firm prepare for Brexit, please contact us.

PRA Updates & Developments

Following an earlier consultation (please see our November 2018 Regulatory Update), the PRA has published a policy statement (PS3/19) on changes to periodic and transaction fees and further updated its webpage. This is relevant to all PRA-regulated firms but particularly to insurers and designated investment firms (DIFs), as well as firms which have, or intend to apply in the future for, Solvency II or Capital Requirements Regulation (CRR) models.

This policy statement sets out the PRA’s final policy on:

  • a revised approach to periodic fees for DIFs
  • amending the approach to periodic fees for life insurers
  • updating the Part VII regulatory transaction fees for insurers
  • updating the internal model application fees for insurers
  • updating the internal model application and model maintenance fees for DIFs
  • updating the rules relating to the provision of relief from PRA fees in exceptional circumstances (all firms)
  • other minor corrections to PRA fees rules (all firms)
  • updates to Supervisory Statement (SS) 3/16 ‘Fees: PRA approach and application’ (all firms).

For advice on periodic fees for designated investment firms, internal model application and model maintenance fees for DIFs, please contact us.

EU Regulatory Updates

The European Banking Authority (EBA) has published a final report setting out guidelines on outsourcing. The guidelines provide a harmonised framework for outsourcing arrangements for financial institutions, including credit institutions and investment firms subject to the amended Capital Requirements Directive (CRD 4).

The EBA has published a consultation paper on draft guidelines on Credit Risk Mitigation (CRM) for institutions applying the internal ratings based (IRB) approach by using their own estimates of Loss Given Defaults (LGDs) in accordance with the Capital Requirements Regulation (CRR).

The guidelines aim to clarify the CRM framework in the context of the advanced IRB approach (A-IRB) and complement the EBA's report on the CRM framework, which focused on the standardised approach (SA) and the foundation IRB approach (F-IRB).

The deadline for comments is 25 May 2019. The guidelines will apply from 1 January 2021.

The European Commission (EC) has adopted a Delegated Regulation in regard to conflicts of interest in the area of European Venture Capital Funds (EuVECA). It contains a list of conflict of interests and sets out the obligations of the managers of qualifying venture capital funds and a disclosure regime.

The European Central Bank (ECB) has published ‘SSM-wide stress test 2018 final results’ with aggregate results for all participating banks under its supervision.

The aggregate report consists of the 87 banks covered in the report including 33-Euro area banks that were part of the EU-wide stress test coordinated by the European Banking Authority (EBA), with additional stress tests on 54 significant institutions which the ECB directly supervises but which were not part of the EBA stress test.

The results show that the 87 banks directly supervised by the ECB have become more resilient to financial shocks over the past two years. The 54 medium-sized banks tested solely by the ECB, appear to have become better capitalised, increasing their ability to absorb financial shocks.

The ECB has published a set of frequently asked questions (FAQs) regarding its launch of a sensitivity analysis of liquidity risk to assess banks’ ability to handle idiosyncratic liquidity shocks. ECB Banking Supervision will test adverse and extreme hypothetical shocks in which banks face increasing liquidity outflows. The exercise will focus on banks’ expected short-term cash flows to calculate the ‘survival period’, which is the number of days that a bank can continue to operate using available cash and collateral with no access to funding markets. The test will be completed in four months.

The results will inform the supervisor about the relative vulnerability of banks to different liquidity shocks applied in the exercise and will also identify improvements needed in banks’ liquidity risk management.

The European Supervisory Authorities (ESA) has published its final report following a consultation (also see our November Regulatory Update edition) concerning amendments to the Delegated Regulation covering the rules for the Key Information Document (KID) for Packaged Retail and Insurance-based Investment Products (PRIIPs). In consideration of the feedback received, the ESA decided not to propose targeted amendments at this stage and to initiate a more comprehensive revision of the PRIIPs Delegated Regulation in 2019, with additional consultation on the draft regulatory technical standards.

The ESA has also issued a supervisory statement concerning the performance scenarios in the PRIIP’s KID to promote consistent approaches and to improve the protection of retail investors.

The European Securities and Markets Authority (ESMA) has published Q&A updates on:

  • MiFID II and MiFIR transparency This contains the update of its action plan for systematic internaliser (SI) regime calculations. ESMA also explains its decision to compute the total volume and number of transactions executed in the EU in order to help market participants, as that data is essential for the operation of the SI regime and is not otherwise easily available.
  • The Prospectuses and the Transparency Directive (TD). The Q&A provide clarifications in the event of a no-deal Brexit and in relation to issuers of equity securities and non-equity securities below 1,000 EUR, and those admitted to trading on regulated markets who currently have the UK as their PD home Member State.
  • Market structure and transparency topics. The new Q&A provide clarification on the topics of approved publication arrangement reports to competent authorities and ESMA and identification of high frequency trading techniques.
  • Data reporting under the Market in Financial Instruments Regulation (MiFIR). ESMA has added two new clarification points to its questions and answers (Q&A).

The update provides clarification to the following issues:

  1. Reporting the Legal Entity Identifier (LEI) of the issuers to the Financial Instruments References Data System (FIRDS) in cases where the issuer of the instrument has a branch or branches that have an LEI
  2. Reporting maturity, expiry and termination dates to FIRDS.

It also contains an amendment that clarifies the use of the Trading Venue Transaction Identification Code (TVTIC) when reporting transactions on complex trades.

ESMA has announced renewing the prohibition of the marketing, distribution or sale of binary options to retail clients (which has been in effect since 2 July 2018) for a further three-month period. 

It has also carefully considered the need to extend the intervention measures currently in place, and has decided that a significant investor protection concern related to the offer of binary options to retail clients should continue to exist. The measure will re-apply from 2 April 2019 on the same terms as the previous renewal decision that started to apply on 2 January 2019.

The renewal was agreed by ESMA’s Board of Supervisors on 14 February 2019.

ESMA published a decision notice (2019/155) renewing the temporary restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients in accordance with the Markets in Financial Instruments Regulation (MiFIR). Please see information on the ESMA’s plan for renewal in our December Regulatory Update edition.

ESMA considered the need to extend the intervention measure currently in effect and decided that a significant investor protection concern to the offer of CFDs to retail clients should continue to exist.

ESMA has published a statement on the use of UK data in ESMA databases and the performance of calculations required under the MiFID II. This statement relates to a no-deal scenario, when the FCA will cease sending data to ESMA and will no longer have access to ESMA’s IT applications and databases, and similarly, no new UK-related data will be received and processed by ESMA nor published on the ESMA website from 30 March 2019.

The FCA has published a statement welcoming the ESMA statement and agreeing to its pragmatic approach, by which in a no-deal scenario, the FCA will no longer send UK trading data to ESMA.

ESMA has published a consultation paper on its draft guidance on liquidity stress tests of investment funds applicable to undertakings for the collective investment in transferable securities (UCITS) and to alternative investment funds (AIFs).

The aim of the guidelines is to promote convergence in how national competent authorities supervise funds liquidity stress testing across the EU. The consultation sets out 14 principle-based criteria for managers’ liquidity stress tests to follow when executing liquidity stress tests on their funds.

Managers of investment funds in the EU need to regularly test the resilience of their funds for different types of market risks, including for liquidity risk – the risk that assets cannot be sold quickly enough to meet investors’ redemption requests.

The consultation is open until 1 April 2019, which will be followed by the ESMA’s feedback in early Q2 2019 and then a final report to be published by the summer of 2019.

Financial Crime

The European Commission has adopted its new list of 23 third countries with strategic deficiencies in their anti-money laundering and counter-terrorist financing frameworks.

The aim of this list is to protect the EU financial system by better preventing money laundering and terrorist financing risks. As a result of the listing, banks and other entities covered by EU anti-money laundering rules will be required to apply increased checks (due diligence) on financial operations involving customers and financial institutions from these high-risk third countries to better identify any suspicious money flows.

The Commission also published a factsheet containing the Q&A on the EU list of high-risk third countries, criteria and methodology used to establish the list, the consequences of the listing for financial institutions, and further steps in improvement of anti-money laundering and countering terrorist financing efforts.

Her Majesty’s Treasury (HMT) has published updated Post EU Exit: Financial sanctions – General Guidance. This is a general guidance that explains that secondary legislation under Sanctions and Anti-Money Laundering Act 2018 (SAMLA), in the form of Statutory Instruments (SIs), will transfer existing EU sanctions into UK law. These SIs do not come into force on exit day unless the UK leaves the EU without a deal. This guidance will only become operational when the SIs come into force.

The European Commission has published a Commission Delegated Regulation (EU) supplementing Directive (EU) 2015/849 of the European Parliament and of the Council (the Fourth money Laundering directive (MLD4) with regard to regulatory technical standards (RTS) for the minimum action and the type of additional measures credit and financial institutions must take to mitigate money laundering and terrorist financing risk in certain third countries.

The FCA has published a speech by Julia Hoggett, Director of Market Oversight, on implementation of the Market Abuse Regulation (MAR).

The speech highlighted following points:

  • Compliance with MAR requires a whole series of situational judgements to be made.
  • A need for protection of the market from suspicious behaviour occurring on our watch in the first place, and not only detecting it
  • Firms need effective risk assessments and must consider for themselves the manner in which their systems and controls evolve as the risks within their businesses evolve. 
  • A need for control of information leaving a firm or moving within a firm
  • A need for a greater awareness of the risks of market abuse  
  • Access controls, surveillance capabilities and general mindset in investment banking and advisory platforms is not yet as evolved as it should be
  • A need for improvement in area of surveillance for market manipulation.

The Financial Action Task Force (FATF) has published the outcomes of its February 2019 plenary meeting. The meeting dealt with issues in relation to operations and the FATF’s major strategic initiatives, discussion of mutual evaluation reports and follow- up reviews, and compliance and other strategic initiatives.

In response to the latest FATF statements, HM Treasury has published an updated advisory notice on Anti-Money Laundering and Counter-Financing Terrorism (AML/CFT) controls in higher risk jurisdictions.

HM Treasury advises firms to:

  • consider the Democratic People’s Republic of Korea as high risk and apply counter measures and enhanced due diligence measures in accordance with that risk
  • consider Iran as high risk and apply enhanced due diligence measures in accordance with that risk
  • take appropriate sanctions to minimise associated risks for the Bahamas, Botswana, Cambodia, Ethiopia, Ghana, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen, which may include enhanced due diligence measures in high risk situations.
Enforcement Action

The FCA has issued a decision which finds that 3 asset management firms: Hargreave Hale Ltd, Newton Investment Management Limited, River and Mercantile Asset Management LLP (RAMAM) breached competition law. This is the FCA’s first formal decision under its competition enforcement powers.

The FCA has fined Hargreave Hale £306,300 and RAMAM £108,600. The FCA has not imposed a fine on Newton because it was given immunity under the competition leniency program.

The infringements consisted of the sharing of strategic information, on a bilateral basis, between competing asset management firms during one Initial Public Offering (IPO) and one placing, shortly before the share prices were set. The firms disclosed and/or accepted otherwise confidential bidding intentions, in the form of the price they were willing to pay and sometimes the volume they wished to acquire. This allowed one firm to know another's plans during the IPO or placing process when they should have been competing for shares.

The FCA has published its Final Notice about imposing a financial penalty of £32,000 on Paul Stephany, a former portfolio fund manager at Newton Investment Management Limited.

The FCA found that Mr Stephany had engaged in communications with other fund managers at competitor firms in attempts to influence them so that they would cap their orders at the same price limit as his order, in relation to shares that were to be quoted on public exchanges. This is a process known as Initial Public Offering (IPO). The FCA found that Mr Stephany breached Principle 3 (failing to observe proper market conduct) and Principle 2 (due skill and care) of the FCA’s statements of principle for approved persons by failing to consider the risks of engaging in these communications adequately.

The Court of Appeal of England and Wales has published its decision regarding the case Manchester Building Society v Grant Thornton [2019] EWCA Civ 40. It considered principles to determine whether the defendant assumed responsibility for losses incurred on close out of swaps when it was discovered that advice on the accounting treatment was incorrect.

Between 2006 and 2012 Manchester Building Society (MBS) followed its auditor’s advice by entering numerous interest rate swap contracts to hedge its interest rate risk on fixed interest lifetime mortgages. The auditors advised that in order to avoid the volatility in MBS’ reported financial position, MBS could apply the hedge accounting rules, which, in fact was wrong, as MBS was not entitled to apply hedge accounting.

The consequent changes to the accounting position meant that MBS did not have sufficient regulatory capital and, due to the volatility to which MBS’ balance sheet was exposed, the decision was taken, with the encouragement of the regulator, to close out the swaps. The swaps were closed out at a loss and transaction costs were incurred.

The Judge held that the auditors were liable for the transaction costs (£285,460 but not the losses from closing out the swaps (approximately £48 million). The Court of Appeal dismissed MBS’ appeal.

The UK’s Office of Financial Sanctions Investigations (OFSI) has published a report with details of the imposition of its first monetary penalty on a bank for breaches of the Financial Sanctions Regulations. OFSI imposed a fine of £5,000 (including a 50 per cent discount for self-reporting and cooperation) on R. Raphael & Sons plc (trading as Raphaels Bank) for breach of Regulation 3 of the Egypt (asset-freezing) Regulations 2011, when it dealt with £200 belonging to a person designated under the financial sanctions regime.

EU Exit

HM Treasury has published the following draft regulations:   

  • The Financial Services and Markets Act 2000 (FSMA)(Amendment) (EU Exit) Regulations 2019. FSMA is an important part of the UK’s legislative framework for financial services regulation. FSMA and related secondary legislation define the ‘regulatory perimeter’, setting out the activities and firms that fall within the scope of UK financial services regulation. Amendments are made to the FSMA 2000 and related subordinate legislation, including the Regulated Activities Order (RAO) as many provisions, particularly RAO, set out the scope of regulated activities by reference to those activities as defined in EU law.
  • The Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019. This draft amends various UK legislation and retained EU law relating to financial services, in order to address deficiencies arising from the withdrawal of the United Kingdom from the European Union. It also makes corrections of errors identified in legislation and revokes several pieces in retained EU law and UK domestic law, which would not be appropriate to keep on the statute book after exit.

The following Brexit related statutory instruments (SIs) have been made to ensure that relevant legislation continues to operate effectively at the point at which the UK leaves the EU:

These regulations are made in order to address failures of retained EU law to operate effectively as well as other deficiencies arising from the withdrawal of the UK from the EU.

The European Commission has adopted several Delegated Regulations that exempt the Bank of England (BoE) and public bodies charges with, or intervening in, the management of public debt in the UK from specified requirements under the Markets in Financial Instruments Regulation (MiFIR), the Market Abuse Regulation (MAR), the European Markets Infrastructure Regulation (EMIR) and the Securities Financing Transaction Regulation (SFTR).

The Delegated Regulations are as follows:

These regulations will enter into force on the day following their publication in the Official Journal of the European Union and will apply from the day following that on which EU Regulations cease to apply to and in the United Kingdom.

The FCA has announced that the ESMA temporary intervention measures prohibiting binary options and restricting contract for difference products (CFDs) sold to retail clients will become part of UK domestic law on exit day as part of the EU (Withdrawal) Act. UK firms are required to comply with ESMA’s measures until they expire in April 2019.

ESMA’s decision notices that renew the temporary restriction on the marketing, distribution or sale of CFDs to retail , and the temporary prohibition on the marketing, distribution or sale of binary options to retail clients will form part of UK law if EU law ceases to apply in the UK on 29 March 2019. Firms are, therefore, required to comply with ESMA’s decision notices until they expire on 1 April 2019 for binary options, and 30 April 2019 for CFDs. The FCA’s supervision of firms in this sector will continue to focus on compliance with ESMA’s temporary product intervention measures.

The FCA has published two consultation papers CP18/37 and CP 18/38 in December 2018 (see details in our December CCL Regulatory Update) to make ESMA’s temporary product intervention measures permanent in the UK. The proposed interventions are the same in substance as ESMA’s, although they are also proposing to apply our rules to closely substitutable products. The consultations closed on 7 February 2019.

The FCA stated that if they are unable to finalise the domestic approach prior to ESMA’s existing interventions ceasing to have effect in the UK, they will consider adopting temporary product intervention measures to replicate ESMA’s to ensure no loss of protections for UK consumers.

ESMA has issued a press release in which it announced that three central counterparties (CCPs) established in the UK: LCH Limited, ICE Clear Europe Limited and LME Clear Limited, meet the recognition conditions under Article 25 of the EMIR and will be recognised to provide their services in the EU in the event of a no-deal Brexit. ESMA states that it has decided to recognise these CCPs to limit the risk of disruption in central clearing and to avoid any negative impact on the financial stability of the EU.

ESMA has also added that the recognition process for the UK Central Securities Depositary (CSD) is ongoing.

ESMA has published its updated MiFID II Supervisory briefing on the supervision of non-EU branches of EU firms providing investment services and activities. Its purpose is to assist national competent authorities in their supervision of the establishment by EU firms of branches in non-EU countries. The briefing covers supervisory expectations, ongoing activities of non-EU branches and supervisory activity and cooperation with non-EU competent authorities. ESMA also addressed the issues identified in the context of the risks arising from the UK withdrawal from the EU.  Since these issues are relevant beyond Brexit, ESMA states that it is important to address them in a convergent manner among national competent authorities (NCAs) as regards all third countries.

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