Investment Management Update
This issue includes:
- SM&CR: FCA consultation and feedback to DP16/4 (overall responsibility and the legal function)
- MiFID II product governance and research unbundling: FCA review
- Amended ESMA MiFID II suitability requirements apply from 7 March 2019
- Asset management market study: FCA Handbook Notice 62
- Transitional powers for UK regulators: House of Commons Treasury Committee letter
- Future of UK’s financial services post-Brexit: House of Commons Treasury Committee launches enquiry
- Draft Brexit SI laid before Parliament: The Money Market Funds (Amendment) (EU Exit) Regulations 2019
- Draft Brexit SI laid before Parliament: The Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019
- Draft Brexit SI laid before Parliament: Securitisation (Amendment) (EU Exit) Regulations 2019
- Draft Brexit laid before Parliament: Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019
- Draft Brexit SI laid before Parliament: Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc.) (EU Exit) Regulations 2019
- Draft Brexit SI laid before Parliament: Financial Conglomerates and other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019
- Draft Brexit SI laid before Parliament: Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019
- Draft Brexit SI laid before Parliament: Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019
- Economic Crime Strategic Board launched
- Suspicious transaction and order reporting: FMSB statement of good practice
- Use of sanctions screening by financial institutions: Wolfsberg Group guidance
The Financial Conduct Authority (FCA) has published a consultation paper (CP19/4) on optimising the Senior Managers & Certification Regime (SM&CR) which also contains feedback to the FCA discussion paper (DP 16/4) on overall responsibility and the legal function. The consultation paper:
- clarifies the application of the SM&CR to the legal function by proposing to exclude the legal function from the overall responsibility requirement and excluding the Head of Legal from the requirement to be approved as a Senior Manager;
- amends the intermediary revenue criteria for the enhanced regime by proposing to implement a notification requirement to bring into scope intermediaries with regulated revenue of more than £35m that do not complete RMA-B profit and loss account;
- amends the scope of the client dealing function in the certification regime to allow firms to exclude purely administrative roles that involve taking part in investment activities;
- proposes to ensure that the Certification Regime applies to individuals performing roles that were approved to carry on the controlled function CF28 (systems and controls function) under the Approved Persons Regime, but which will not otherwise be approved under the SM&CR;
- applies Senior Manager Conduct Rule 4 to non-approved executive directors at limited scope firms; and
- makes minor changes to regulatory forms and the FCA Handbook.
The deadline for responding to the consultation is 23 April 2019 and the FCA intends to publish rules and guidance in a policy statement in Q3 of 2019.
At a House of Commons Treasury Committee hearing held on 16 January 2019, Andrew Bailey, FCA Chief Executive, and Charles Randell, FCA Chairman, gave evidence on the work of the FCA. The published transcript shows that, during the course of his evidence, Mr Bailey confirmed that the FCA has been carrying out supervisory work on costs and charges, the conclusions to which the FCA will publish in the next month or two. In addition, Mr Bailey stated that the FCA will undertake supervisory work during 2019 on new product governance and research unbundling.
In its January 2019 regulation round-up, the FCA confirms that it has notified the European Securities and Market Authority’s (ESMA) that the FCA is compliant with ESMA’s guidelines on certain aspects of the MiFID II suitability requirements. The guidelines were updated in May 2018 and will apply from 7 March 2019. If they have not already done so, firms in scope should consider what steps they need to take to be compliant.
The FCA has published Handbook Notice 62 setting out changes made to the FCA Handbook under instruments made by the FCA board and the Financial Ombudsman Service board. In particular, the Collective Investment Schemes Sourcebook (Miscellaneous Amendments) Instruments 2019 makes changes originating from the FCA’s asset management market study and which were consulted on in CP18/9. The changes amend:
- the Glossary, Chapter 2 and TP 2 of the Conduct of Business sourcebook (COBS); and
- chapters 4 and 6 of the Collective Investment Schemes sourcebook (COLL).
The amendments are intended to help investors in authorised funds get better information about what their fund managers is doing, and to understand better how they can evaluate whether their fund manager has “done a good job”. The instrument comes into force as follows:
- Part 1 of Annex B (COBS) comes into force on 4 February 2019.
- Annex A (Glossary), Part 2 of Annex B (COBS) and Part 1 of Annex C (COLL) come into force on 7 May 2019.
- Part 2 of Annex C (COLL) comes into force on 7 August 2019.
Feedback to CP18/9 will be published in a separate policy statement.
The House of Commons Treasury Committee has published a letter setting out the Government's proposal to delegate a temporary power to the UK regulators in the event of a no-deal Brexit. The temporary power would enable the regulators to delay, or phase in, regulatory requirements where they either change (as a result of the UK leaving the EU) or apply to firms for the first time. The transitional period granted by the regulators could last up to two years and their delegated power will end after two years from exit day. During the transitional period, the regulators would prescribe the requirements which firms must meet and these are expected to be current EU standards in most cases.
The delegated temporary power will be incorporated into the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019. The Prudential Regulation Authority, FCA and Bank of England consulted on their use of this power in October 2018 and are expected to publish their final proposals in February 2019.
The House of Commons Treasury Committee has published a press release and webpage announcing that it has launched a new enquiry into the future of the UK’s financial services once the UK has left the EU. The terms of reference of the enquiry are:
- What should the Government’s financial services priorities be when it negotiates its future trading relationship with the EU?
- What should the Government’s financial services priorities be when it negotiates with third countries in the rest of the world in order to allow UK financial services access to their markets?
- What regulatory actions are required for each specific segment of the UK financial services industry in order to maximise access to EU markets?
- How can the UK financial services sector take advantage of the UK’s new trading environment with the rest of the world?
- Should the UK open its financial services markets to external competition from countries outside of Europe, or should the UK maintain the current regulatory barriers that apply to third countries?
- What skills and immigration policy will the UK financial services sector need once the UK has left the EU?
There is no set deadline for the submission of written evidence to the enquiry.
HM Treasury has published a draft version of the Money Market Funds (Amendment) (EU Exit) Regulations 2019, together with an explanatory memorandum, as laid before Parliament. The statutory instrument (SI) makes amendments to retained EU law to change the scope of the retained Money Market Funds (MMF) Regulation to apply to MMFs established in the UK only. The legislation intends to ensure that the rules continue to operate effectively in the UK once the UK has left the EU. See our update of 5 December 2018 for more detail on the SI.
The Treasury has published a draft version of the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019, together with an accompanying explanatory memorandum, as laid before Parliament. The purpose of this SI is to amend the Benchmarks Regulation 2016 to ensure that it can remain operational once Brexit has occurred. We reported more fully on this regulation and related developments in our update of 5 December 2018.
The Treasury has published a draft version of the Securitisation (Amendment) (EU Exit) Regulations 2019 alongside an explanatory memorandum, as laid before Parliament. This draft SI is designed to amend the EU Securitisation Regulation and related legislation. The SI aims to ensure that the European framework governing securitisations can continue after the UK leaves the EU.
HM Treasury has published a draft version of the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019 (Gibraltar Order), accompanied by an explanatory memorandum, as laid before Parliament. The draft SI will amend the Financial Services and Markets Act 2000 (Gibraltar) Order 2001, the Financial Services and Markets Act 2000 (FSMA) and the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018. Primarily it will allow financial services firms authorised in Gibraltar to continue to provide services and establish branches in the UK. The SI will come into force on the day after the day on which they are made, with the exception of the amendments to FSMA and the Gibraltar Order set out in Parts 2 and 3 of the Regulations, which will come into force on exit day. See our update of 16 January 2019 for a discussion on the SI.
HM Treasury has published a draft version of the Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc.) (EU Exit) Regulations 2019, together with an explanatory memorandum, as laid before Parliament. The draft SI addresses deficiencies in relation to the EU’s equivalence framework and retained EU law that result from the UK’s withdrawal from the EU.
- provides ministers with a temporary power, for up to twelve months after exit day, to make equivalence directions and exemption directions specified in the SI for the EU and EEA member states;
- gives functions to the financial services regulators to provide technical advice to HM Treasury to support third country equivalence assessments to which their fee raising powers apply and ensures that the Treasury can require the regulators to provide advice; and
- revokes EU Regulations that are no longer appropriate once the UK has left the EU and corrects deficiencies in some retained EU equivalence decisions.
Regulations 7, 8 and Schedule 2 will come into force on exit day and the remaining provisions will come into force on the day after the day on which the Regulations are made.
Draft versions of the Financial Conglomerates and other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019 and an explanatory memorandum, as laid before Parliament, have been published. The purpose of the draft SI is to ensure that the Financial Conglomerates and Other Financial Groups Regulations 2004 (which implement the Financial Conglomerates Directive) remain operative in a UK-only context post-exit. The SI will come into force on exit day. See our update of 16 January 2019 for a discussion on the SI.
HM Treasury has published draft versions of the Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019 and their explanatory memorandum, as laid before Parliament. The changes introduced by the SI will ensure that the UK continues to be able to disclose information to other regulatory and supervisory authorities, post-Brexit. Parts 1 and 3 of the Regulations come into force on the day after the day on which the Regulations are made and part 2 of the Regulations will come into force on exit day. See our update of 16 January 2019 for a discussion on the SI.
A draft version of the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019, as laid before Parliament, has been published, together with an explanatory memorandum. The purpose of the SI is to replicate, as far as possible, the current effects of the prospectus regime, the transparency rules and the listing rules which stem from the Prospectus Directive and the Transparency Directive. Once made, the SI will come into force on exit day. See our update of 5 December 2018 for a discussion on the SI.
HM Treasury and the Home Office have issued a press release announcing the first meeting of a new Government taskforce which will work with senior figures from the UK financial sector to tackle economic crime. The economic crime strategic board will be the “first ever cross-departmental board to prevent more people from becoming victims of economic crime”. Among other things, the Home Office indicates that the Home Secretary is committing £3.5m in 2019/20 to support work to reform the suspicious activity reports regime. With the private sector, law enforcement and regulators, the Home Office is co-designing a new system which is more efficient and effective, and which will benefit business and the public sector.
The FICC Markets Standards Board (FMSB) has published a statement of good practice (SGP) on suspicious transaction and order reporting to improve conduct and raise standards in the wholesale Fixed Income, Commodity and Currency (FICC) markets. The SGP is designed to be relevant to all front office and control or support function personnel who are active participants in the FICC markets and to those who are engaged in the monitoring and surveillance of those activities. The FMSB indicates that its members are expected, and other firms are invited, to consider their own practices in light of the SGP and make any changes to such practices that they deem to be appropriate.
The FMSB states that “FICC market firms are very diverse and therefore in considering the SGP firms should interpret them in light of their own circumstances and develop arrangements, systems and procedures which are appropriate and proportionate in relation to the scale, size and nature of their business activity”.
The Wolfsberg Group (an association of 13 global banks which aims to develop frameworks and guidance for the management of financial crime risks) has published guidance on the use of sanctions screening by financial institutions. Sanctions screening is a control employed within financial institutions to detect, prevent and manage sanctions risk. The objective of the guidance is for the Wolfsberg Group to provide guidance to financial institutions as they assess the effectiveness of their sanctions screening controls, whether automated, manual or both.
The guidance considers what is meant by sanctions screening, looking at both reference data and transaction screening, the timing of screening, technology and the use of automated systems, the criteria for alert investigation, testing and quality assurance.