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Investment Management Brief: 14 December 2017

Updates from the Financial Regulation team at Pinsent Masons.

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UK Regulatory  |  EU Regulatory  | Brexit | Fintech

UK Regulatory

FCA publishes its "package of proposals" for transitioning firms and individuals to the Senior Managers and Certification Regime

The FCA has published three CPs [13.12.17] in its consultation on transitioning firms and individuals to the Senior Managers and Certifcation Regime (SMCR). These are:

  • CP17/40: Individual accountability: Transitioning FCA firms and individuals to the Senior Managers and Certification Regime;
  • CP17/41: Individual accountability: Transitioning insurers and individuals to the Senior Managers and Certification Regime; and
  • CP 17/42: The Duty of Responsibility for insurers and FCA solo-regulated firms.

The FCA has consulted previously on extending the new regime to almost all regulated firms (read more here). The FCA has said that for most of the firms it regulates individuals "automatically convert" from the Approved Persons Regime to the SMCR. So, for most FCA regulated firms there will be no requirement to apply to convert their currently Approved Persons to Senior Managers.  This means they will be able to focus their attention on ensuring the new SMCR culture is properly embedded at their firm and their staff understand the new requirements.  Jonathan Davidson, Executive Director of supervision – Retail and Authorisations, at the FCA has said "Extending the Senior Managers and Certification Regime will drive forward culture change in financial services firms."

The consultation on the Duty of Responsibility is needed because of the FCA's proposal to extend the duty to insurers and to FCA solo-regulated firms: it applies currently only to bank Senior Managers. The FCA is also assessing the effect of the new SMCR on the Financial Services Register.

The FCA asks for feedback on its proposals saying it expects to finalise its approach in the summer of 2018. Feedback to these three CPs is required by 21 February 2018. 

There is no implementation date yet for these new rules, it remains to be set and announced by HM Treasury although, for the purposes of the FCA draft rules in the CPs, the FCA assumes the rules to apply to insurers in late 2018 and to FCA solo-regulated firms in mid-to-late 2019.

The UK Government publishes its Investment Management Strategy II

The Investment Management Strategy II [06.12.17] is the Government's "long term approach to enhancing the UK's position as a centre for asset management." The strategy focuses on six areas including: "strengthening the UK's investment management talent pipeline by supporting the industry to establish Asset Management Centres of Excellence at UK universities across the country"; developing Fintech solutions "such as a blockchain enabled digital fund"; enhancing dialogue between Government, regulators and industry via the new Asset Management Taskforce; and by supporting fund managers to be global leaders "in developing innovative investment strategies – such as green finance and social impact investing – to meet the changing investor demands." For more information, click here.  This section of the Investment Management Brief contains public sector information licensed under the Open Government Licence v3.0.

FCA publishes Policy Statement on FAMR Implementation Part II

The FCA has published final Handbook Rules and Guidance [08.12.2017] arising out of its consultation earlier this year on a number of the Financial Advice Market Review (FAMR) recommendations and on insistent clients (read more here). The Handbook will be changed to reflect amendments to the RAO taking effect on 3 January 2018, regarding the meaning of regulated advice. New Handbook guidance is introduced resulting from the Advice Unit's experiences to date and on insistent clients. The changes will come into force on 3 January 2018.

The Policy Statement also consults on retiring guidance relating to inducements and conflicts of interest (FG14/1) and independent and restricted advice (FG12/15) in light of it being superseded by new requirements, including MiFID II requirements. Responses are sought by 19 January 2018.

Guidance on personal recommendations will be published in a separate policy statement in early 2018. 

FCA publishes two new approach documents: Approach to Authorisation and Approach to Competition

The FCA has published [11.12.2017] the next two approach documents in the series it flagged in "Our Mission 2017" where the FCA committed to being "more open and transparent" about how it regulates and about its decision making.  These next two approach documents follow on from its Approach to Consumers document [November 2017] and are: its proposed Approach to Authorisation and its Approach to Competition. 

The Approach to Authorisation explains the FCA's purpose with and approach to authorisation. On this the FCA quotes Andrew Bailey, FCA Chief Executive, as saying "It's vital that we get it right to keep out firms that are not up to scratch and allow the right ones through". The Approach to Authorisation asks a number of questions about the way the FCA approaches authorisations, on a number of areas including: Threshold Conditions; minimum standards; if commitments the FCA has suggested to firms applying for authorisation are correct and if any others could be made; and on the FCA's strategic goals - whether the right ones are prioritised and if others would be useful.

The Approach to Competition document questions how the FCA approaches its competition responsibilities. The questions include: whether the FCA's competition remit is well understood; the indications of harm the FCA should consider in a preliminary competition assessment; whether there are other tools it could use in remedies where competition is lacking; and if more clarification is needed around the FCA's approach to competition. These two approach documents are open for consultation until 12 March 2018.

FCA reminds consumers of risks of pension transfer scams

The FCA has released a reminder to consumers alerting them about transferring their pension into risky investments and of pension transfer scams. It also reminds consumers and firms of the FCA's previous consumer alert in 2014 on pension transfers or switches into unregulated products using SIPPs.   

The FCA sets out a list of questions for consumers to consider before transferring their pension monies to a new scheme that could be invested in very risky, unregulated investments or which could even be a scam. "Professional pension advice is not free" says the FCA and professional advisers are unlikely to cold call customers.  Accordingly, if consumers have been cold called or are considering moving their pension monies into a new scheme they have been approached about or seen in an advert, the FCA reminds consumers to seek advice first from an authorised impartial professional adviser who is unconnected to the firm that contacted them.  Financial advisers should be able to make the consumer aware of any concerns they identify that the investment is riskier than the consumer was initially made aware, or if it is "simply unlikely to work out as promised."

Investing their pensions' savings in unregulated investments is unlikely to be in consumers' best interests.  The FCA reminds consumers to consider "all investment alternatives and leaving your pension pot where it is may be the best decision."

FCA announces successful firms for third regulatory sandbox

The FCA has revealed the 18 successful firms who will proceed to testing in the regulatory sandbox [06.12.2017]. "Cohort 3" contains firms such as Barclays testing a regtech proposition, Economic Data Sciences testing a "technology solution that utilises artificial intelligence to provide fund managers with a mathematically-defined optimal trade-off among a number of risks and objectives during the investment selection process", and Solidi testing a "blockchain based payments platform that uses cryptocurrencies to facilitate money remittance at a faster speed and with lower transaction costs". Applications are now being accepted for the fourth sandbox phase. Read more on the regulatory sandbox here.

FCA speech on artificial intelligence and criminal funds

Rob Gruppetta, Head of the Financial Crime Department at the FCA, delivered a speech to the FinTech Innovation in AML and Digital ID regional event [06.12.2017] on the use of artificial intelligence to keep criminal funds out of the financial system. In the speech, Mr. Gruppetta questioned whether software could be taught human intuition "that senses something is not quite right" or to "pick out suspicious behaviour that even humans might not notice". He suggested that AI could help in the fight against money laundering through transaction monitoring, anti-impersonation checks and identifying higher risk customers, referencing a recent report by the FSB on artificial intelligence and machine learning in financial services.

Mr. Gruppetta clarified that the FCA would expect to see new technologies being implemented "in a way you would any other – testing, governance and proper management."  The FCA does not expect machine learning to replace human judgement, but rather to complement it – "the software will deal in probabilities, not absolutes, and a person will need to make the final decision about whether intelligence is passed to the authorities." The speech identified in addition to the big potential benefits, the key challenges of using machine learning in anti-money laundering as: data quality (can be "patchy") and lack of police feedback on suspicious activity reports filed; and that individual institutions will not see the whole picture of a transaction as "the part of the transaction they handle is just one piece of the jigsaw."

The FCA's Megan Butler speaks on pension advice and key MiFID II changes

In a speech delivered to the Personal Investment Management and Financial Advice Association (PIMFA) in London [14.11.2017], Megan Butler, FCA Director of Supervision - Investment, Wholesale and Specialists, focused on pensions advice. She drew on the results of the FCA's Assessing Suitability Review (ASR) (read more here) to say that "we found suitable advice was dispensed in 93.1% of cases in 2015", but that "removing increasingly small – and therefore less visible – pockets of underperformance is not easy." Accordingly the FCA is particularly active in areas "where instances of bad advice are, or are likely to be, much worse than the ASR benchmark results". So it has been focussing on Defined Benefit (DB)  to Defined Contribution (DC) pension transfer advice where it has found "higher levels of unsuitability and unacceptable disclosure than we expected", and on high-risk investments, in relation to which it has issued alerts on working with unregulated introducer firms (read more here) and on the risks SIPP operators face from new pension scams (see above section on: FCA reminds consumers of risks of pension transfer scams).

The FCA intends to manage "remaining pockets of poor advice" using data analysis as a "key means". To manage – and challenge – the volume of ad hoc requests for information, the FCA has set up an Information Governance Board and is employing increasingly sophisticated analytical models to identify high-risk firms.

As part of addressing the "comparatively fewer whistle-blowers coming forward from the advice market than [...] in other sectors", Butler stressed that the FCA treats the information shared with it in total confidence.

Butler also recapped key MiFID II changes, suggesting among other things that "it would be useful for both parties [manufacturers and distributors] to put pen to paper on contractual provisions for the exchange of data" in relation to product governance, and that, although the FCA is not providing a standardised format for costs and charges disclosure, it will engage on any industry-led proposals for templates.

The UK PRIIPs Regulations 2017 to come into force on 1 January 2018

The Packaged Retail and Insurance-based Investment Products Regulations 2017, SI 2017/1127 [05.12.2017] come into force on 1 January 2018. Read more about the PRIIPs Regulations requirements in our earlier update. Among other things the Regulations designate the FCA as the competent authority for the purposes of the EU PRIIPs Regulation and provide the FCA with certain enforcement powers.

Risk Transformation Regulations 2017 come into force

The Risk Transformation Regulations 2017 (the "Regulations") came into force on 8 December 2017.  The Regulations form a framework for issuing insurance linked securities and create a new PRA regulated activity under the Financial Services and Markets Act 2000 ("FSMA"), the Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013 2013/556 and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2011 SI 2001/544. The new regulated activity concerns transformer vehicles assuming risk under a contract of insurance. The Regulations provide that investments may only be offered by transformer vehicles to "qualified investors", which excludes most retail clients. A new type of body corporate is introduced by the Regulations, namely a "protected cell company" in which the "cells" are used for assuming risk and carrying out business while the "core" administers the company. The core and the cells are segregated from each other but do not have a separate legal personality..

HM Treasury publishes updated Advisory Notice on money laundering and terrorist financing controls in respect of higher risk jurisdictions

HM Treasury has updated its  Advisory Notice on money laundering and terrorist financing controls, namely enhanced due diligence and ongoing monitoring of persons established in high-risk third countries, required by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 [04.12.2017]. The Advisory Notice contains the latest FATF statements on high-risk jurisdictions. Read more here. This section of the Investment Management Brief contains public sector information licensed under the Open Government Licence v3.0.

EU Regulatory 

ESMA speech on key developments in Brexit, MMFs and MiFID II

Verena Ross, Executive Director of ESMA, delivered a speech [05.12.2017] at the ICI 2017 Global Capital Markets Conference in London. Ms. Ross discussed key developments in 2017 notably ESMA's work on Brexit and money market funds - and its priorities for 2018.

Ms. Ross echoed comments made by Stephen Maijoor, ESMA's chair, (read more here) regarding opinions published by ESMA on Brexit, namely that ESMA considered these opinions: to be in line with existing Level 1 requirements, not to undermine freedom of establishment, and that they do not "call into question the delegation model". ESMA has also established a Supervisory Coordination Network for national competent authorities to discuss issues arising as a result of firms looking to relocate from the UK to the EU. In the context of Brexit and "how different types of the cliff effect could be mitigated" Ms. Ross referred to the market's concerns about cooperation agreements. She suggested that ESMA could "act as the facilitator of agreements" where cooperation agreements are required between regulators for certain activities, for instance under the UCITS Directive or AIFMD.

Ms. Ross also outlined ESMA's three main deliverables in regards to the MMF Regulation: (i) technical advice on Level 2 measures, (ii) implementing technical standards (ITS) on reporting requirements, and (iii) guidelines on stress testing. The technical advice focused on reverse repurchase agreements, particularly on developing the liquidity requirements, and the assessment of credit quality. The reporting requirements in the ITS have been made consistent with AIFMD reporting requirements such that data will be reported in the same way and format as under the AIFMD. The guidelines do not specify the reference parameters, but ESMA aims to update this in the next version of the guidelines, which are to be updated every year, and expects to issue updated guidelines by the end of 2018.

On MiFID II, Ms. Ross focussed on investment research and LEIs. She discussed ESMA's guidance to date on payments for research, discussions with the SEC on dealings with third-country broker-dealers and sub-advisors, and the importance of compliance with LEI requirements.

Draft MLD4 regulatory technical standards published by ESAs

The Joint Committee of the ESAs has published [06.12.2017] draft regulatory technical standards under the incoming MLD4 "to strengthen group-wide management of money laundering and terrorist financing risks". Read more here.  The draft regulatory technical standards apply to credit and financial institutions groups with branches or majority owned subsidiaries in third countries which do not allow the application of some or all of their group-wide policies or procedures on AML and CFT which they are required to put in place on a group-wide level; or where a competent authority's ability to supervise compliance with MLD4 is impaired as it cannot access relevant information in such jurisdictions. The standards set out "minimum actions" that institutions must take, on a risk-sensitive basis, regarding the risks created by the situation. 

In extreme situations after taking all possible steps, where the risk cannot be mitigated, institutions will have to terminate the business relationship, or not carry out the business in question or close down all or part of their operations in the third country in question.

The draft regulatory technical standards will now be submitted to the European Commission for approval.

European Commission publishes delegated regulation adopting regulatory technical standards on European long-term investment funds (ELTIF)

ESMA produced draft regulatory technical standards "establishing the circumstances in which the use of financial derivative instruments solely serves hedging purposes[...], the circumstances in which the life of an ELTIF is considered sufficient in length to cover the life-cycle of each of the individual assets of the ELTIF[...], the criteria for an assessment of the market for potential buyers and a valuation of the assets to be divested [...], common definitions, calculation methodologies and presentation formats of the costs and overall ratio of the costs to the capital of the ELTIF [...] and the types and characteristics of the facilities available to retail investors" under the ELTIF Regulation ((EU) No 2015/760). The Commission has now adopted these regulatory technical standards [04.12.2017]. The regulation is directly applicable in all Member States and will come into force on 24 December 2017.


FCA CEO gives evidence to Parliament on Financial Regulation and Supervision following Brexit

Andrew Bailey, FCA CEO, and John McFarlane, Chairman of Barclays, gave evidence before Parliament's EU Financial Affairs Sub-Committee [29.11.2017] on Financial Regulation and Supervision following Brexit.

Among other matters, in response to a question on the nature of a transition period, Bailey said "a transition period, in my mind now, is primarily designed to give us time to deal with the risks that we observe from a sudden exit […] The biggest one that I would point to is so-called contract continuity, and the consequences of a sudden loss of the passport." He pointed out that "contract continuity is a symmetric risk" which is an important point and is not merely a risk for the UK, because "… it must apply on both sides of the fence because of the nature of the underlying issue, which is the sudden loss of the passport." Bailey also said: "We have reached a point where it is necessary to have a transition period to allow us time to deal with those risks. That is the thing that needs to be sorted out PDQ, as they say."

On a question regarding how to deal with contractual continuity, Bailey said there were three ways to deal with it, namely: in the Article 50 agreement; with the UK and the EU doing it in parallel at UK government level and at the EU level; or to leave firms to sort it out. However, in Bailey's view "the problem with leaving firms to sort it out is that it is extremely disruptive and there is not enough time to do it. It means novation of contracts, for instance. It involves court processes, and there just is not enough time to deal with the volume."

This section of the Investment Management Brief contains Parliamentary information licensed under the Open Parliament Licence v3.0


EU negotiating amendments to bring cryptocurrencies within scope of MLD4 

The UK Government has confirmed in a Q&A raised on 27 October 2017 and answered on 3 November 2017 [on its website 04.12.2017] that amendments to the 4th Anti-Money Laundering Directive currently being negotiated by the UK Government would bring custodian wallet providers and virtual currency exchange platforms within the scope of anti-money laundering and terrorist financing regulations. This means that the activities of such firms will be supervised by national competent authorities. The UK Government supports the amendments. This section of the Investment Management Brief contains Parliamentary information licensed under the Open Parliament Licence v3.0. 


Recent Pinsent Masons publications

Read the latest edition of our Insurance Briefing.

We have recently launched our new Banks Briefing, a newsletter produced specifically for lawyers working for banks in the UK. Our monthly publication focuses on the key news stories affecting the banking sector. In our December edition we look at topics including a new case on the definition of "financial institution" for transferability provisions, UK plans to align open banking reforms with PSD2 and an ECB warning that banks' Brexit relocation plans are inadequate. 

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