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Investment Management Brief: 4 April 2019

Updates from the Financial Regulation team at Pinsent Masons.

Select a topic to read more.

UK Regulatory | Ireland | EU Regulatory | Brexit

UK Regulatory

FCA publishes March 2019 Regulation round-up

The FCA published its March 2019 Regulation round-up [26.03.2019]. It includes:

Brexit delay: Nausicaa Delfas, Executive Director of International, in her introduction to the Round-up, comments on the Government's confirmation that the earliest date for the UK to leave the EU is now 11pm on 12 April 2019. Accordingly, while the FCA will continue to prepare for all scenarios – including the UK leaving the EU without an agreement - Delfas said: "While the change in date does give us all extra time to prepare, this is only a short delay. We will therefore continue to prepare at the same pace as before and expect firms to do the same."

In view of this delay to the UK's withdrawal from the EU:

  • firms and funds wishing to enter the Temporary Permissions Regime now have until the end of 11 April to notify the FCA of their wish to enter the TPR using the Connect system to do so. See also further information in the Brexit section of the IMB below; and
  • the switch to FCA FIRDS and FCA FITRS (replacing ESMA's MiFID systems in the UK in the event of a no-deal Brexit) will now take place on the weekend of 13/14 April 2019 with their 'go-live' date on Monday 15 April 2019, according to the FCA. "Firms should continue to report to the FCA as they currently do until 11 pm on Friday 12 April", the FCA states. Read more in our earlier updates here and here.
  • Preparing Statements of Responsibilities and Responsibilities Maps: the FCA published guidance on doing so [08.03.2019]. Read more in our earlier update here.
  • Digital regulatory reporting: the FCA has published the findings from its first phase of the pilot [13.03.2019] - read more in our earlier update here. 
  • Directory: the FCA published its Directory policy statement [08.03.2019]. According to the FCA: "Firms subject to the certification regime will have to complete a ‘Directory person’s notification’ on Connect to provide the FCA with details of their Directory persons (eg non-executive directors etc). Solo-regulated firms will need to provide us with information on their Directory persons by December 2020". Read more on the Directory in our earlier update here and in our Out-law article. 
  • Cryptoassets: the FCA published [07.03.2019] research on UK consumers' attitudes to cryptoassets to help it assess harm from such assets and to ensure it is "acting on evidence as we seek to protect consumers and market integrity" the FCA stated. Read more in our earlier update here. 
  • MoUs: the FCA has progressed memoranda of understanding (MoUs) for information sharing and supervisory co-operation in the event of a no-deal Brexit (the scenario where the UK leaves the EU without an implementation period in place): 
    • with the Prudential Regulation Authority (PRA), the FCA has agreed MOUs with EIOPA and EU insurance supervisors [05.03.2019] in relation to UK and EU/EEA insurance companies; and
    • the PRA and FCA have agreed a template MoU with the European Banking Authority [20.03.2019] and the FCA states that, having agreed the template, the authorities "intend to move swiftly to sign bilateral MoUs". Read more in the Brexit section below.
    • UK Benchmarks Register: to replace the ESMA Benchmarks Register for UK supervised users and UK and third-country based benchmark administrators wanting their benchmarks to be used in the UK. The UK Benchmarks Register has been developed by the FCA in preparation for a no-deal Brexit where the UK leaves the EU without an implementation period in place. Read more below in the Brexit section of the IMB. 
    • FSA website to be switched off: the FSA website will be turned off "over the next few months" the FCA states.  It has not been updated since 2013; some links will be re-directed to the address.  Old content is accessible at the National Web Archives. 

This is the final version of the Regulation round-up that will be available on the FCA's website. To receive further editions sign-up to the FCA's newsletter from the March 2019 Regulation round-up webpage.

FCA publishes Handbook Notice No. 64

The FCA has published Handbook Notice No. 64 [March 2019]. It includes information on the:

  • Reporting of Information about Directory Persons (Dual-Regulated Firms) Instrument 2019 (FCA 2019/11): this makes changes to the FCA's Handbook relevant to establishing a Directory that will, FCA states: "empower customers and other stakeholders to ensure they only deal with those who have been assessed by an authorised firm as fit and proper, or otherwise suitable." The Handbook changes take effect from 9 September 2019. Read more on the FCA's Directory in our earlier update here and in our Out-law article.
  • Financial Ombudsman Service (Award Limit) Instrument 2019 (FCA 2019/12) (FOS 2019/1): the instrument makes changes to the FCA's Handbook to increase the FOS's binding award limit to £350,000 for complaints about acts or omissions on or after 1 April 2019; and increasing it to £160,000 for complaints about acts or omissions prior to that date but that are raised with FOS after 1 April 2019. The changes in the instrument took effect on 1 April 2019.  Read more in our earlier update here and in our Out-law article.
  • Financial Services Compensation Scheme (Management Expenses Levy Limit 2019/20) Instrument 2019 (FCA 2019/14): after joint consultation with the PRA, this instrument makes changes to the FCA's Handbook so the FSCS has sufficient funds to operate the compensation scheme and for a contingency for doing so if there is an "unexpected increase in the number and value of claims against firms which are unable, or likely to be unable, to satisfy claims against them" the FCA states.  The changes took effect on 1 April 2019.
  • European Union Withdrawal Instruments:  after consulting in CP18/28, CP18/29, CP18/36 and CP19/2 the FCA has made Handbook changes by way of a number of Handbook Instruments made by the FCA Board on 28 March 2019.  The Board also made Binding Technical Standards (BTS) instruments to correct deficiencies arising as a result of the UK's withdrawal from the EU. According to the FCA "the changes ensure that a functioning regulatory framework for financial services is in place on Exit Day, with new guidance provided to stakeholders where necessary."  The FCA clarifies further that: "A number of the BTS near-final instruments that were published with Policy Statement (PS) 19/5 have to be made by the Prudential Regulation Authority before they can be made by the FCA Board. This is planned to take place in April, before Exit Day and we will publish in due course". The instruments listed in PS19/5 that the FCA Board made on 28 March 2019 are listed in the Handbook Notice.

FCA bans sale of binary options to retail customers

With effect from 2 April 2019, and following feedback on its consultation, the FCA confirmed [29.03.2019] "all firms acting in or from the UK are prohibited from selling, marketing or distributing binary options to retail consumers". Read more in our earlier update. According to the FCA, its rules "in substance" are the same as those of ESMA which has imposed a temporary, EU-wide restriction on binary options. However, the FCA's permanent ban is wider as it includes 'securitised binary options' as well, although they are not yet sold in or from the UK, the FCA says it "thinks these products pose the same risks for investors and so are extending the scope of the prohibition to prevent a market developing for these products."

Given the permanent ban on selling these products to retail customers, the FCA reminds consumers "any firm offering binary options services to retail consumers is likely to be a scam." 


Ireland - Investment Funds

Central Bank publishes Q&A documents on AIFMD, UCITS and Investment Firms*

The Central Bank has recently issued the 33rd edition of the Central Bank AIFMD Q&A which includes a new Q&A ID 1130 in relation to Irish AIFs which acquire Chinese bonds through the Bond Connect infrastructure. The Central Bank also issued the 25th edition of the Central Bank UCITS Q&A which deals with similar considerations. Further to a submission by Irish Funds to the Central Bank, the Q&A’s clarify that if an Irish authorised AIF proposes to acquire Chinese bonds through Bond Connect, the depository of the AIF, or an entity within its custodial network, must ensure it retains control over the bonds at all times. Central Bank of Ireland, March 2019

Updated Central Bank Brexit FAQ’s*

The Central Bank has been considering Brexit-related issues since before the UK's Referendum and has been seeking to ensure that financial services firms are adequately prepared and resilient enough to cope with the possible effects of Brexit. On 6 March 2019, the Central Bank updated a FAQ to clarify that the Multilateral Memoranda of Understanding which were agreed between European securities regulators and the FCA on 1 February 2019 facilitate delegation or outsourcing arrangements between Irish UCITS Management Companies/AIFMs/MiFID Firms and UK entities. Central Bank of Ireland, March 2019

ESMA Guidelines on risk factors under the Prospectus Regulation

The European Securities and Markets Authority (ESMA) has published its final guidelines on how national competent authorities should review risk factors, as required by the Prospectus Regulation. The guidelines aim to encourage more appropriate, focused and streamlined risk factor disclosures for securities, which is presented in an easy to analyse, concise and comprehensible form. The purpose of including risk factors in a prospectus is to ensure that investors can assess the risks related to their investment, therefore allowing them to make informed investment decisions. This should combat the trend of risk factors in Prospectus’ essentially functioning solely as disclaimers. ESMA, March 2019

Hot off the press! Update on the Investment Limited Partnership Legislation 

It is expected that the draft bill amending the Investment Limited Partnership legislation in Ireland (as discussed in the previous edition of the IMB) will be laid before Irish cabinet by the end of this month. This will be a welcome development for asset managers, particularly those in the real economy space, who have been monitoring developments in this area closely.

Irish Funds Alternative Investments Seminar, April 2019 

*Contains Irish Public Sector Information licensed under a Creative Commons Attribution 4.0 International (CC BY 4.0) license. For further information please click here.


EU Regulatory

ESMA updates Q&A on MiFID II and MIFIR investor protection and intermediaries

ESMA has updated its Q&A on the investor protection topics under MiFID II/MiFIR [28.03.2019]. According to ESMA the Q&A now provide new answers on a range of areas including reverse solicitation; using generic statements in the suitability report; costs and charges; durable medium and best execution. The ESMA announcement also states that ESMA updated two of the Q&A as follows:

  • "Suitability report: availability on firm’s website"; and
  • "Information on costs and charges - Use of products’ costs presented in the PRIIPs KID."

Restriction on CFDs renewed for the three months from 1 May 2019

ESMA has renewed the restriction on marketing, distributing or selling contracts for differences (CFDs) to retail clients for three months from 1 May 2019, [announced 27.03.2019]. The restriction was put in place on 1 August 2018 and its current renewal is on the same terms as the renewal decision that commenced on 1 February 2019.

Requirements for benchmark disclosure by UCITS clarified by ESMA in Q&A

ESMA has updated its Q&A on the UCITS Directive [29.03.2019] on the UCITS KIID benchmark and past performance obligations. There are three changes in relation to benchmark disclosure. According to ESMA these are in relation to: the UCITS strategy being indicated clearly in the KIID; clarification of "a UCITS managed in reference to a benchmark" with ESMA also noting that a past performance Q&A has been repealed because of this clarification; and that "Investors should be provided with an indication of how actively managed the UCITS is, compared to its reference benchmark index".

On past performance ESMA sets out that the areas updated in the Q&A are: "Where funds name a target in their investment objectives and policies, the performance should be disclosed against the target, even if the comparator is not named a ‘benchmark’"; and in relation to consistent performance disclosure across investor communications: "The performance disclosed in the KIID regarding a benchmark index should be consistent with performance disclosure in other investor communications" ESMA states.


The FCA updated its Temporary Permissions webpage in relation to extending the notification window for the TPR

The FCA updated its dedicated temporary permissions regime webpage [28.03.2019] with the following notice:

“In light of the short delay to the process of the UK’s withdrawal from the EU, the notification window for the temporary permissions regime will be extended and will now close at the end of 11 April 2019.

Any fund managers that, as a result of this extension, wish to update their notification should email by the end of 2 April 2019 at the very latest confirming this and including their FRN.”

STOP PRESS - Editor’s note: in the case of umbrella schemes with sub-funds receiving their authorisation before exit day, but which will not now have time to make a passport notification, contact the FCA asap.

The FCA publishes final Brexit instruments and guidance

The FCA has published final instruments and guidance "that will apply in the event the UK leaves the EU without a deal or an implementation period", according to its new webpage: "Brexit the FCA confirms final rules for firms" [29.03.2019]. On this page the FCA states that the package of documents it has published contains "the majority of the final instruments and guidance, following the February publication of the FCA’s Policy Statement with near-final instruments" (PS 19/5 [28.02.2019]).

The FCA explains that the newly published documents "have been made under powers given to the FCA under the EU (Withdrawal) Act. They have been approved by the Treasury, so the FCA can now make them final." The FCA confirms that the final instruments "are largely unchanged from the near-final versions, which were published in February" – the main change being the reference now to "exit day" for when the instruments commence - rather than to 11pm on 29th March 2019. "This change reflects the decision made at the European Council on 21 March, as well as the changes made by the European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) Regulations 2019" the FCA confirms.

The FCA has also now published "the majority" of its final transitional directions and guidance for using the transitional power. According to the FCA, it "identified three additional areas where it has made amendments to the near-final directions published in February". According to the FCA these changes relate to:

  • "UK managers of EEA UCITS funds
  • the application of the Client Assets sourcebook (CASS) to activities carried on from an EEA branch, and
  • the distance marketing provisions."

The FCA's Executive Director of International, Nausicaa Delfas, is quoted on the webpage as describing the documents published on 29 March 2019 as "the final stages" in the FCA's preparations for the UK leaving the EU without an implementation period.

The FCA and the US SEC sign updated co-operation arrangements including in relation to the UK's Alternative Investment Fund Managers Regulations

The FCA's CEO Andrew Bailey and the US's SEC Chairman Jay Clayton met in London to sign two updated Memoranda of Understanding (MoUs) [29.03.2019].  These reaffirm the commitment of the two regulators "to continue close cooperation and information sharing in the event of the UK's withdrawal from the European Union", according to the FCA.  Bailey is quoted as saying "As part of our [FCA's] preparations for Brexit we have been working with our partners in the EU and globally to ensure there is minimal disruption. These MoUs will ensure the UK can continue to be a key market for funds and fund managers.” The MoUs come into force on the date that EU legislation ceases to have direct effect in the UK. 

Of the two MoUs one was originally signed in 2006 and covers regulated entities "that operate across national borders" according to the FCA. The updated version, among other things, expands the firms covered by the MoU.

The other MoU was signed in 2013 originally and is a requirement under the UK's Alternative Investment Fund Managers Regulations. It "provides a framework for supervisory cooperation and exchange of information relating to the supervision of covered entities in the alternative investment fund industry" the FCA explains. "The updated MoU ensures that investment advisers, fund managers, private funds and other covered entities in the alternative investment fund industry that are regulated by the SEC and the FCA will be able to continue to operate on a cross-border basis without interruption, regardless of the outcome of the UK’s withdrawal from the EU" the FCA says.

The FCA and PRA agree a template MoU with the EBA

The FCA and PRA have agreed a template Memorandum of Understanding with the European Banking Authority the FCA announced [20.03.2019]. According to the FCA, "the template sets out the expectations for supervisory cooperation and information-sharing arrangements between UK and EU/EEA national authorities." Now there is agreement on the template the UK authorities and the EU/EEA national authorities intend "to move swiftly to sign bilateral MoUs" the FCA states, which "will allow uninterrupted information-sharing and supervisory cooperation in the event of a no-deal scenario." The PRA's press release can be found here.  The MoUs will only take effect if there is a no-deal Brexit.

FCA's new UK Benchmarks Register

The FCA has announced [22.03.2019] it has developed a new UK Benchmarks Register as part of its preparations for a no-deal Brexit to "replace the ESMA Register for UK supervised users, and UK and third-country based benchmark administrators that want their benchmarks to be used in the UK" the FCA's statement explains. The new Register would include both Benchmark Administrators and third-country benchmarks.  According to the FCA it will "temporarily copy" the information from ESMA's register onto the UK Benchmarks Register on Exit day. It will remain on the UK Benchmarks Register for 2 years "unless it is subsequently removed" under the UK Benchmarks Regulation, the FCA says.

"Brexit and beyond" - speech by Nausicaa Delfas, FCA Executive Director of International

Nausicaa Delfas, Executive Director of International at the FCA spoke at the City and Financial 4th UK Financial Services Brexit Summit in London on "Brexit and beyond" [21.03.2019]. She covered three main areas:  the FCA's preparations for Brexit, its expectations of firms and implications for customers; residual risks; and the FCA's future on a global stage.  Delfas referred to the need to "retain our preparedness for all scenarios" given the continuing possibility of a hard Brexit.

Key aspects of the FCA's Brexit preparations outlined in the speech include:

  • The Temporary Permissions Regime (TPR) and Financial Services Contracts Regime (FSCR): relevant for a hard Brexit as, "without a deal, passporting will end" Delfas said;
  • Delfas reminded firms:
    • of some limits to the FSCR regime, "for example EEA established fund managers, depositories and trustees will not be able to manage or provide depositary services to UK authorised funds, unless they enter the Temporary Permissions Regime. So it is vital that firms properly consider whether to notify for entry into the Temporary Permissions Regime…" Delfas said and;
    • there is nothing similar to the TPR and FSCR in place for UK firms passporting into the EU although some EU Member States have put in place arrangements that are "similar but not identical to the TPR" she said, including Germany, Spain, France, Ireland, Italy, Luxembourg and the Netherlands;
    • in the UK FCA is to start regulating trade repositories and credit rating agencies;
    • temporary transitional power:
      • firms will have 15 months to meet most of the changes on-shoring EU law brings - although there are some exceptions, in particular, the MiFID II reporting rules, so some changes to regulatory requirements will apply on the UK's exit from the EU;
      • FCA intends to "act proportionately" in this respect Delfas said, noting that: "we will not take a strict liability approach and do not intend to take enforcement action against firms and other regulated entities for not meeting all requirements straight away, where there is evidence they have taken reasonable steps to prepare to meet the new obligations by exit day". (Read more in our earlier update here);
      • updating the FCA's IT systems: notably putting in place its own transaction reporting system for on-shored MiFID/MiFIR. "Our aim has been to help firms by making our system as similar as possible to ESMA’s" Delfas said. Read more in our earlier update here;
      • firms must continue to satisfy the FCA's threshold conditions and  principles for businesses and are "expected to make decisions consistent with their obligations and to be guided by good consumer outcomes" Delfas said;
      • consumers: Delfas said:
        • the FCA's "had been driven by a desire to minimise disruption for UK customers of UK and EEA firms" in its Brexit preparations;
        • in terms of their expectations of firms Delfas said:
          •  "Firms should contact each group of customers affected by Brexit to explain clearly how they are or will be affected"; and
          • "Our [FCA's] message to firms has been clear: that they should have contacted their consumers if anything has changed. This also includes being able to respond to customers’ queries" she said;
          • international continuity: Delfas referred to:
            • the MOUs the FCA recently agreed with ESMA, EIOPA and the EBA and EU national regulators;
            • "The majority of equivalence decisions that the EU has taken on third countries to date, have been incorporated into UK legislation" Delfas said.

Residual risks:

  • Delfas noted that while most of the risks to UK financial stability ffom service disruption on a hard Brexit have been mitigated, some remain. According to Delfas these include:
    • the transfer by UK and global banks of their activities to EU-incorporated entities are, Delfas explained, "to some extent dependent on their clients agreeing to move contracts to these new entities";
    • operational risk from transferring businesses, assets and contracts;
    • contract continuity risk; and
    • lack of equivalence.

The FCA's future role "on the global stage"

Among other examples Delfas spoke about:

  • the FCA "forging new relationships with the EU and the rest of the world" saying it would "continue to work with our [FCA's] key counterparts" and international organisations such as the G20, G7 and IMF and that it will "remain closely engaged" with its EU partners;
  • the FCA's work with the Treasury and Government's Global Financial Partnership Strategy seeking "to maximise the UK’s trading and regulatory relationship with a number of non-EU jurisdictions after the UK has left the EU"; and
  • the FCA's provision of "technical expertise and advice to the Treasury as the Government develops its positions on financial services trade policy" – this is "a relatively new area of focus for the FCA", she said.

The Mutual Recognition of Funds (MRF) agreement signed by the FCA with the Hong Kong Securities and Futures Commission (SFC) Delfas explained, "supports reciprocal access to each other’s jurisdiction for the marketing and distribution of investment funds covered by the scheme". It is an example of how the FCA has also progressed with work to support market access.

In relation to the future relationship with the EU, the FCA's "work to onshore the EU rulebook means that on day one, the UK will have the most equivalent framework to the EU of any country in the world" Delfas said, further noting: "This provides a strong basis for the EU and UK to find each other equivalent across the full range of equivalence provisions."

ESMA publishes its: Data Operational Plan under a no-deal Brexit scenario on 29 March

ESMA has published a statement [19.03.2019] on the impact of a no-deal Brexit on its IT systems and databases.  According to ESMA, the new statement complements a previous statement it made [05.02.2019] on "the use of UK data in ESMA's databases and performance of MiFID II calculations" in the event of a no-deal Brexit. Read more on ESMA's February 2019 statement and on the FCA's response to it in our earlier update here.  According to ESMA's current announcement the new statement covers: Financial Instruments Reference Data System (FIRDS); Financial Instrument Transparency System (FITRS); Double Volume Cap System (DVCAP); Transaction reporting systems; and ESMA’s registers and data.


Recent Pinsent Masons' publications

Read our article on Out-law on Brexit and cross-border dispute resolution here.

Read our Out-law article on ESMA publishing no-deal Brexit share trading plans here.

Read our Out-law article on the extension of the TPR notification deadline here.

Read our Out-law article on the Equality Act and customer complaints/FOS and the need to make reasonable adjustments here.

Read the latest edition of our Banking briefing here.

Read the latest edition of our Insurance Briefing here.

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