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Investment Management Brief: 7 March 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 “calls on firms to act following review of costs and charges disclosure in the investment sector”

The FCA has published [28.02.2019] "the key findings of supervisory work to assess the effectiveness of disclosure by asset managers and intermediaries, such as wealth managers, to their retail customers." The work was triggered by the new costs and charges disclosure requirements under PRIIPs and MiFID II that came into force in January 2018. The FCA tells asset managers they should now “review their cost disclosures to ensure that they are clear, fair and not misleading.”  Firms that are part of the product design, manufacture and distribution process “need to work together to ensure all costs and charges are disclosed properly to customers” the FCA says.

The FCA also published its findings from its Call for Input seeking views on "initial experiences" under PRIIPs - including transaction cost reporting and PRIIPs scope issues. Read more in our earlier update here. According to the FCA, it “will continue to work with firms to increase understanding of the PRIIPs legislation” but warns it “will take further action if firms do not improve.” The FCA is to consider if there is a need for further guidance “to address concerns about conflicting requirements and lack of clarity about the scope of application of PRIIPs requirements” it said.

FCA speech on ending LIBOR Reliance

FCA Executive Director of Supervision, Investments, Wholesale and Specialists, Megan Butler, spoke to the Investment Association in London on Ending reliance on LIBOR [21.02.2019]. Butler opened by saying "As you know, in two years the production of LIBOR is likely to end. Presenting asset managers with the non-trivial task of managing their LIBOR exposures." How firms "respond to this deadline will be of fundamental importance" she said - both to the firms and to their customers. Some firms are "already managing down" their LIBOR-linked derivatives and moving portfolios to SONIA-based (Sterling Overnight Index Average-based) swaps which she refers to as "the smart play. LIBOR is an anachronism. The markets for which it was originally built have, as Andrew Bailey described last year, changed beyond recognition" Butler said. Read more on Andrew Bailey's speech in our earlier update. 

In terms of the Buy-side, Butler noted many asset managers will have LIBOR exposures in "multiple areas" she said – "the most obvious and extensive areas" being for hedging: where strategies use LIBOR-referencing interest rate derivatives; and investments (bonds or other securities) with LIBOR-referenced interest payments, according to Butler. In the derivatives market, some reasons the FCA has heard for delaying action include waiting for greater liquidity or for terms rates to be produced based on the new overnight risk free rates and that dealing costs can be "a deterrent to transition" she said. While "firms can adopt different approaches to scenario planning and reviewing or re-papering contracts" according to Butler, the FCA "strongly encourage[s] asset managers to transition their hedges and positions over to SONIA before LIBOR disappears, and before liquidity in LIBOR-derivatives begins to decline" because firms need to be ready for an end-date for LIBOR in 2021 – whether the exposure the firm has "is to sterling LIBOR or to one of the other LIBOR rates" Butler said.

Butler's "main message" was: "do not make the back book problem worse than it needs to be. Get to it right now. Inertia remains the biggest obstacle to a smooth transition" asking firms – "Do you know what you’ve got in terms of LIBOR exposures? Have you looked at your inventory? Where is LIBOR in your books? Is it hidden? Is it on the front page of the instrument? Do your due diligence so that you know what you have got" Butler said.  Firms that are worried about the cost of transitioning portfolios now should "weigh this up against the impact of a potentially costly re-papering exercise" in future, Butler warned.

The FCA publishes "Psychological safety" page

The FCA has published its page "Psychological safety" [18.02.2019] as it has "been exploring the topic of psychological safety and how to create a speak up, listen up culture in financial services". The FCA notes "the traditional focus has been on encouraging employees to 'speak up'" – but, according to the FCA it has "overwhelmingly been hearing that there should be more of a focus on 'listening up'". The FCA says "the response of an organisation when employees do speak up is key to determining whether it is safe to do so again, and to cultivating a broader 'safe' environment."  The page refers also to the FCA's "CultureSprint" in December 2018 which was the first such event the FCA has run for "creating a speak up, listen up culture in financial services" in which a range of participants - from industry as well as behavioural scientists, academics, consumer groups and thought leaders - worked on "small changes that can make a big impact".  According to the FCA, "After examining how psychological safety is experienced in financial firms, the 25 participants developed solutions based on behavioural science principles." The page also links to the FCA's CultureSprint video on psychological safety; the FCA's webinar in which experts explore the importance of psychological safety and to a number of insight articles on this area.

FCA issues research note on whether growth in passive investing affects equity market performance

The FCA has issued a Research Note in which it reviews recent work by academics on the effect that the growth of passive investing has on market efficiency and efficiency [08.02.2019].  

The FCA has published its February 2019 regulation round-up

The FCA has published its February 2019 regulation round-up [21.02.2019]. It includes:

  • an update on Brexit, from Nausicaa Delfas, Executive Director of International at the FCA, who reminds firms of the Brexit briefings the FCA is hosting on 11 March in London and on 14 March in Edinburgh for which firms can sign up. Read more in our earlier update here;
  • Delfas said about the FCA's Brexit preparations: "A significant part of our work is to ensure the firms we regulate are ready for this milestone. Your Brexit contingency plans should now be well advanced, including your plans for communicating with your customers. As we have said, you must communicate clearly with customers and in good time";
  • the FCA's banking leaders video on SM&CR preparations. Read more in our earlier update here;
  • FCA's consultation on cryptoassets regulation guidance and on its future consultation on banning the sale of derivatives linked to certain cryptoasset types (read more in our earlier update here);
  • February 2019 the FCA published its second set of rules and guidance aiming to improve the quality of information available on funds to consumers PS19/4: Asset Management Market Study – further remedies) that works in conjunction with the April 2018 new rules for fund managers on acting as agents for the investors in their funds: PS 18/8 (Asset Management Market Study remedies and changes to the handbook – Feedback and final rules to CP17/18) [read more and in our earlier updates here and here];
  • temporary transitional power for the FCA in the event of a no-deal Brexit "to delay or phase in changes to regulatory requirements for a maximum of up to two years" from the date of the UK's exit from the EU. There is information on the FCA's website on how it intends to use this power and the areas in which firms do now need to take steps. Read more in our earlier update here;
  • FCA FIRDS and transaction reporting: the FCA has published a high-level overview of its system for the on-shored MiFID regime for transaction reporting that it has built to replace ESMA's system in the UK as part of the FCA's no-deal Brexit contingency plans.  Read more in our earlier update here;
  • MOUs with ESMA and EU regulators have been signed – read more in our earlier update here;
  • Preparing your firm for Brexit page –updated with sector specific information – see below;
  • FCA reminds firms that have received the FCA and Practitioner Panel Joint Survey form to fill in and return the form. Read more in our earlier update here;
  • CP19/04: Optimising the SMR and feedback to DP16/4 – Overall responsibility and the legal function. The FCA is asking for comments by the 23 April 2019. Read more in our earlier update here;
  • Consultation on improving shareholder engagement and on how parts of the Revised Shareholder Rights Directive (SRD II) is to be implemented in the UK – read more in our earlier update here; and
  • MOU updated with the ICO [18.02.2019]: the FCA has updated its Memorandum of Understanding with the Information Commissioner's Office. FCA reminds readers that "While the ICO regulates firms’ compliance with the General Data Protection Regulation (GDPR), firms are reminded that complying with the GDPR requirements is also something the FCA will consider under our rules. As part of their obligations under the Senior Management Arrangements, Systems and Controls (SYSC) module, firms should establish, maintain and improve appropriate technology and cyber resilience systems and controls."

New members join Government's Asset Management Taskforce

The Government announced [18.02.2019] five new members joining its Asset Management Taskforce.  John Glen, Economic Secretary to the Treasury asked the Taskforce to look into "new international opportunities" for the UK's £9.1 trillion asset management industry after Brexit. Glen notes that "Stewardship and responsible investment is an area the UK has yet to fully take advantage of" so he is challenging the Taskforce to find ways to "tap into that growing market and enhance our position as a world leader in asset management".  The Taskforce was set up in October 2017, to encourage dialogue between Government, industry and the FCA. One area the Taskforce identified as key to the success of the industry was Fintech and, according to Treasury "building on the Taskforce’s discussions, the Investment Association designed and launched Velocity, a Fintech Accelerator, to speed up the adoption of new emergent technologies across the asset management industry." Contains public sector information licensed under the Open Government Licence v3.0. Read more on the establishment of the Taskforce in our earlier updates here and here.

The FCA's statement on "onshoring ESMA's temporary intervention measures on retail CFD and binary options products"

The FCA has made a statement [22.02.2019] on ESMA's temporary intervention measures temporarily restricting the marketing, sale or distribution of binary options to retail customers and restricting the marketing, distribution or sale to retail customers of CFDs.  The FCA reminds firms that they are to comply with ESMA's decision notices until they expire (on 1 April 2019 for binary options) and on 30 April 2019 for CFDs saying: "our supervision of firms in this sector will continue to focus on compliance with ESMA's temporary product intervention measures" as these measures will become part of UK domestic law on the day the UK exits from the EU under the EU (Withdrawal) Act. Read more on these decision notices in our earlier update here.

In addition, the FCA published two CPs [7 December 2018] (CP18/38 regarding CFDs and other retail derivate products; and CP18/37: regarding retail binary options) "to make ESMA's temporary product intervention measures permanent in the UK" according to the FCA and proposing to apply the FCA's rules to "closely substitutable products" (read more in our earlier update here). The consultations are now closed and the FCA is considering the feedback. According to the FCA it plans to make its decision on final rules so as to publish a Policy Statement and any final Handbook rules in March 2019 for binary options, and in April 2019 for CFDs and CFD-like options. The FCA says it "would expect our finalised rules to apply very shortly after publication to coincide with the dates that ESMA’s restrictions expire. If, for any reason, we are unable to finalise our domestic approach prior to ESMA’s existing interventions ceasing to have effect in the UK, we will consider adopting temporary product intervention measures to replicate ESMA’s. This will ensure no loss of protections for UK consumers in a period between ESMA’s existing interventions ceasing to have effect in the UK, and finalising our domestic approach" the FCA says. Read our coverage in Out-law here and here.

Ireland - Investment Funds

Outlook for the Irish economy*

The Central Bank’s Director of Economics and Statistics, Mark Cassidy, recently delivered a speech to the Select Committee on Budgetary Oversight, focusing on the outlook for the Irish economy.  Ireland’s domestic economy grew at a strong pace during 2018, driven by broad-based growth in employment, which boosted consumer spending, and an acceleration in investment within the building and construction sectors.  There was also relatively favourable growth in international activity during the period, although overall investment by multinationals remains volatile.  The economy continues to be affected by the uncertainty surrounding Brexit, a tightening within the domestic labour market and a possible threat of overheating as the country moves towards full employment. On the international front, the economy faces headwinds in relation to international trade, taxation and currency.   Mr Cassidy also outlined the macroeconomic forecasts set out in the recently published Central Bank Quarterly Bulletin.

Central Bank of Ireland, 27 February 2019

Final compromise texts on cross-border distribution of funds published

The Council of the European Union has published the final compromise texts in respect of proposals for a Directive on cross-border distribution of collective investment funds, and a Regulation on facilitating cross-border distribution of collective investment funds and amending Regulations (EU) No 345/2013 and Regulations (EU) No 346/2013.  It is the European Commission’s intention that these texts will be adopted before the European Parliament elections in May 2019. Both the proposed Regulation and Directive would enter into force 20 days after publication in the Official Journal of the EU.

Council of the EU,  22 / 26 February 2019

ESMA consultation on draft guidelines on liquidity stress test for investment funds

The consultation, which opened on 5 February 2019, aims to collate industry feedback on proposed guidelines on liquidity stress testing in UCITS and AIFs. Comments are due by 1 April 2019 and ESMA expects to publish a final report in summer 2019.

ESMA, February 2019

Capital Markets Union: Agreement simplifies rules for investment firms to support open and vibrant capital markets

An agreement between the European Parliament and Member States has been reached that seeks to ensure more effective prudential rules for investment firms. Future rules will be more proportionate, and there will be better supervision of investment firms that carry out bank-like activities. As they pose similar risks to such financial institutions they will be subject to the same rules.

European Commission, February 2019

Pan-European pension products

EU ambassadors have endorsed the agreement reached by the European Parliament and the Presidency in December on the “pan-European pension product” (PEPP). The draft regulation aims to increase the market for personal pensions while providing consumers with a greater choice of pension products.

Council of the EU, February 2019

Response to DBEI consultation on the review of the Limited Partnerships Act 1907

Irish Funds has responded to the consultation by the Department of Business, Enterprise & Innovation (“DBEI”) on the review of the Limited Partnerships Act 1907 (the “1907 Act”) and has proposed an “AIF Limited Partnership” regime as part of the update of the Investment Limited Partnerships Act 1994 (the “ILP Act”). Irish Funds has been advocating for reform of both the 1907 Act and the ILP Act in order to enhance the AIF product offering available in Ireland. A draft reform bill is anticipated soon and the publication by the DBEI of the consultation on the 1907 Act signals the beginning of the review process.  Irish Funds will continue to advocate for a modernised AIF Limited Partnership regime under an updated 1907 Act, with the AIFMD framework applicable to managers that manage such AIFs. 

Irish Funds, February 2019

EU confirms plan to keep Irish shares trading under no-deal Brexit

The European Securities and Markets Authority (ESMA) has approved a plan to allow the transfer of Irish shares for up to 2 years following a potential no-deal Brexit. In such a scenario, Euroclear UK & Ireland will continue to settle securities traded in Dublin for the immediate future.

ESMA, March 2019

Central Bank explains cryptocurrencies (digital money)*

The Central Bank of Ireland has published an information sheet on its consumer hub on the topic of cryptocurrencies.  The Central Bank addresses several questions relating to the use and control of cryptocurrencies and highlights recent research conducted by other central banks (such as the Swedish Riksbank and the Bank of England) around whether central banks should investigate launching their own digital currency. The Central Bank of Ireland states, “…the idea of a central bank digital currency is still very speculative, and does not look likely to happen in the near future”.

Central Bank of Ireland, March 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 publishes list of AIFMD MoUs signed by EU Authorities

ESMA has published [20.02.2019] a chart showing the MoUs signed by the EU authorities with third countries. ESMA reminds readers that "in addition to the supervisory cooperation arrangements, the AIFMD sets out other conditions that need to be satisfied in order for the relevant cross-border activity to be permitted in the EU" – that the "non-EU country must not be listed in any of the categories of the periodic Public Statement of the Financial Action Task Force" and that, "as from the date of application of the passport for non-EU AIF managers, there should be an agreement between the non- EU country and the relevant EU Member State that complies fully with the standards laid down in Article 26 of the OECD Model Tax Convention on effective exchange of information on tax matters."

Binary options prohibition renewed for 3 months from 2 April 2019 by ESMA

ESMA announced [18.02.2019] it is renewing its prohibition on the marketing, sale or distribution of binary options to retail clients that it imposed on 2 July 2018, for a further 3 months from 2 April 2019. ESMA's view is that the risk to investors from offering binary options to retail customers remains. Accordingly, the renewal of the prohibition measure from 2 April 2019 will be made on the same terms as its previous renewal decision applying since 2 January 2019. The renewal measure is to be published in the Official Journal in due course. Read more above in the section on The FCA's statement on "onshoring ESMA's temporary intervention measures on retail CFD and binary options products" and on Out-law here and here.

Commission consults on new guidelines for company reporting on climate-related information

The Commission has announced [21.02.2019] as part of its Sustainable Finance Action Plan, it has launched a "targeted consultation" on new company guidelines for reporting on climate-related information. According to the Commission: "This consultation proposes ways to assess how climate change can impact the financial performance of companies, as well as how companies can have positive and negative impacts on the climate." It also builds on the report of the Technical Expert Group on Sustainable Finance on climate related disclosures [10 January 2019 updated 20 February 2019] and responses to the call for feedback to the report.

ESMA lists thresholds below which an offer of securities to the public does not require a prospectus in various EU Member States

ESMA has published a list [08.02.2019] setting out the thresholds below which a prospectus is not required for an offer of securities to the public in various EU Member States. The document contains information that national competent authorities have supplied on national thresholds below which a prospectus is not required, national rules applicable to offers below that threshold and links to the relevant national law and rules.


FCA guidance on firms' EU departure preparations

The FCA has published a guidance page [27.02.2019] for regulated firms preparing for the UK's departure from the EU [27.02.2019]. The information is intended to help firms "finalising their preparations for as smooth a transition as possible when the UK leaves the EU", according to the FCA. There are links to specific information from the FCA for 5 key sectors including retail investment and wholesale banks, markets and asset managers. The FCA "is urging firms to ensure they are making any necessary changes to protect customers from negative impacts of leaving the EU, whatever the outcome of negotiations" reminding them "to consider what information needs to be communicated to their customers, and how this will be done in a way that is clear, fair and not misleading." All the five sector pages are to be read in conjunction with the FCA's updated page "Preparing your firm for Brexit" [26.02.2019] containing information specifically for UK regulated firms, EEA firms operating in the UK as well as issues relevant for all firms, next steps and further information.

FCA publishes PS19/5 confirming its proposals if there is a no-deal Brexit

The FCA has published its near-final rules and guidance that will apply if the UK leaves the EU without an implementation period [28.02.2019].  The FCA's page notes that the documents it has now published contain the feedback from a number of its consulation papers (CP18/28, CP18/36 on proposed changes to the Handbook and BTS; CP18/29 on the temporary permissions regime for inbound firms and funds; CP19/2 on Brexit and contractual continuity; and on CP18/34 on regulatory fees and levies). The PS contains further information on how Gibraltar based firms will be treated after Brexit and on the temporary transition power [read more in our earlier update here]. On the temporary transition power the FCA says: it "would give the FCA the ability to waive or modify changes to regulatory requirements which have been amended under the EU (Withdrawal) Act". The FCA explains that it intends "to use it so firms and other regulated entities do not generally need to prepare now to meet new UK regulatory obligations. In most cases, we plan to allow firms a period of 15 months to adapt to these changes. We have also set out the areas where firms need to prepare to comply now on our website". 

HM Treasury publishes update to the Policy Note on the Financial Services (Implementation of Legislation) Bill

HM Treasury has published [19.02.2019] an updated policy note that outlines the purpose of the Bill in a no-deal scenario and the EU legislative proposals it would apply to. Read more on the original Policy Note in our earlier update here. According to Treasury, in a no-deal scenario the Bill would "provide the power" for the UK "to implement and make changes to a specified list of ‘in-flight files’." HM Treasury explains "these are pieces of European Union financial services legislation agreed or in negotiation at the point of exit, with implementation dates falling in the two years after exit. This policy note outlines the bill’s purpose, and provides detail on the ‘in-flight files’ specified in the bill itself." Among others, these include:

  • Prospectus Regulation provisions that apply from 21 July 2019;
  • in the Bill's schedule are 13 proposals for financial services legislation currently in negotiation, that the UK may wish to implement and which could enter the Official Journal of the EU up to two years after the UK's exit from the EU, including:
    • the Investment Firms Review;
    • the Cross-border Distribution of Funds Regulation and Directive;
    • Sustainable Finance: low carbon benchmarks;
    • European Supervisory Authority Review;
    • Sustainable Finance – Disclosures; and
    • Sustainable Finance - Framework.

The Policy Note now contains further legislative safeguards on use of the powers than previously, so there are "more stringent reporting requirements and limitations to the Bill's power of adjustment" according to Treasury, that have now been added to it after its passage through the House of Lords. Contains public sector information licensed under the Open Government Licence v3.0.

Draft EU exit legislation on the financial services framework proposed for the UK with Gibraltar

HM Treasury has updated its legislation page [06.02.2019] with the draft statutory instrument the Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019. Contains public sector information licensed under the Open Government Licence v3.0.  Read more on the arrangements proposed with Gibraltar in our earlier updates here and here.

HM Treasury updates page of made financial services SIs

HM Treasury has updated [21.02.2019] its Guidance list of made financial services SIs. HM Treasury explains these are "all the financial services SIs laid under the affirmative resolution procedure that have completed their parliamentary stages and are now made (i.e signed and numbered)".  The updated page now includes, among other SIs in that update round, The Market Abuse (Amendment) (EU Exit) Regulations 2019, the Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2019, the Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019, the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019. Contains public sector information licensed under the Open Government Licence v3.0.

New draft SI Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 has been published

A new draft of the SI  Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019 has been published and replaces the draft with the same title that was laid before Parliament and published on 21 February 2019. Contains public sector information licensed under the Open Government Licence v3.0.


Recent Pinsent Masons' publications

For the latest edition of our Insurance Briefing please click here.

Read our latest edition of the FS Enforcement Express here.

Read our recent Out-law article "EU and UK insurance regulators agree 'no deal' Brexit cooperation" here.

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