Capital Markets Regulatory Newsletter: July 2023
Welcome to the latest edition of our compliance newsletter aimed at capital markets firms, including wholesale buy and sell-side firms and wealth managers. Since I last wrote to you, UK regulatory reform has continued apace. The prevailing flow of economic news over the past quarter was negative with a deterioration in inflation expectations leading to a very sharp rise in bond yields. Higher short-term rates in turn threaten a severe demand-led recession in the UK as fixed mortgage deals expire. This is likely to seriously impact sectors ranging from banking to retail. A truly alarming outlook…in the meantime, the UK electoral cycle is running on, and the current regime is anxious to demonstrate its pro-growth credentials. So, in the midst of a rather gloomy economic backdrop, we have picked out the following reforms and summarised them as below. As always, if you have any questions on the below, please contact us here and we will be happy to help with your enquiry.
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Early April saw publication of the FCA’s Business Plan for 2023/24. This annual event used to be eagerly awaited by regulator-watchers, but in recent years has generally failed to excite. Picking through the detail, there are three key areas of focus for the FCA in the coming year.
1. Reducing and preventing serious harm:
- Dealing proactively with firms that pose the highest risks.
- Fair and timely resolution of complaints.
- Reducing the risk of firm failures through new baseline information on financial resilience.
- Improving the oversight of Appointed Representatives.
- Reducing and preventing financial crime.
- Delivering assertive action on market abuse.
2. Setting and testing higher standards:
- Putting consumers’ needs first.
- Enabling consumers to help themselves.
- Delivering the strategy on ESG priorities.
- Minimising the impact of operational disruptions.
3. Promoting competition and positive change:
- Delivering the outcomes of the Future Regulatory Framework and the Edinburgh Reforms.
- Strengthening the UK’s position in global wholesale markets including a consultation a Consolidated Tape
- Promoting competition in digital markets, and further work on the implications of AI and understanding digital consumer journeys.
Against the backdrop of the Business Plan, and notwithstanding reports of poor staff morale and collective action, there are interesting things going on at the FCA. This was the theme of our recent webinar The transformed FCA: what has changed about the Regulator interacts with firms? which featured a cross-sector panel. It discussed the increasing level of information and data requests from regulated firms, as well as a whole series of Dear CEO letters. Our panel provided examples of the type of data the FCA has been requesting, what its expectations are from firms, and what firms can do to both prepare, and respond, should an FCA request for information be received. To access a recording of this session, click on the link above.
Also, of relevance here, is the FCA’s information request to a sample of Wealth Management firms sent on 17th April. asking them to provide a significant amount of information about their processes, systems, controls, oversight and how these processes are applied in practice. Click here for Jennifer Cahill’s summary of this important new spotlight being placed on the sector by the FCA.
The introduction of the Consumer Duty in a matter of days, is for many firms, their most pressing regulatory concern. The FCA cannot be faulted for the sheer volume of guidance on implementing the regime – most recently with their one month to go for the Consumer Duty update – but sometimes it is hard to interpret the Regulator’s precise expectations.
Cosegic’s Consumer Duty expert, Jennifer Cahill has distilled the FCA’s guidance in the context of a significant number of areas of doubt faced by our clients. In Consumer Duty FAQ – 3 weeks to go you can access responses to key questions such as:
- Consumer Duty Champions (who can be one and what are their responsibilities).
- Fair value assessments (what is required).
- Manufacturers’ and distributors’ obligations.
- The definition of a consumer.
- Vulnerable customers (how do firms identify them and what are their obligations towards them).
New Public Disclosure requirements under IFPR
The final new obligation derived from the Investment Firm Prudential Regime (“IFPR”) is the MIFIDPRU 8 Public Disclosure. Replacing the Pillar 3 disclosure regimes of BIPRU and IFPRU, these are now a reality for the first time for many firms. The disclosures are broader than before (particularly for the larger, so-called non-SNI firms) and are now applicable to all investment firms, including those previously exempt from CAD requirements. Transitional provisions applied last year, but the full requirements are now in force for firms with accounting reference dates from 31 December 2022 onwards.
In the first of a series of Bitesize Compliance lunchtime webinars, our Prudential team, led by Jonathan Aseervatham, will offer practical and digestible guidance on the new obligation, including a Q&A. Click here for a recording of the event.
On 17th May, the European Commission formally adopted the draft Memorandum of Understanding (“MoU”) establishing a framework for structured regulatory cooperation in financial services with the UK. This was unfinished business from the Joint Declaration on Financial Services Regulatory Cooperation signed in March 2021, which in turn was derived from the Trade and Cooperation Agreement marking the end of the transition period for the UK’s departure from the EU.
The MoU creates the administrative framework for voluntary regulatory cooperation in financial services between the EU and the UK, outside of the TCA structures. The UK Government also responded on 19th May with its own Policy Paper on the MoU, summarising the next steps.
It’s important to note what the MoU does not do, namely will not address the question of giving UK firms access the EU’s Single Market or EU firms’ access to the UK market. The Commission stated that the MoU is not intended to prejudge the adoption of equivalence decisions which are critical to such access. The MoU may, however, facilitate resumption of equivalence assessments by the EU, which appear to have been suspended pending formal conclusion of the MoU.
Its adoption now signals some thawing of the relationship between the two parties, notwithstanding the significant regulatory divergence from EU legislation and regulation already announced by the UK.
Edinburgh update: SMCR review
On 30 March 2023, the FCA and PRA jointly published DP23/3: Review of the Senior Managers and Certification Regime (“SMCR”). In parallel, the HM Treasury issued a Call for Evidence on the regime. These papers signal a comprehensive reassessment of the operations and effectiveness of one of the most important pillars of the UK regulatory regime. Responses will be considered in any subsequent consultations, with the Treasury making any proposals in the legislative framework and the FCA/PRA doing the same for regulation.
Martin Lovick has looked at the context and content of both reviews and assesses some of the possible outcomes. See his summary SMCR Review: is this the right time for reform?
Proposals for the amendment of AIFMD (commonly referred to as “AIFMD 2.0”) have reached the Trialogue phase (the joint negotiations between the European Commission, Council and Parliament) with the first meeting having taken place on 8 March 2023.
However, these appear to have stalled with the announcement by the Swedish Presidency that the 4th meeting of the Trialogue scheduled for 26 June would now not take place. At issue appears to be the question of loan originating funds, specifically (i) the definition of a loan originating fund, (ii) whether there should be a leverage limit, and if so, what should that limit be and how should it be calculated and (iii) risk retention. Disagreements also remain on the issues of delegation, the depositary passport, white-label services and undue costs.
Discussions now move forward to the next Trialogue scheduled for September under the Spanish Presidency. However, this looks likely to push back the whole AIFMD 2.0 timetable, with full implementation (assuming Trialogue agreement in 2023) unlikely before 2026.
On 24th May, the European Commission published long-awaited package of measures to reform the regulatory framework for retail investment products across the EU. The main proposals are contained within a Directive amending retail investor protection rules and a Regulation “modernising” the key information document for PRIIPs.
The stated objective is “to empower retail investors to make investment decisions that are aligned with their needs and preferences, ensuring that they are treated fairly and duly protected.” In a broader sense, one may see this as the EU’s response to the UK’s Retail Distribution Review, the Asset Management Market Study, some elements of the new Consumer Duty, and also reforms to the UK financial promotion regime. Not surprisingly, it has already been dubbed MiFID III in some quarters.
There are three main sections to the Strategy, covering:
1. Changes to MiFID:
- Elective professional opt-up – changes to qualitative and quantitative criteria.
- Enhanced product governance rules.
- Inducements – extended to execution only firms.
- Suitability and appropriateness
- Marketing communications
- Costs and charges
- Knowledge and competence
- Reporting of cross-border activities
2. Changes to AIFMD and UCITS Directive:
- Prohibition on “undue costs” (note: as currently drafted, these proposals would not apply to non-EU AIFMs marketing into the EU under NPPR).
3. Changes to PRIIPs Regulation
- New exemption for certain pension products such as annuities.
- New "Product at a glance" section to the KID.
Timing: initial feedback period closing on 31 July 2023, the Strategy then enters the full trialogue legislative process. Full implementation of the Retail Investment Strategy is unlikely until at least 2026.
Form PF reporting amendments
The SEC has adopted final rules regarding modifications to Form PF reporting requirements for registered investment advisers to private funds. These include new event-driven reporting requirements for large hedge fund advisers), additional disclosures for large private equity (“PE”) advisors (those with at least $2 billion of PE assets); and new event-driven reports for nearly all PE advisers (those with at least £150 million of PE assets). Read our SEC expert Stephen Robert’s summary of the new requirements here.
Mansion House Speech: new proposals for UK Investment Research, the Short Selling Regulation and Securitisation Regulations
Chancellor Jeremy Hunt delivered a speech at the Mansion House on 10th July which signalled a continuation of the Edinburgh reforms announced last December.
He confirmed the UK Government’s acceptance of the recommendations of Rachel Kent’s Investment Research Review. Key recommendations include:
- Introducing a Research Platform to help generate research.
- Allowing additional optionality for paying for investment research.
- Allowing greater access to investment research for retail investors.
- Involving academic institutions in supporting investment research initiatives.
- Supporting issuer-sponsored research by implementing a code of conduct.
- Clarify aspects of the UK regulatory regime for investment research and consider introducing a bespoke regime.
- Review the rules relating to investment research in the context of IPOs.
Taken together, these proposals represent a significant retreat from the unbundling regime so long championed by the FCA and is important in the context of the end of the SEC’s no action relief for US firms receiving hard dollars from UK and EU managers at the beginning of July. The FCA made a statement confirming that it will work closely with the Treasury to “support” these proposals.
As part of the Mansion House package announced on the same day, HM Treasury published the Government response to the Short Selling Regime Review (“SSR”). This proposes to replace public disclosure of short positions with an aggregate disclosure regime – in other words, individual short sellers will not be identified, rather there will be a single % figure for the total short positions in each issuer. The threshold for reporting short positions will be raised from 0.1% to 0.2%, a restoration of the position prior to the Covid pandemic.
They also announced a Consultation on the Short Selling Regime for Sovereign Debt and Credit Default Swaps – if accepted, this will remove these elements from SSR altogether.
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