Capital Markets Newsletter - June 2024

Posted on: 13 June 2024

Written by: Martin Lovick

Welcome to the latest edition of our compliance newsletter aimed at capital markets firms, including wholesale buy and sell-side firms, wealth managers and corporate finance firms. We are now coming to the end of a busy period for regulatory developments in the UK and beyond. However, with the General Election on 4th July, we are offered a brief period of respite as the FCA news machine effectively goes into purdah, with no new regulatory initiatives to be launched until the new administration is in place. The Regulatory Initiatives Grid, normally updated in June or July, is also being delayed until later in the year.

In this edition, we consider the implications of the General Election and the likely outcome of a new Labour administration. We also explore some of the big themes currently dominating the regulatory landscape in the UK, including prudential reform, financial crime, the Consumer Duty, the anti-greenwashing rule and a new Form A for Senior Manager applications. In the EU, AIFMD II has now passed into law. In the US, we review an interesting “shadow trading” insider dealing case, and consider the recent Supreme Court ruling on the Private Fund Adviser Rule.

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Change of government, change of regulatory direction?

Well, at first sight, probably no. The in-coming Labour administration (a near certainty at the time of writing) is anxious to proclaim its pro-business, pro-growth credentials. Continuity and stability thus appear to be the main watchwords in terms of the regulatory regime. We expect the main initiatives already in play (notably those under the Edinburgh Reforms banner) to progress more or less unaffected in the short term.

An early test of these credentials may be the FCA’s Consultation on publicising regulatory enforcement actions at an early stage when this is deemed to be in the public interest. The current Chancellor, Jeremy Hunt, has been openly critical of this initiative seeing it as giving unwarranted quasi-judicial authority to the FCA with the potential to do real harm to affected businesses. Will the new administration also adopt this uncommon stance or will the new Chancellor, Rachel Reeves, elect to hold fire for the time being? See here for our analysis of these proposals, including some of the potential criticisms.

The FCA’s current Consultation on research may also test Labour’s willingness to challenge current regulatory orthodoxy – with proposals that apparently offer greater freedom on how research services can be paid for but with some fairly stringent strings attached. See here for our summary of the FCA’s proposals, again with our thoughts on their potential limitations.

Looking further ahead, one can discern two of the main tenets of Labour policy that have the potential to conflict with each other: i) economic growth; and ii) rebuilding a close relationship with the European Union. Thus, any thoughts Labour might have of a more aggressive de-regulation, Singapore on Thames agenda are likely to come up against the immovable barrier of European policy making. An obvious example is how the UK responds to the EU’s AIFMD II which recently passed into law. Will the FCA’s own proposals, expected later this year, lessen the divergence or in fact create more? See more on AIFMD II itself below.

One other initiative that seems likely to be developed further under a Labour administration is that of a super-regulator which will oversee and challenge the work of all regulatory bodies in the UK (not just financial ones). Back in February, the House of Lords Industry and Regulators Committee published a Report “Who Watches the Watchdogs”. This envisages a body that will set the responsibilities and objectives of each individual regulator including a clear order of priorities. Passing on scrutiny on regulatory performance to such an independent body is seen as more likely to be resistant to direct Parliamentary and Treasury interference. The report has already been referenced in recent Labour Party press conferences.

What are the other big regulatory themes for 2024 and beyond?

Back in January, we held a horizon scanning webinar for clients in our sector. The webinar highlighted some the key regulatory initiatives and reforms that will be hitting firms and compliance departments this year, and some of these themes were picked up in a recent Dear CEO letter to asset managers which we analysed here. Of particular interest were comments on the ongoing implementation of the Smarter Regulatory Framework, affecting the migration of MiFID, AIFMD and UCITS into the FCA Handbook. This will include making AIFMD requirements more proportionate and updating the regime for retail funds. The FCA’s review of valuation practices in the private markets sector was also referred to. These themes were also recently picked up in a speech by FCA Chair, Ashley Alder on. We expect several announcements to come out of the regulator on these topics in the second half of 2024.

HFM Award

Cosegic was delighted to again be a winner at the With Intelligence, HFM European Services Awards in April, and honoured to win the coveted ‘Best advisory firm - regulation and compliance’ award.

We are extremely proud of this achievement which is a testament to the expertise, dedication, and hard work of our amazing team to whom we extend our gratitude. Congratulations to all of the other winners and nominees and thank you to With Intelligence for hosting such a wonderful evening.

In the words of our CEO, Philip Naughton, "Today I’m a very proud CEO with Cosegic last night having won the best advisory firm - regulation and compliance award. This award recognises our relentless focus on client service, technical excellence and being market leading in the hedge fund space."

Although primarily associated with the Hedge Fund sector, this award is testament to the depth of knowledge and experience across the entirety of Cosegic’s business. Cosegic has also been shortlisted for the prestigious ICA Compliance Awards 2024, in the category ‘Compliance Consultancy Firm of the Year’. Our case study involved assisting a client challenge the FCA’s threat of regulatory action through our in-depth knowledge of the rules and regulations relating to payments and AML.

Keeping tabs on prudential matters

Prudential compliance and regulatory reporting remains a key priority for all regulated firms and an area that many compliance personnel are not comfortable with. In its recent webinar, our Prudential team provided an overview of recent developments and a guide to the FCA’s focus areas. Topics included financial resilience, how IFPR is working in practice and the FCA’s feedback to MiFID investment firms.

Another topic addressed in the webinar and expanded on in a recent article by Stefan Babic was the FCA Consultation on new capital requirements for personal investment firms (“PIFs”). The purpose of these proposals is to ensure that PIFs hold sufficient capital to meet potential redress liabilities. This has the intention of making individual firms responsible for their mistakes, hence reducing the burden on the Financial Services Compensation Scheme, itself funded by regulated firms in this universe.

Finally, the European Banking Authority (“EBA”) and ESMA have just released a Discussion Paper to request advice and feedback on the Investment Firms Regime (IFR), applicable to MIFID investments firms in the EU.

FCA priorities concerning financial crime

Combatting financial crime and the facilitation of criminal activity by financial firms has been consistently one of the FCA’s top priorities.

It was interesting therefore that it used its recent Market Watch 77 newsletter to highlight the risks posed by organised crime, particularly in relation to insider dealing. Our recent article poses a plausible scenario of how such risks might manifest themselves, alongside the FCA’s guidance on how to mitigate them.

Cosegic’s experts on financial crime matters also gave their thoughts on the FCA’s recent revisions to its Financial Crime Guide. This Guide remains the best source of the regulators expectations for firms operating in the financial sector.

Consumer Duty: significant challengers remain…

For financial firms operating in the retail space and those tangentially affected, the Consumer Duty which came into force last July still poses some major challenges. Not least of these is the imminent inclusion of “closed products and services” within the scope of the Consumer Duty from 31 July this year.

In a recent webinar, hosted by Jennifer Cahill of Cosegic and Tim Hogg of Fairer Finance, we explored the current Consumer Duty priorities and offered insights into achieving comprehensive customer understanding. Available via the same link is Cosegic’s template Consumer Duty board report, which provides a framework to document the risks and issues in delivering good customer outcomes.

In March, the FCA announced a review on how firms are understanding and responding to the needs of customers in vulnerable circumstances. The review will determine whether firms are supporting vulnerable customers fairly and delivering outcomes for them which are as good as those for other customers. Jennifer Cahill’s article on the review considers its implications.

Justifying your green credentials

The FCA’s new Anti-Greenwashing Rule, which came into effect on 31 May, also has a Consumer Duty dimension. Its supporting guidance stands firmly within the orbit of its expectations on the Duty, requiring firms to act in good faith towards their retail customers, supporting them in achieving their financial objectives. In relation to any claims regarding sustainability, retail must receive timely information that they need and present it in a way that they can understand to make informed decisions. Our recent summary explains what firms need to do and also places the new Rule in the context of the upcoming Sustainability Disclosure Requirements (“SDR”) which will be phased in starting on 31 July 2024.

A streamlining of FCA processes?

One FCA promise almost as common as General Election commitments to “reduce waste” (and seemingly as hard to put into practice) is that of simplifying and speeding up its application processes for individual and firm registrations. One recent example may be the FCA’s recently revised Form As for Senior Manager and Controlled Function applications. Our summary examines whether this hits the mark. It should be noted that the new Form applies, for the time being, only to stand-alone applications, not those connected to firm authorisations.

In Europe, AIFMD II comes into force…

As noted above, AIFMD II came into force in March. However, the main provisions will actually come into effect two years later. Aside from any influence on the UK’s own version expected to be consulted on in the second half of 2024, some of the main provisions will have a direct impact on UK managers:

  • Enhanced delegation requirements for third country firms including managers based in the UK providing portfolio management to an EU entity.

And for firms marketing in the EU

  • additional Annex IV disclosure requirements (applicable to firms marketing in the EU under the National Private Placement Regime) and;
  • new obligations on loan origination funds.
In the US, SEC enforcement takes a new turn…

A case that regulators in other jurisdictions will have followed with interest, was that brought by the SEC against Matthew Panuwat for insider trading. The unusual feature of the case was that of “shadow trading”, in that the inside information in question did not directly relate to the company that that was traded on.

Panuwat worked at Medivation Inc., a mid-cap pharmaceutical company focused on oncology. On 18 August 2016, he received an email from his CEO that the company was to be acquired by Pfizer. Seven minutes later, he purchased short-term call options in Incyte, a similar but unrelated pharmaceutical company also focused on oncology. Four days later, the Pfizer acquisition announcement caused Incyte’s share price increased by 8%, resulting in a $120,000 profit on the trade.

The SEC successfully argued under the misappropriation theory of insider trading, where material non-public information is used to trade in breach of a duty owed to the source of the information. The case came down to proving that Panuwat had been entrusted with confidential information by Medivation and had not received consent to trade based on that information.

Even though, as the SEC argued, the legal ground-rules are not new, firms operating on either side of the Atlantic will want to remind their staff of the broad application that this shadow trading case brings to their activities.

Plus, is the SEC’s Private Fund Adviser Rule not now happening?

Back in August 2023, the SEC adopted the final version of its Private Fund Advisers Rule (the “Rule”), a series of rules and amendments under the Investment Advisers Act of 1940 – see here for our summary of the main provisions. Just one month later, a suit was filed by various industry bodies challenging the Rule, arguing (amongst other things) that the SEC was exceeding its statutory authority by attempting to regulate the terms of the relationship between private funds (which are specifically exempt from such regulation) and their investors.

On 5 June, the US Court of Appeals for the Fifth Circuit has determined that the Rule is indeed unauthorised and has “vacated” (i.e. thrown out) the final Rule in full. On the face of it, this is a stunning victory for the private funds industry which had been facing some fairly onerous new obligations.

However, the story may not stop here – most observers expect the SEC to appeal the ruling. Its options are: either (within 14 days) to request a rehearing of the case with another panel of the Fifth Circuit; or (within 90 days of the judgement) lodge a full appeal to the Supreme Court (known as a writ of certiorari).

Martin Web

Martin Lovick

Martin is Director of Capital Markets.

Contact Martin

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