UK Regulatory Calendar 2020

Effective Stewardship

On January 30, 2019, the Financial Reporting Council (FRC) published a consultation paper on proposed amendments to The UK Stewardship Code intended to address examples of poor governance practice, poor decision-making and underperformance that have contributed to corporate failure. On the same day, the FRC and the FCA also published a joint Discussion Paper (DP19/1) examining the following:

• What effective stewardship should look like
• Minimum expectations for financial services firms that invest for clients and beneficiaries
• The standard the UK should aspire to
• How this could be achieved.

Together with the implementation of the Shareholder Rights Directive II (SRD II), these documents form a package of publications focussing on stewardship, which the FCA’s 2019/20 Business Plan highlighted as a focus in regards to their supervision of the asset management industry.

In October 2019 the FCA issued Feedback Statement (FS19/7) in response to the joint Discussion Paper. It accepted the view of most respondents that no new stewardship-related requirements should be imposed on asset managers currently. Instead time should be given for the new rules on shareholder engagement (i.e. SRDII) to be embedded.

However, it also identified a number of initiatives that could already be undertaken in conjunction with the industry:

• An examination of how asset owners set and communicate stewardship objectives and promote arrangements between asset owners/managers that support these objectives
• Addressing regulatory, informational and structural barriers to effective stewardship practices, including consulting on rule changes to enhance issuers’ climate change disclosures (as outlined in FS19/6)
• Considering further the role of culture, governance and leadership in the exercise of stewardship
• Continuing work with the FRC as the UK Stewardship Code 2020 is introduced.

The FCA also committed to three actions, specifically:

• Holding an industry workshop jointly with other regulators in Q1 2020 to discuss how stewardship objectives are set and communicated and how effectively they are adopted by asset managers
• Engaging with ongoing industry work led by the Investment Association (IA), considering how to promote a longer-term perspective in investment mandates
• Considering the issue of stewardship when designing an appropriate regulatory regime. This follows the Competition and Markets Authority (CMA) recommendation that investment consultants be brought under FCA regulation.

Q4 2019

UK Stewardship Code 2020

The Financial Reporting Council’s revised version of the UK Stewardship Code came into effect on January 1, 2020.

Key changes include the following:

• An expanded scope to include asset owners (pension fund/insurance companies) and service providers, as well as asset managers.
• A new requirement to report annually on stewardship activity and its outcomes
• An expectation on signatories to take environmental, social and governance factors, including climate change, into account and to ensure their investment decisions are aligned with the needs of their clients
• Signatories are required to explain how they have exercised stewardship across asset classes – not just for equities, but for fixed income, private equity, infrastructure, and investments outside the UK, for instance.
• Signatories must explain their organization’s purpose, investment beliefs, strategy and culture and how these enable them to practice stewardship.

Until December 31, 2019, firms could become a signatory to the previous version of Code. Any firm that has done so will remain a signatory until the first list of signatories to the 2020 Code is published (likely to be in the second half of 2021). To become a signatory to the 2020 Code firms will need to produce an annual stewardship report explaining how they have applied the Code in the previous 12 months. The FRC will evaluate these against an assessment framework, and those meeting the required expectations will be listed as signatories to the 2020 Code. To be included in the first list, firms must submit a final report to the FRC by March 31, 2021.

January 1, 2020, and March 31, 2021

Brexit planning

The UK’s exit from the EU has been delayed again to 31 January 2020 with the transitional period due to end by 31 December 2020.

In the case of a “hard Brexit” (should the UK leaves the EU without a withdrawal agreement in place), which is still possible, UK firms will lose their passporting rights under the relevant financial services EU single market directives. They will then be considered “third-country firms” from an EU perspective. The Temporary Permissions Regime (TPR) notification window will now close on January 30, as will the notification window for fund managers under the Temporary Marketing Permission Regime (TMPR). The Government has not yet announced its plans for the period after December 31, 2020, and the FCA has said it will provide further details on its approach to the end of the implementation period in due course.

The FCA has also noted that all MiFID systems will remain connected to ESMA during the implementation period. Its new Financial Instruments Reference Data System (FCA FIRDS) will continue to publish in parallel to ESMA’s systems but should only be used by firms for testing purposes. The FCA’s version of ESMA’s Financial Instruments Transparency Reference System (FCA FITRS) will be suspended until further notice, and will be resumed, as appropriate, closer to the end of the implementation period.

Duff & Phelps has published a note, here, summarising the key implications of Brexit for Fund Managers. The FCA has also published a table detailing the dedicated Brexit websites hosted by 14 EEA financial regulators, which can be found here. It has also set up a dedicated telephone line: 0800 048 4255.

On October 11, the FCA published an update outlining its expectations for firms in the event of a no-deal Brexit, particularly given the potential operational challenges of leaving the EU during the working week. It noted that it would take a proportionate and pragmatic approach to supervising reporting (both MiFID and EMIR) around exit day. MiFID reporting firms unable to comply fully at exit day were to be required to be able to back-report missing, incomplete or inaccurate transactions as soon as possible after exit day (then planned for October 31, 2019).

December 31, 2020.

Fifth Anti Money Laundering Directive (5MLD)

The final text of 5MLD, published on June 19, 2018, was  transposed into UK law on January 10, 2020.

A number of changes may be relevant:

• Updated beneficial ownership records of corporate clients, with an explicit customer due diligence (“CDD”) requirement for firms to take reasonable measures to understand the ownership and control structure of their corporate customers
• A requirement to identify CEOs and chief executives – an explicit CDD requirement to take reasonable measures to verify the identity of the senior managing official when the beneficial owner of a body corporate cannot be identified
• Requirement to establish the source of wealth and source of funds for business relationships with persons established in high-risk third countries or in relation to relevant transactions where either of the parties is established in such a country

New high-risk factors for enhanced due diligence. These include where parties to transactions are in high-risk third countries; the customers is the beneficiary of a life insurance policy or a third-country national seeking residence rights or citizenship; and where the transaction relates to oil, arms, precious metals, tobacco products, cultural artefacts, ivory or other items related to protected species, or archaeological, historical, cultural and religious significance, or of rare scientific value.

January 10, 2020

Asset Management Portfolio Tools

The FCA has published its findings of how firms in the asset management sector select and use risk modelling and other portfolio management tools. It found that some firms sampled relied on a single provider of portfolio management tools (by way of an integrated package), others used a suite of tools from different providers, and the remainder used in-house technology.

Firms said they found it challenging to decide whether to use a single provider or several providers. The integrated package offers reduced manual input and improved oversight, but also leads to possible concentration risk and some elements not being best in class.

The report also focussed on findings in respect of:

• Vendor management
• Governance of risk and investment models
• Change management
• Resilience and recovery
• Testing of software upgrades and patches
• Whether models manage portfolios in line with client’s expectations.

This report was based on the FCA’s findings from a sample of firms, but the findings are relevant to all asset management sector firms.

The FCA expects firms to consider how the findings may apply to their own organisation, while ensuring that their implementation, oversight and contingency arrangements in respect of these tools enables them to comply with the FCA’s expectations set out in the systems and controls handbook and elsewhere.

The FCA will continue to look at the operational resilience arrangements in place at firms, including those not included in this review.

January 14, 2020

Annual firm details update via Connect

From the end of January 2020 all authorised firms will need to review and confirm the accuracy of their firm details annually, in line with their Accounting Reference Date. This should be done via Connect, even if there have been no changes from the previous year.

January 31, 2020

Securities Finance Transaction Regulation (SFTR)

Market participant entities within the SFTR’s scope must report all SFT’s to a registered trade repository (TR) on a T+1 basis.

The Regulatory Technical Standards (RTS) set out the reportable fields across four categories: margin data, transaction data, re-use data and counterparty data. The tables can be found within the report at pages 261 -281. These provide a description of each field to be included.

The European Commission has confirmed the reporting requirements go-live timelines:

• April 11, 2020 – Credit institutions, investment firms and relevant third country firms
• July 11, 2020 – Central counterparties (CCPs) and central securities depositories (CSDs)
• October 11, 2020 – Other financial counterparties
• January 11, 2021 – Non-financial counterparties.

Duff & Phelps can assist clients with all aspects of their planning for SFTR reporting.

Q2 2020

Liquidity Stress Tests for Investment Funds

On September 2, 2019, ESMA published final guidelines regarding liquidity stress testing of AIFs and UCITS funds. Whilst they are applicable to both managers and depositaries of such funds, the majority of the guidelines apply to the relevant fund manager.

The guidelines clarify that liquidity stress testing should:

• Be subject to appropriate governance and oversight, including appropriate reporting and escalation procedures
• Be carried out at least annually and, where appropriate, employed at all stages in a fund’s life-cycle
• Employ hypothetical and historical scenarios and, where appropriate, reverse stress testing.

The guidelines also clarify the following:

• The outcomes in which appropriate liquidity stress testing should result
• The key factors which liquidity stress testing models should take into consideration in their construction
• The requirements of a liquidity stress testing policy.

Fund managers should be able to demonstrate to their regulators that their authorised fund’s strategy and dealing frequency enable them to remain sufficiently liquid during normal and stressed circumstances. The guidelines should also be adapted to the nature scale and complexity of the fund.

The guidelines will apply from September 30, 2020, and they are available here.

September 2020

Illiquid Assets in open-ended funds

The FCA has published Policy Statement (PS19/24) in response to the consultation on CP18/27, which closed in January 2019.

The regulator is seeking to reduce the potential for harm to investors in funds holding inherently illiquid assets, such as property, particularly under stressed market conditions. Open-ended funds investing in illiquid assets can encounter difficulties if many investors simultaneously try to withdraw their money at short notice.

The changes impact on non-UCITS retail schemes (NURSs). Following the suspension of the Woodford Fund (a UCITS fund), however, the FCA is considering whether any of these remedies should be applied more widely. It has said it will consult as appropriate should it decide that they should.

The changes can be captured under 3 broad areas:

• Suspension of dealing in units. NURSs holding property and other immovables will be required to suspend dealing when there is “material uncertainty” about the valuation of at least 20% of the scheme property. However, an authorised fund manager (AFM) can continue to deal where they have agreed with the fund’s depositary that to do so is in the best interests of investors.
• Improving the quality of liquidity risk management. Managers of funds investing mainly in illiquid assets will be required to produce contingency plans for dealing with liquidity risks. Depositaries will also have a specific duty to oversee the processes used to manage the liquidity of the fund. The FCA has also issued specific guidance to clarify two areas – First, the circumstances in which it may be appropriate to suspend dealing (so, for a fund investing mainly in illiquid assets, the fund manager may suspend dealing before running down the liquidity in the fund, if this is in unit holders’ best interests); and, second, the process for arriving at a fair and reasonable value for an immovable, where it needs to be sold quickly to ensure the fund can meet redemption requests as they fall due.
• Increased disclosure, with new rules requiring additional disclosure in a fund’s prospectus of the details of their liquidity risk management strategies, including the tools they will use and the potential impact on investors; and a standard risk warning to be given in financial promotions to retail clients for such funds. This will apply to all firms communicating a financial promotion, not just the fund manager.

September 30, 2020

Disclosure Regulation

Published in the Official Journal of the EU on  December 9, 2019, the regulation on sustainability-related disclosures in the financial services sector will apply with effect from March 10, 2021.

The regulation requires AIFMs and UCITS Mancos, as well as firms providing MiFID portfolio management services, to include in their pre-contractual disclosures (such as prospectus, offering memorandum, MiFID disclosures etc.) specific disclosures around how they factor sustainability risks into their investment decision making. Information, and policies, also must be disclosed on firms’ websites covering the points above. Furthermore, there is a requirement to incorporate into firm’s remuneration policies how they are consistent with the integration of sustainability risks (and to also publish this on their website). Additional requirements apply if firms manage ESG or products with sustainable investment objectives.

We don’t know at this stage how this will be impacted by Brexit, and there has not yet been any FCA communications regarding how these regulations will be adopted in the UK.

March 10 2021

Changes to the Prudential Rules/CRD IV

The Level 1 Investment Firms Directive & Investment Firms Regulations were published in the EU’s Official Journal on December 5, 2019 and will be effective from June 25, 2021. The FCA has said it intends to publish a discussion paper in January 2020 followed by a consultation paper in Q2 2020. The new regime will apply to all MiFID firms (most likely including CPMIs) and introduces a new framework.

This includes new categorisation of firms:

• Class 1 Systemic/“bank-like” firms that are dealing on their own account, underwriting or placing financial instruments on a firm commitment basis; or whose total AUM exceeds €30bn. Full Capital Requirement Directive (CRD) rules continue to apply to these firms.
• Class 2 “Non-systematic” firms dealing on their own account, or holding client money or assets; or where the AUM is greater than €1.2bn, client orders greater than €100m per day (€1bn for derivatives), balance sheet above €100m, or gross revenues over €30m. Class 2 Firms are subject to the new framework.
• Class 3 Small firms with “non-interconnected” services providing limited services that do not meet the Class 2 thresholds. A simplified version of the new regime applies to these firms.

The base capital requirements, meanwhile, will increase from €50k, €125k and €730k to €75k, €150k and €750k. The rules for Class 2 and 3 firms are as follows:

• Class 2 firms must hold capital that is the higher of the base capital requirement, the fixed overhead requirement (FOR) and the K-factor requirement (see below); must maintain one month of FOR for liquidity purposes; and maintain an ICAAP.
• Class 3 firms must hold capital the higher of the base capital requirement and the fixed overhead requirement (FOR); and maintain one month of FOR for liquidity purposes. Most Class 3 firms will be exempt from maintaining an ICAAP, but the FCA may ask for one to be produced if it is considered appropriate.

K-Factor Formula is a new capital calculation designed to capture the risk a firm’s business may pose to customers; market access or liquidity; and the firm itself.

June 25, 2021

Cross Border Distribution Directive

The Cross Border Distribution Directive aims, among other things, to increase the harmonization of cross-border marketing between both the AIFMD and UCITS regimes on the one hand, and different practices adopted by EU Member States, on the other. It introduces rules regarding the following:

• Pre-marketing of Alternative Investment Funds (AIFs)
• Provisions for AIFs and UCITS being marketed to retail investors
• The process for de-notifying marketing of an AIF or UCITS in a host member state.

Broadly the provision of this directive will only apply to EU, or “authorised”, AIFMs – so a non-EU AIFM marketing via the FCA’s national private placement regime (NPPR) will not be affected, unless the FCA decides to make changes to the NPPR regime in light of the directive.

However, where a non-EU AIFM will be marketing an AIF (EU or non-EU) to retail investors in the EU, this directive introduces requirements for the AIFM to make available, in each member state it markets, certain facilities:

• To process investors subscriptions, redemptions
• To provide information to investors on how orders can be made and redemption proceeds are paid
• To make information available for investors to inspect
• To act as contact point for communication with national competent authorities.

In respect of this provision Member States cannot require the AIFM to have a physical presence in the host member state, nor to appoint a third-party representative.

While the rules took effect 20 days after publication (i.e. August 1, 2019), member states have two years to transpose them into law, giving them until July 12, 2021. There have been no comments from the FCA to date detailing when and how this directive will be transposed into UK law.

July 2021

Transition from LIBOR to SONIA

In 2017, the FCA announced plans to stop compelling banks to submit to LIBOR by the end of 2021. Since then, regulators and market participants around the world have come together to develop comprehensive transition plans.

Regulatory communications have so far focussed on the largest banks and insurers. However, the wide-ranging use of LIBOR within the market means this subject may be relevant to all firms, and they should plan for LIBOR’s cessation.

A joint FCA/PRA statement in June sought to share a number of observations from the work conducted so far and assist firms. It identified eight examples of good practice in Libor transition planning (not all of which will be relevant to all firms):

• Identification of reliance on and use of LIBOR (all firms)
• Quantification of LIBOR exposure (if applicable)
• Granularity of transition plans and their governance (if applicable)
• Identification and management of prudential risks associated with the transition (unlikely to be relevant for most Duff & Phelps clients)
• Identification and management of conduct risks associated with the transition (again, unlikely to concern many clients)
• Scenario planning (if applicable)
• The role of market participants in supporting transition (if applicable)
• Transacting using new risk-free rates and building in fallbacks (if applicable).

The FCA has also published a webpage answering key questions on conduct risk arising from the transition from LIBOR to alternative reference rates. Furthermore, it stated that, where applicable, firms subject to SMCR should identify the senior manager responsible for overseeing the transition away from LIBOR and that this responsibility should be detailed in that senior manager’s statement of responsibilities.

On January 16, 2020, a joint FCA/Bank of England statement confirmed that the market convention for sterling interest rate swaps should be changed from LIBOR to SONIA from March 2, 2020.

End 2021

GABRIEL replacement

The FCA has announced it is planning to improve the way it collects data from authorised firms, which will include replacing GABRIEL.

This work is at an early stage, but forms part of the FCA’s data strategy and will also support its existing work on digital regulatory reporting. These plans are expected to improve the experience of submitting data to the FCA and the quality of information provided. This, in turn, will deepen the FCA’s understanding of both markets and consumers and allow it to identify potential harms and take appropriate action more efficiently.

The FCA is asking all firms who use GABRIEL to complete a survey ahead of a programme of events designed to capture further stakeholder views and test the new platform.

On October 14, 2019, the FCA noted that over 1,000 GABRIEL stakeholders had completed the online survey and highlighted three key areas for improvement:

• Accessing GABRIEL – including the speed of the system and support provided
• Viewing reporting schedule – changes to the layout of schedules
• Submitting data – including better guidance when making data submissions and improved validation.

The survey remains open and the FCA will contact stakeholders when they are ready to test the new platform.

Ongoing

MiFID II reporting errors

A Freedom of Information request made by Duff & Phelps to the FCA (in November 2019) has revealed that 546 firms (around 15% of impacted firms) have admitted to errors in their transaction reporting since January 2018, and 223 firms have been contacted proactively by the FCA.

No enforcement investigations in relation to MiFID II transaction reporting have so far been launched, but this cannot last. The FCA has indicated that it will take a much stricter approach where firms have made no meaningful effort to comply with their obligations.

The FCA also disclosed that only 682 firms (around 18% of those impacted) have requested a data extract from the regulators Market Data Processor system against which to check the accuracy of their reporting.

Given the express obligation in RTS 22 to regularly reconcile front-office trading records against data samples provided by the regulator, it is surprising more firms have not requested these samples.

Ongoing

FCA’s Data Strategy

The FCA has published an updated Data Strategy (its first strategy was published in 2013), which outlines the FCA’s intentions:

• To review historical data, assessing where harm has occurred and drawing lessons for the future
• Improving the way it uses intelligence to better understand harm, and manage it more swiftly
• To improve its use of predictive analytics by spotting patterns and trends across firms, business models and sectors, ensuring it can identify harm and intervene quickly
• Strengthening its analytics capabilities, to help its decision-making and help set priorities
• Sharing data more effectively and streamlining work across the FCA to improve efficiency.

Whilst no action is required by clients in respect of this new strategy, they will start to see some changes linked to it, in particular the replacement of GABRIEL.

Ongoing

Suspicious Activity Reports

On 6 September 2019 the FCA wrote to UK Finance outlining its responsibility and expectations regarding Suspicious Activity Reports (SARs) and Suspicious Transactions and Order Reports (STORs.) This letter was published on its website on 23 October 2019.

Clients should take this opportunity to review their market abuse controls and refresh their understanding of their responsibilities with regards SARs/STORs and the FCA’s expectations.

Ongoing