Wed, Mar 10, 2021

Regulatory Focus - March 2021

In this edition of Regulatory Focus, Duff & Phelps’ compliance experts round up the news and publications from the Financial Conduct Authority during January and February 2021.
SM&CR Deadline is Approaching

A reminder to firms that March 31, is fast approaching and is the deadline for:

  • Training your Conduct Rule staff
  • Certifying your Certified staff
  • Notifying the FCA of your Directory Persons

If you need any help with SM&CR, please contact us.

Principals for PRI Reporting

We have been writing recently about ESG matters and the EU’s Sustainable Finance Disclosure Regulation (SFDR) which comes in on March 10. Please see the article in this publication about the Regulatory Technical Standards that support SFDR.

Where firms are signatories of the Principals for Responsible Investment (PRI), an organization supported by the UN, the reporting cycle is now live. This is a pilot year for the PRI’s new reporting platform and the PRI is looking for feedback from signatories.

If you would like assistance with your PRI reporting, please contact us.

Firms to Update or Confirm their Details Annually

We remind firms of the requirement to review their firm details on the Financial Services Register at least annually, and either confirm its accuracy or amend it if necessary, using the FCA’s Connect system. This needs to be done within 60 business days of a Firm’s Accounting Reference Date and applied from January 31, 2020.

Firms that have not confirmed their firm details in the last 12 months have seen a notice appear on the Financial Services Register to this effect.

Joint ESAs Final Report on draft Regulatory Technical Standards on Disclosures under the SFDR

The European Supervisory Authorities (ESAs) published their final report on the draft regulatory technical standards (RTS) for the Sustainable Finance Disclosure Regulation (SFDR) on February 4, 2021. The ESAs first published draft RTS for consultation in April 2020 and received significant industry feedback. The European Commission is expected to endorse the RTS within three months of their publication, and the ESAs have recommended that the final revised RTS take effect from January 1, 2022. 

The revised RTS provide technical detail and specification on how the Level 1 SFDR requirements must be applied by impacted firms. A number of significant changes and clarifications are provided within the revised RTS:

  • The number of mandatory indicators for the principal adverse impacts on sustainability factors has been significantly reduced from 32 to 14. Many of the original 32 indicators are now included in the list of additional indicators. Separate mandatory indicators have been provided for investments in sovereigns and real estate assets. 
  • There is a new disclosure requirement in relation to the actions taken to reduce or avoid principal adverse impacts. Financial market participants (FMPs) must describe the actions taken, together with actions planned or targets set for the next reference period.
  • A template format is provided for the required content and presentation of pre-contractual disclosures for Article 8 and Article 9 products. These are to be provided in a separate annex and sign-posted in the main body of the pre-contractual disclosure document. The template will necessarily apply to a widely varying set of pre-contractual disclosure documents and is generally seen as a sub-optimal “one size fits all” approach by the ESAs.
  • The revised RTS clarify that FMPs should “look-through” to the underlying investments of investee companies when assessing the adverse impacts of investment decisions. This will be relevant where, for example, the investee company is a fund or special purpose vehicle. If FMPs don’t have sufficient information to assess adverse impacts on a “look-through” basis, then they will not be able to hold themselves out to investors as considering the principal adverse impacts of their investment decisions on sustainability factors.
  • There is a new recital (Recital 22) relating to financial products that promote environmental or social characteristics, which has generally been perceived as both confusing and unhelpful in preventing greenwashing. The Recital 22 provisions potentially broaden the scope of the financial products required to make Article 8 product disclosures. Firms with such products should revisit how they plan to categorize such products for SFDR purposes.

Firms should start considering the impact of the revised RTS and planning for the implementation of these from January 1, 2022. Firms who are voluntarily complying with aspects of the Level 2 RTS prior to January 1, 2022, should review the revised RTS and assess what action is required. Please contact us if you would like to discuss how we can assist you with SFDR and ESG implementation.

You can read the full final report published by the ESAs here.

MiFID II: Product Governance Review

The FCA has published its findings following a thematic review of product governance arrangements at eight asset management firms. It examined how these firms apply the FCA’s product governance rules throughout the product lifecycle. 

The FCA’s view is that compliance with the product governance rules enables asset management firms to comply with the requirement to act in the best interests of the funds that they manage and the investors in the funds.

All the products assessed were UK-authorized collective investment schemes, available to retail investors through platforms on both an advised and an ‘execution-only’ basis.

The FCA’s review suggests that some asset managers are not undertaking product governance in line with its expectations.

Only one product manufacturer reviewed had considered the ‘negative target market’ concept. However, it could not identify the specific group of consumers that would be a 'negative target market’ for its products.

The FCA still see areas where firms need to improve their costs and charges disclosures. Some cost information shown in marketing documents did not match the information shown in regulatory documents such as the Key Investor Information Document.

The FCA observed variable standards of due diligence over distributors. All asset managers faced challenges in getting end-client data from distributors, even when they specifically asked for this information.

All asset managers had product governance committees, but some fell short of the FCA’s expectations. The role of the second line of defence was often poorly defined, resulting in a lack of meaningful challenge. 

Following the review, the FCA is considering whether to make changes to its product governance rules and guidance. 

Please find a link to the review here.

FCA Publishes COVID-19 Financial Resilience Survey Data

The FCA published the results from surveys sent to 23,000 solo-regulated firms in the Summer of 2020 to monitor and assess the impact of the coronavirus pandemic on their financial health and resilience. 

Sheldon Mills, Executive Director of Consumers and Competition, acknowledged that “a market downturn driven by the pandemic risks significant numbers of firms failing”. He noted that at the end of October 2020, the FCA had identified 4,000 small and medium sized regulated firms with low financial resilience and at a higher risk of failing.

The key findings from the surveys include the following:

  • Between February 2020 (pre-lockdown) and May / June 2020 (during the impact of the first lockdown), firms experienced a significant change in their total amount of liquidity.
  • 59% of firms expected the pandemic to have a negative impact on their net income. 
  • The Payments and E-money sector has the lowest proportion of profitable firms, followed by Wholesale Financial Markets, Investment Management, Insurance Intermediaries and Brokers, Retail Lending and Retail Investments.
  • Proportionately, the Retail Lending sector has used the available government support, such as the furlough scheme and government-backed loans, the most.

The FCA advised caution in relying on the data to make predictions and it also noted that the surveys were undertaken prior to the extension of the furlough scheme, the progress in vaccine development and before the introduction of further national restrictions. 

The FCA confirmed that it will repeat the survey as the pandemic continues to develop. To read the full article, click here.

MoUs with European Authorities

The FCA published an article detailing the Memoranda of Understanding (MoUs) between the FCA and European authorities in the areas of securities, investment services and asset management, insurance and pensions, and banking, which came into effect on January 1, 2021. The MoUs, which cover cooperation and exchange of information, are: 

  1. A multilateral MoU with EU and EEA National Competent Authorities (NCAs) covering supervisory cooperation, enforcement and information sharing relating to a range of investment related activities.
  2. An MoU with the European Securities and Markets Authority (ESMA) covering supervision of credit rating agencies and trade repositories.
  3. A multilateral MoU with EU and EEA NCAs covering supervisory cooperation, enforcement and information exchange regarding insurance regulation/supervision.
  4. An MoU with the European Insurance and Occupational Pensions Authority (EIOPA) covering information exchange and mutual assistance in the field of insurance regulation/supervision.
  5. An MoU with the European Banking Authority (EBA) covering information exchange and mutual assistance in the field of banking.
  6. Individual MoUs with EU and EEA NCAs which can be found on the Prudential Regulation Authority (PRA) website.

To read the article in full, click here.

Completing Sterling LIBOR Transition by End-2021

The LIBOR administrator, ICE Benchmark Administration, has consulted on ceasing publication of all sterling LIBOR settings at the end of 2021, leaving firms with less than a year to remove their reliance on LIBOR benchmarks. 

The Working Group on Sterling Risk-Free Reference Rates has recommended that, after the end of March 2021, firms no longer:

  • Use sterling LIBOR in any new lending or cash product which matures after the end of 2021.
  • Initiate new linear derivatives linked to sterling LIBOR, other than for risk management of existing positions or where they mature before the end of 2021.

The Working Group has published an update to its priorities and roadmap for this final year of transition away from LIBOR. Supervisors of regulated firms expect transition plans to be executed in line with industry-recommended timelines across sterling and other LIBOR currencies.

It is widely anticipated that most sterling markets will be based on SONIA, compounded in arrears. In addition, term SONIA reference rates (TSRRs) are beginning to be made available by providers. 

The full FCA press release can be read here.

ESMA Reminds Firms of the MiFID II Rules on Reverse Solicitation

The European Securities and Markets Authority (“ESMA”) has highlighted some dubious practices by firms around the use of reverse solicitation since the end of the transition period. ESMA has issued a Public Statement to remind firms of the MIFID II requirements regarding the provision of investments services to retail and professional clients by those firms not established in the European Union.   

ESMA states that “where a third-country firm solicits clients or potential clients in the Union or promotes or advertises investment services or activities together with ancillary services in the Union, it should not be deemed as a service provided at the own exclusive initiative of the client”. This is true “regardless of any contractual clause or disclaimer purporting to state, for example, that the third country firm will be deemed to respond to the exclusive initiative of the client”. ESMA has found that a number of firms are aiming to circumvent the rules by adding clauses to terms of business or via adding an ‘I agree’ box to online systems whereby clients essentially state that the transaction has been executed at the exclusive initiative of the client.  

There is a risk that service providers could be subject to administrative or criminal proceedings should investment services be provided in the EU without proper authorisation. Investors may also lose the protections granted to them under EU relevant rules in such a scenario.

Please click here to read the public statement.  

Supreme Court judgment on FCA’s Business Interruption Insurance Test Case

The Supreme Court has substantially allowed the FCA’s appeal on behalf of policyholders who have claimed for coronavirus-related losses under business-interruption insurance. This follows a High Court decision in September 2020 that these losses were covered by such insurance policies, which was appealed by the six impacted insurers.

The Supreme Court judgement is complex, running to 112 pages, but the key points include: 

  • Cover may be available for partial closure of premises (as well as full closure) and for mandatory closure orders that were not legally binding;
  • Valid claims should not be reduced because the loss would have resulted in any event from the pandemic;
  • Two additional policy types from insurer QBE also provide cover.

The details of this judgement may be of interest to firms who have business interruption insurance and have suffered an interruption to business due to the coronavirus pandemic.

The Supreme Court’s judgement can be found here and will be distilled into a set of declarations; in addition the FCA will publish a set of Q&As for policyholders as soon as possible. Further information for policyholders can be found here.

The FCA’s press release can be found here.

FCA Reminds Firms to Regularly Review Regulatory Permissions

The FCA has reminded firms to regularly review their regulatory permissions to make sure they are up to date.

The FCA expects to be notified in a timely manner of any material changes and reminds firms that if they have not carried out any regulated activities for 12 months or more, this could result in their Part 4A Permissions being removed. 

New powers under the Financial Services Bill are currently being discussed in Parliament which mean that the FCA will be able to act more quickly where it believes that firms are not carrying out any regulated activities. 

Firms are required to provide accurate and timely information to the FCA, so that the Financial Services Register, which is a valuable source of information for both consumers and firms, is kept up to date. The FCA  said that incorrect or outdated permissions can increase the risk of harm to consumers, can mislead consumers about the level of protection offered or give credibility to unregulated activities. 

Read the latest guidance here

Half of Reporting Firms Moved to RegData

50% of firms who previously submitted their regulatory reporting on Gabriel are now using RegData, the Financial Conduct Authority’s (FCA) new portal for data collection. 

The FCA began moving firms to RegData in October of last year, with firms’ moving dates determined by their reporting obligations and schedules. Users will use the same username and password for Connect and RegData, and firms must enable this by logging into Gabriel and completing a short one-time registration ahead of their move. The regulator will continue to move remaining firms across in stages. Firms will not be able to access RegData until the FCA moves their users across from Gabriel. Until then, they should continue to submit their regulatory reports through Gabriel. 

For more information, please click here.  

Insider Dealer Ordered to pay £3.9 million in Confiscation

The FCA has successfully obtained a consent confiscation order against a day trader, who was recently sentenced to three years imprisonment for Insider Trading. Interestingly, the total amount confiscated exceeds the profits generated from the prosecuted offences. This is because the court can assume that profits from other trading also represent proceeds of crime. The FCA press release can be read here.

LIBOR Transition from end-2021 

Edwin Schooling Latter, Director Markets and Wholesale Policy at the Financial Conduct Authority (FCA), delivered a speech at City & Financial’s Managing LIBOR transition event.

Mr Schooling Latter highlighted that most of the industry has risen to the challenge of transitioning away from LIBOR.

The FCA estimates that 85% of the uncleared UK derivatives market is ready for the end of LIBOR as 12,500 firms have signed the ISDA protocol, a fallback arrangement for LIBOR’s cessation.

Last year, LIBOR’s administrator, ICE Benchmark Administration (“IBA”), consulted on its proposal for an end to all 35 of the LIBOR currency-tenor settings. The consultation has now closed. Based on the feedback received, the IBA will advise the FCA on how it intends to proceed in relation to the future path for all five LIBOR currencies simultaneously.

Mr Schooling Latter encouraged users of LIBOR to press ahead with transition plans in their new business and their legacy LIBOR books.

Please find a link to the full speech here.

FCA and FRC joint Statement on Extended Financial Information Timelines Continue to Apply

The FCA and Financial Reporting Council (FRC) have issued a joint statement reminding companies of the measures available to them in light of the pandemic. These measures allow flexibility in the preparation and publication of financial information. This includes a two-month extension for listed companies to publish their audited annual financial reports. The FCA and FRC encourage the boards of listed companies to engage with these measures to ensure the ongoing integrity of their financial reporting.

The reminder also highlights the importance of ensuring ongoing compliance with the Market Abuse Regulation – specifically, the need for firms to continue identifying and assessing inside information, and the importance of ensuring the market is kept up to date during the pandemic.

The reminder also sign-posts a series of guidance published by the FRC which is designed to support the reporting and disclosure of circumstances that companies have experienced due to the pandemic, along with the mitigants in place to manage associated risks.

Read the full article here.

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