Investment management update - November 2020

11 November 2020

Welcome to the November 2020 edition of our investment management update. This publication has been tailored to highlight topical news, cases and changes in the law impacting the investment management sector.

Key things to keep an eye out for in this month’s update include:

  • FCA welcomes Financial Services Bill;
  • Dear CEO letter to firms holding client assets;
  • FCA policy statement on extending SM&CR implementation deadlines for solo-regulated firms;
  • New FCA webpage on getting firms ready for LIBOR transition; and
  • FCA updates Brexit temporary transitional directions and explains how it will use the TTP.

Key items

FCA welcomes Financial Services Bill

On 21 October 2020, the Financial Conduct Authority (FCA) published a statement welcoming the Financial Services Bill (the Bill) introduced in Parliament, which will help to maintain high standards and provide greater clarity to firms. In particular, the FCA welcomes the Bill’s provisions to amend the Benchmarks Regulation, which provides the FCA with additional powers to manage and direct an orderly wind-down of critical benchmarks such as LIBOR.

The government intends to use the Bill to make extensive amendments to the legislative and regulatory framework for financial services following the UK's departure from the EU. The Bill also sets out reforms relating to:

  • prudential regulation of credit institutions and investment firms – the Bill will establish the legislative framework for the Investment Firms Prudential Regime and for the UK implementation of the final Basel III standards;
  • access to financial services markets – the Bill will establish the legislative framework for the Overseas Funds Regime and the Gibraltar Authorisation Regime and make amendments to the UK Markets in Financial Instruments Regulation (600/2014) relating to the equivalence regime for third country investment firms; and
  • insider dealing and money laundering – the Bill will amend the UK Market Abuse Regulation (596/2014), increase the maximum sentence for criminal market abuse and amend the Sanctions and Anti-Money Laundering Act 2018 (SAMLA).

The FCA will continue its work with HM Treasury on the reforms during the Bill’s passage through Parliament.

Dear CEO letter to firms holding client assets

On 30 September 2020, the FCA published a Dear CEO letter stressing the importance during the Covid-19 pandemic of firms continuing to maintain adequate arrangements to safeguard client assets that they hold for customers.

This letter is in addition to the Dear CEO Letters on the inappropriate use of Title Transfer Collateral Agreements and increased client money balances.

The FCA identifies a number of areas that are particularly important to maintaining adequate client assets arrangements in the current environment, including the below.

  • Governance and oversight – firms should have adequate governance to identify material risks to their client assets arrangements and ensure monitoring of those arrangements. This includes appropriate oversight by the senior manager with responsibility for client assets.
  • Oversight of third parties and outsourcing arrangements – firms are required to carry out periodic due diligence reviews on third parties holding client assets. If a firm deposits client assets with any institution in the EEA, it should review its due diligence to ensure that client assets will not be subject to increased risk due to any changes arising from the end of the Brexit transition period, and manage the risks accordingly. Where a firm outsources operational functions to third party administrators, the firm remains responsible for discharging its regulatory responsibilities. This includes compliance with the relevant client assets rules.
  • Appointed representatives – firms should ensure that any client money arising from an appointed representative’s activity is received directly into a client bank account of the firm and no client money is held in the name of any appointed representative.
  • Client money held with third party brokers – firms are reminded that client money can be placed with intermediate brokers only to facilitate transactions. They should review the balances held in client transaction accounts to make sure they hold no excess client money.
  • CASS Resolution pack – firms must ensure that they maintain a complete and up to date CASS Resolution Pack, in line with the relevant requirements. This is essential in the event of firm failure to help insolvency practitioners understand the firm’s client assets arrangements and speed up the recovery and return of client assets.
FCA policy statement on extending SM&CR implementation deadlines for solo-regulated firms

On 28 October 2020, the FCA published a policy statement (PS20/12) on extending the implementation deadlines for solo-regulated firms under the Senior Managers and Certification Regime (SM&CR) relating to the certification regime and conduct rules.

The policy statement follows the FCA’s consultation on extending the deadlines in July 2020 in CP20/10. PS20/12 sets out the FCA's final rules and summarises the feedback it received to CP20/10 and its responses. The majority of respondents were supportive of the proposals.

PS20/12 confirms that the deadline for the following requirements is extended from 9 December 2020 to 31 March 2021:

  • the date the conduct rules come into force for staff who are not senior managers, certification staff or board directors;
  • the date by which relevant employees must have received training on the conduct rules;
  • the deadline for submission of information about directory persons to the Financial Services Register; and
  • references in the FCA's rules to the statutory deadline for assessing certified persons as fit and proper.

The text making the Handbook amendments is in the Individual Accountability (FCA-Authorised Firms) (Covid-19 and Extension of Deadlines) Instrument 2020 (FCA 2020/64). The changes affect all FCA solo-regulated firms, aside from benchmark administrators and appointed representatives.

The FCA encourages all firms to meet the original deadline of 9 December 2020 wherever possible. Solo-regulated firms (except benchmark administrators) must have fully implemented the certification regime and conduct rules, and reported information on directory persons by 31 March 2021.

New FCA webpage on getting firms ready for LIBOR transition

On 17 September 2020, the FCA published a new webpage for firms on getting ready for LIBOR transition. On the webpage, the FCA sets out information and actions that all firms need to consider so they can prepare for LIBOR transition.

The FCA recommends firms consider their balance sheet exposure and how affected firms can move their stock of LIBOR linked contracts to alternative risk-free rates.

Boards and senior managers are expected to put necessary arrangements in place to identify their firms’ exposures to LIBOR and to ensure their transition away from LIBOR does not harm their clients or how markets operate.

Firms should conduct an end-to-end inventory of LIBOR exposure, covering the full range of processes and systems. These may include in-house or ancillary systems. Where third-party vendors provide critical systems, firms should get assurance on timely software upgrades to use alternative rates.

Where a firm identifies that the LIBOR transition will affect the finances and product choices available to clients or require a contract amendment or renegotiation, the FCA expects the firm to treat clients fairly and to communicate with them in a clear and timely manner.

FCA updates Brexit temporary transitional directions and explains how it will use the TTP

The Brexit transition period is due to end at 11pm on 31 December 2020, after which onshored legislation will apply. “Onshoring” is the process of amending legislation and regulatory requirements so that they work in a UK-only context, including EU legislation that will form part of UK law by virtue of the European Union (Withdrawal) Act 2018.

The onshoring process means that there will be some areas where the requirements on firms have changed. The Treasury has given the FCA the power to make transitional provisions to financial services legislation for a temporary period. This is known as the Temporary Transitional Power (the TTP).

On 1 October 2020, the FCA published updated draft versions of the main FCA transitional direction (together with revised versions of Annexes A and B) and the FCA prudential transitional direction that it intends to make using its TTP.

The FCA has also published a statement explaining how it intends to use the TTP, set out the full legal effect of the TTP and provided further advice.

The FCA proposes to make the final TTP directions towards the end of the transition period, and expects to publish them in December 2020.


FCA Market Watch issue 65

On 7 September 2020, the FCA published issue 65 of Market Watch, its newsletter on market conduct and transaction reporting issues. This Market Watch addressed issues regarding the confidentiality of FCA information requests, data quality issues in transaction reports and the use of materials which could be subject to legal professional privilege that are submitted as an attachment to a suspicious transaction report (STOR) or market observation.

The FCA has identified further data quality issues in firms’ transaction reports in addition to those highlighted in Market Watch 59 and 62. The FCA has reiterated its expectation that transaction reports are reviewed to verify their completeness and accuracy. The FCA identified the following specific data quality issues:

  • unreported transactions executed in non-EEA listed indices or baskets composed of one or more financial instruments admitted to trading on an EEA trading venue;
  • erroneous reporting of the ultimate underlying instrument for transactions executed in derivatives;
  • inaccurate reporting of trading venue transaction identification codes; and
  • inaccurate reporting of country of branch codes.

The FCA further reminded firms that they should not assume a transaction report is accurate on the basis that it has been accepted by the FCA. This is because the FCA’s validation rules are not intended to identify all potential errors and omissions. The FCA directs investment firms to consider whether their understanding of transaction reporting requirements is sufficient to identify errors where front office reconciliations may not highlight the issue.

The FCA also discusses how inappropriate handling of information requirements issued by it can hinder, or even compromise, its preliminary reviews of, and investigations into, suspected market abuse. The FCA has said that it states clearly in its information requests that the requests should be kept strictly confidential and should not be discussed with staff outside firms’ Compliance departments without the FCA’s prior agreement.

The FCA reminds firms that material that could be subject to legal professional privilege should not be included in STORs or market observations submitted to the FCA and, if it is, participants risk that any claimed legal privilege may be regarded as waived or lost. The FCA recommends that firms should consider seeking independent legal advice if they are uncertain about whether a document is subject to legal professional privilege.

FCA consults on approach to international firms

On 23 September 2020, the FCA published a consultation paper (CP20/20), in which it set out its general approach to international firms providing or seeking to provide financial services that require authorisation in the UK.

The consultation closes to responses on 27 November 2020, following which the FCA expects to publish a finalised document supplementing its existing guidance and explaining its general approach to international firms.

The FCA anticipates an increase in the number of international firms seeking to be authorised in the UK as, after the expiry of the Brexit transition period, EEA firms (who form the majority of international firms in the UK) will no longer be able to use their establishment or services passports to operate in the UK. Subject to anything contained in any potential UK-EU trade agreement, the consultation paper suggests that EEA firms would be treated in the same way as other international firms.

The FCA makes clear that it is not proposing to change existing rules or other provisions in the FCA Handbook through this consultation. Instead, the FCA seeks to explain how it will assess international firms against minimum standards when they apply for authorisation and during ongoing supervision, as well as general expectations for international firms. The FCA also sets out the circumstances where international firms could present higher risks of harm, and how those risks could be mitigated.

The consultation applies to international firms that require authorisation, including:

  • EEA firms that have applied for authorisation in the UK, or intend to seek authorisation in the future, including those which have notified (or intend to notify) for the TPR; and
  • international firms from non-EEA countries that have applied or intend to apply for authorisation in the UK, or are already authorised in the UK.

In its assessment of international firms against the relevant minimum standards, the FCA will consider a number of issues including the:

  • nature of a firm’s operations;
  • firm’s personnel and decision making;
  • firm’s systems and controls; and
  • firm’s home state jurisdiction.

As part of the FCA’s assessment, it considers the international firm’s potential to cause harm and the level of these risks. The FCA has identified three potential risks that are more relevant for international firms, especially those operating from branches: retail harm, client assets harm and wholesale harm.

If the FCA takes the view that an international firm meets the minimum standards, it will authorise the firm. As part of any approval, it may also consider imposing:

  • limitations on a firm’s permitted activities to reduce its potential for harm, or
  • requirements on a firm to require it to take or refrain from taking certain action.

The FCA consultation should also be viewed in the context of the previous supervisory statements published by the Prudential Regulatory Authority (PRA) on the authorisation of international banks and insurers.

FCA announces first firms will move to RegData in October 2020

As anticipated by an FCA announcement on 23 September 2020, an initial group of firms moved from Gabriel to RegData, the FCA’s new data collection platform for gathering regulatory data, over the weekend of 17 and 18 October 2020.

The FCA will continue to move firms to RegData from Gabriel in stages over the coming months, based on their reporting requirements. All firms will receive three direct email reminders from Gabriel advising them of their moving date.

Firms will not be able to access RegData until they and their users’ data have been moved across from Gabriel. Until then, firms should continue to report through Gabriel, using their existing Gabriel login details.

ESMA consults on reference data and transaction reporting obligations under MiFIR

The European Securities and Markets Authority (ESMA) has published a consultation paper containing proposals for possible amendments to the transaction reporting and reference data regime under the Markets in Financial Instruments Regulation (MiFIR). The consultation closes on 20 November 2020 and ESMA intends to submit its final review report to the Commission in Q1 2021.

ESMA is required under Article 26(10) of MiFIR to submit a report to the European Commission on the functioning of Article 26 (which requires investment firms to provide transaction reports), including its interaction with the related reporting obligations under the European Market Infrastructure Regulation (EMIR), and whether the content and format of transaction reports received and exchanged between competent authorities comprehensively enables monitoring of investment firms’ activities in accordance with Article 24 of MiFIR.

The consultation also poses questions relating to the functioning of Article 27 of MiFIR on the supply of financial instruments reference data and of Article 4 of the Market Abuse Regulation on the notifications and list of financial instruments, which ESMA considers to be closely-linked to the issues relating to Article 26 of MiFIR.

The consultation paper covers:

  • the scope of the transaction reporting and reference data obligations. This includes proposals for a possible extension of the scope of reporting in the light of ESMA’s earlier final report on the transparency regime for non-equity instruments and the trading obligation for derivatives and the Benchmarks Regulation;
  • the specific data elements that should be reported under the transaction reporting obligation that are explicitly mentioned in Article 26(3) of MiFIR. ESMA has included proposals as to whether each of these data element should be maintained, removed, replaced or further clarified. ESMA also proposes four additional elements to be included in the set of details to be reported;
  • the order transmission regime and the delegation of the reporting obligation to approved reporting mechanisms;
  • the interaction with reporting obligations under EMIR, and proposals to ensure further alignment between the two reporting regimes; and
  • use of the legal entity identifier of the issuer of the financial instruments for reference data reporting purposes.
Draft Bearer Certificates (Collective Investment Schemes) Regulations 2020 published

On 28 September 2020, a draft version of the Bearer Certificates (Collective Investment Schemes) Regulations 2020 (the Regulations) was published on, together with an explanatory memorandum. The Regulations are due to come into force on 1 January 2021.

The Regulations amend the Financial Services and Markets Act 2000 to prohibit bearer certificates for all collective investment schemes (CISs) based in the UK. They also include a provision for converting or cancelling existing bearer certificates within a year of the Regulations coming into force, the payment of dividends or other distributions during that year, and giving notice to those who hold bearer certificates. The Regulations close a technical loophole that still allowed certain CISs to issue bearer certificates.

The Regulations supplement Regulation 48 of the Open-Ended Investment Companies Regulations 2001, as amended by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which already prohibits certain UK authorised open-ended investment companies from issuing bearer shares.

FCA perimeter report 2019/20

On 29 September 2020, the FCA published its Perimeter Report 2019/20, which provides an update on the issues raised in its 2018/19 report.

The three broad challenges which the FCA identified in its 2018/19 report remain unchanged: customer confusion over how they are protected in case things go wrong; firm activity outside the perimeter affecting the FCA’s public interest objectives; and swiftly evolving markets and business models.

The 2019/20 report highlights potential perimeter issues relating to:

  • speculative illiquid securities (including speculative minibonds);
  • unregulated mortgage book purchasers and unregulated introducers;
  • mass marketing of high-risk investments to retail consumers;
  • lending to SMEs;
  • credit-like products and unregulated lead generators in the debt advice and debt solutions markets;
  • cryptoassets; and
  • developing payment markets business models.
ESMA guidelines on liquidity stress testing

As foreshadowed by the September 2019 edition of our investment management update, the ESMA guidelines on liquidity stress testing (LST) in UCITS and AIFs have applied since 30 September 2020. The guidelines aim to increase the standard and consistency of LST by providing guidance on the design of models, governance and policies, and frequency of LST.

The FCA expects fund managers and depositaries to have regard to the guidelines, according to the nature, scale and complexity of the fund, when conducting LST as required by the UCITS and AIFMD Directives.

ESMA updates reporting instructions for MMF Regulation

On 2 October 2020, ESMA announced that it had published updated reporting instructions under the Money Market Funds Regulation (MMF Regulation).

Article 37 of the MMF Regulation requires money market fund managers to submit data to their national competent authorities who will then transmit the data to ESMA.

Following feedback received by market participants after publishing the validation rules, ESMA has decided to implement amendments on the validations. The changes only add new warning type validations or provide clarifications on existing validation rules to fix inconsistencies or ease the understanding of the rules.

As the updates in the validation rules have no effect on data processing, the deadline for reporting remains unchanged.

FCA fines ARCM £873,118 for breaches of short selling disclosure rules

On 14 October 2020, the FCA fined Asia Research and Capital Management Ltd (ARCM) £873,118 over transparency failures for the reasons given in a Final Notice. The firm failed to notify the FCA and disclose to the public its net short position in Premier Oil Plc, which it built between February 2017 and July 2019 in breach of the Short Selling Regulation 2012 (the SSR). This is the first time the FCA has taken enforcement action for a breach of the SSR.

Between February 2017 and July 2019, ARCM failed to make 155 notifications to the FCA and 153 disclosures to the public of its net short position in Premier Oil. By 5 July 2019, ARCM had built a net short position equivalent to 16.85% of the issued share capital in Premier Oil, which was then held by ARCM for a further 106 trading days before being notified to the FCA and disclosed to the public.

The FCA considers ARCM’s failings to be particularly serious given:

  • the failures to comply with its obligations under the SSR were multiple, and occurred over a long period of time;
  • ARCM did not inform the FCA promptly upon discovering its failure to comply with the relevant obligations under the SSR, and instead notified the Authority only after it had reviewed and collated the relevant data for disclosure; and
  • the size of the position (as demonstrated by the fact that, as at the date of the Final Notice, ARCM’s final net short position was the largest net short position held in an issuer admitted to the FCA’s Official List with shares admitted to trading on the Main Market of the London Stock Exchange).

ARCM agreed to resolve the matter and qualified for a 30% discount under the FCA’s executive settlement procedures. Were it not for this discount, the FCA would have imposed a financial penalty of £1,247,312.

European Commission consults on ELTIF Regulation review

On 19 October 2020, the European Commission launched a consultation relating to its review of the Regulation on European long-term investment funds (ELTIFs). The deadline for responses to the consultation is 19 January 2021.

Despite the ELTIF legal regime being adopted in 2015, only around 28 ELTIFs have been established, with an asset base below 2 billion euros. This relatively low uptake of the ELTIF regime supported the European Commission’s view of the need for a public consultation on the functioning of the ELTIF regime.

In the consultation, the European Commission seeks views on issues grouped under headings including:

  • scope of the ELTIF authorisation and process;
  • investment universe, eligible assets and qualifying portfolio undertakings;
  • borrowing of cash and leverage; and
  • rules on portfolio composition and diversification.

The European Commission seeks submissions from all stakeholders, including market participants, such as asset managers, investment firms, institutional and retail investors and consumer and investor organisations.

Macfarlanes will continue to maintain its involvement with the Alternative Credit Council’s ELTIF working group in an effort to ensure that any legislative changes lead to material improvement in the ELTIF framework.

European Commission consults on AIFMD review

On 22 October 2020, the European Commission launched a consultation relating to its review of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD). The deadline for responses to the consultation is 29 January 2021. The consultation webpage indicates that, in Q3 2021, the Commission intends to put forward a legislative proposal amending the AIFMD in the form of a Directive.

The consultation is divided into sections that focus on authorisation, investor protection, international issues, financial stability, investment in private companies and stability. There are a number of questions about delegation, with the Commission specially asking whether the delegation rules are sufficiently clear to prevent the creation of letterbox entities in the EU. The Commission also asks whether delegation rules should be "complemented" by way of quantitative criteria, or a list of core or critical functions that would always be performed internally.

Through the consultation, the Commission will examine how to strengthen the rules and complete the internal market for alternative investment funds, through potential changes to the AIFMD. The Commission notes that the process may also lead it to adjust the existing EU rules on UCITS.

We have also separately considered in more detail the topics of greater interest to UK fund sponsors:

  • delegation arrangements;
  • national private placement regimes; and
  • the effectiveness of the asset-stripping rules for those running private equity strategies.
FCA Handbook Notice 81

The FCA has published Handbook Notice 81, which sets out changes to the FCA Handbook made by the FCA board on 23 July, 30 September and 22 October 2020. Handbook Notice 81 also sets out the FCA’s feedback on a number of quarterly consultation papers.

The Handbook Notice reflects changes made to the Handbook by a number of instruments including:

  • Technical Standards (Securities Financing Transactions Regulation) (EU Exit) (No 1) Instrument 2020 (FCA 2020/51) and Technical Standards (Securities Financing Transactions Regulation) (EU Exit) (No 2) Instrument 2020 (FCA 2020/52);
  • Technical Standards (Markets in Financial Instruments Regulation) (EU Exit) (No 3) Instrument 2020 (FCA 2020/56); and
  • Handbook Administration (No 54) Instrument 2020 (FCA 2020/61).


Phased ending of FCA temporary relief extending deadlines for publishing fund reports and accounts

On 9 September 2020, the FCA updated its webpage on extending deadlines for publishing fund reports and accounts.

By way of background, in April 2020 the FCA published a statement giving managers of authorised funds extra time to produce their annual and half-yearly fund reports and accounts (including assessment of value reports, where applicable) due to the operational challenges arising from the COVID-19 pandemic.

The policy was intended to be temporary and the FCA considers that firms have now had time to adjust to the changed environment. Accordingly, it intends to end the temporary relief in stages over the coming months as follows.

  • Funds with an annual or half-yearly accounting date on or before 31 August 2020 – the temporary relief will remain in place. For example, this means for an authorised fund manager of a UK UCITS scheme, relevant annual reports would need to be published at the latest by 28 February 2021 instead of 31 December 2020. Relevant half-yearly reports would need to be published at the latest by 30 November 2020 instead of 31 October 2020.
  • Funds with an annual or half-yearly accounting date on or before 31 September 2020 (but after 31 August 2020) – one month’s relief will be permitted where necessary. For example, this means for an authorised fund manager of a UK UCITS scheme, relevant annual reports would need to be published at the latest by 28 February 2021 instead of 31 January 2021. Relevant half-yearly reports would need to be published at the latest by 30 December 2020 instead of 30 November 2020.
  • Funds with an annual or half-yearly accounting date after 30 September 2020 – the temporary relief will expire and no extra time will be provided. The FCA expects relevant reports to be published in line with the usual timelines (the “existing timeframes” section on the webpage summarises fund managers’ obligations in this regard).

This phased process will bring an end to the temporary relief. Over the coming months, the FCA will continue to monitor the situation. Firms are asked to raise any questions with their FCA supervisor in the first instance.

ECON draft report on proposed Directive amending MiFID II Directive

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report on the proposal for a Directive amending the MiFID II Directive as regards information requirements, product governance and position limits, to help the recovery from the COVID-19 pandemic.

The draft report, prepared by Rapporteur Markus Ferber, contains a draft European Parliament legislative resolution, which sets out amendments to the draft legislative proposals. The explanatory statement to the draft report explains the amendments, which cover disclosure of costs and charges, best-execution reports, product governance, ex-post information about costs and charges, professional investors, the loss reporting threshold, research and the ancillary activity exemption.

The proposal for a Directive, published in July 2020, is designed to contribute to the EU’s recovery by facilitating investments in the real economy and freeing up resources for both firms and investors.

FCA extends flexibility over 10% depreciation notifications

On 30 September 2020, the FCA announced a further six-month extension to the temporary Covid-19 measure applying supervisory flexibility over 10% depreciation notifications.

The FCA is amending its extension of the previous flexibility regarding professional investors. For services offered to professional investors, from Thursday 1 October 2020 the FCA will not take action for breach of COBS 16A.4.3 EU, provided that firms have allowed professional clients to opt-in to receiving notifications.

FCA updates statement on firms' complaint handling

On 20 October 2020, the FCA updated its statement on firms' handling of complaints during the Covid-19 pandemic. The statement was first published in May 2020 and the FCA intends to review the statement again by the end of April 2021 at the latest.

The FCA considers that although firms’ operations continue to be affected, firms have now had enough time to embed new ways of working, and, accordingly, a failure to comply with the FCA’s complaint handling requirements should only arise in exceptional circumstances connected to the impact of coronavirus.

The FCA reminds any firm facing difficulties complying that it should inform its usual supervisory contact and advise the FCA of the steps it is taking to manage and address its non-compliance.


Sterling Working Group publishes documents supporting transition of existing sterling LIBOR-linked cash products

In order to support a timely transition away from use of LIBOR ahead of the end of 2021, the Working Group on Sterling Risk-Free Reference Rates (the Working Group) has recommended that lenders prepare to offer non-LIBOR linked products to their customers, and work with their customers to include clear contractual arrangements to facilitate conversion of all new or refinanced LIBOR-linked products to SONIA, or other alternatives, ahead of end-2021.

By the end of March 2021, the Working Group recommends lenders to cease new issuance of all sterling LIBOR-linked loan products expiring after the end of 2021.

In order to support firms in the transition of their existing sterling LIBOR linked contracts, the Working Group published the following documents.

  • Paper on active transition of sterling LIBOR-referencing loans: this paper sets out steps lenders and borrowers can take to amend their existing sterling LIBOR-linked loans (including identifying the alternative rate, considering whether systems and operations are ready and documenting the transition).
  • Paper on active transition of sterling LIBOR-referencing bonds: this paper sets out how issuers might consider transitioning legacy transactions by way of consent solicitation.
  • A formal recommendation on the appropriate credit adjustment spread to be used in fallbacks for cash products referencing sterling LIBOR: the Working Group recommends using a historical five-year median spread adjustment methodology to calculate the credit adjustment spread to be applied to the SONIA rate chosen or recommended to replace sterling LIBOR under contractual fallback and replacement of screen rate clauses following permanent cessation or pre-cessation trigger events.


FCA reopens notification window for temporary permissions regime until end 30 December 2020

On 30 September 2020, the FCA published an updated webpage on the temporary permissions regime (the TPR). EEA firms and fund managers should be aware that they have until 30 December 2020 to notify the FCA if they wish to use the TPR via the Connect system.

Firms that have already submitted a notification do not need to take any further action. Fund managers that want to update a previously submitted notification should email the FCA by the end of 9 December 2020 at the latest confirming this (and include their FRN in the email). They should expect to be able to submit updated notifications from 14 December 2020. However, fund managers should only submit updated notifications when they are certain that all the correct funds are included. Updated notifications must be received by the FCA by 30 December 2020.

If new funds have been added to a fund manager’s population since an earlier notification was submitted, the new funds will not be included in the temporary marketing permission regime unless the fund manager requests to update their notification and include the new funds in that updated notification.

FCA updates webpage on considerations for firms preparing for end of Brexit transition period

On 30 September 2020, the FCA updated its webpage on Brexit considerations, setting out issues for UK firms to consider as they prepare for the end of the transition period on 31 December 2020.

The FCA has added a section relating to client money and custody assets. This section states that:

  • firms are required to carry out periodic due diligence reviews on third parties holding client money or custody assets (or both);
  • if a firm deposits client money or custody assets (or both) with any institution in the EEA, it should review its due diligence to ensure that client assets will not be subject to increased risk due to any changes arising from the end of the transition period, and manage the risks accordingly; and
  • firms should make sure that existing safeguards and protections for client assets, especially in the event of insolvency, remain effective from the end of the transition period.
FCA updates Handbook to reflect Brexit amendments and publishes instruments applying at end of Brexit transition period

On 1 October 2020, the FCA announced that it had updated its Handbook to reflect the amendments relating to Brexit that will come into effect at the end of the transitional period at 11.00 pm on 31 December 2020 (IP Completion Day).

The FCA Handbook has been updated to, amongst other things, reflect amendments relating to Brexit, incorporate the instruments relating to Brexit that will come into effect on IP Completion Day and set out the consolidated texts of the onshored binding technical standards for which the FCA is responsible.

The FCA has also published a guide to the revised version of the Handbook, intended to assist users to navigate the Handbook in preparation for and following the end of the transition period.

New webpage on BoE and PRA TTP and general guidance on use of transitional directions

On 1 October 2020, the PRA and the Bank of England (the BoE) published a webpage providing firms and financial market infrastructures with information on the BoE’s and PRA’s approach to the TTP.

The TTP allows the UK’s financial services regulators to delay or phase-in onshoring changes to UK regulatory requirements arising at the end of the transition period. The BoE and PRA intend to use the TTP to provide broad transitional relief, with certain exceptions, for 15 months after the end of the transition period, until 31 March 2022.

The BoE and PRA have also published general guidance on the BoE’s transitional direction and general guidance on the PRA’s transitional direction. The guidance documents support the draft transitional directions published as part of their consultation on changes to their rules, binding technical standards, and the use of temporary transitional powers required before the end of the Brexit transition period. The final versions of the guidance will be published closer to the end of the transition period.

ESMA updates statements on impact of Brexit on BMR, MiFID II Directive and MiFIR

On 1 October 2020, ESMA updated previous statements issued in March and October 2019 setting out its approach to applying key provisions in the MiFID II Directive, MiFIR and the Benchmarks Regulation (BMR) in light of the possibility of no trade agreement being reached between the UK and the EU.

The first statement sets out the consequences of Brexit for the ESMA register for benchmark administrators and third-country benchmarks under the BMR.

The second statement is ESMA’s approach under MiFID II to the C(6) carve-out, the ESMA opinions on third-country trading venues for the purpose of post-trade transparency, and the position limits regime and post-trade transparency for OTC transactions. The statement also covers the implementing technical standards on main indices and recognised exchanges under the Capital Requirement Regulation.

HM Treasury consults on post-EU financial services regulatory framework

On 19 October 2020, HM Treasury published a consultation paper relating to Phase II of its Financial Services Future Regulatory Framework Review. HM Treasury seeks views on proposals for the post-EU financial services regulatory framework. The consultation closes on 19 January 2021.

The consultation forms part of HM Treasury's review into the long-term future of the financial services regulatory framework following the UK's departure from the EU. Phase I of the review concluded in March 2020 following HM Treasury's announcement of the establishment of the Financial Services Regulatory Initiatives Grid and the Financial Services Regulatory Initiatives Forum.

Among other things, HM Treasury is considering adapting the current Financial Services and Markets Act 2000 regulatory framework by:

  • providing for a clear division of responsibilities between government, Parliament and the regulators. Government and Parliament will be responsible for setting the policy framework while the regulators will be largely responsible for setting the requirements that apply to financial services firms and markets, which means that the majority of retained EU provisions will be transferred to regulators' rulebooks; and
  • setting out in legislation the overall purpose and regulatory approach needed for particular areas of regulated activity. When consulting on changes to rules, the regulators will be required to explain how their proposals meet the statutory purpose set for a particular regulatory regime and have taken into consideration activity-specific regulatory principles.

HM Treasury is also reviewing cooperation and coordination arrangements between government and the regulators, as well as the existing accountability, scrutiny and public engagement arrangements that currently apply to financial services regulation. In particular, it considers the role played by Parliament, the relationship between the regulators and itself and potential improvements to engagement by stakeholders in the policy-making process.

New FCA webpages on preparing for Brexit: market making exemptions and net short positions reporting

On 28 October 2020, in the context of firms preparing for Brexit, the FCA published a new webpage on market making exemptions. The Short Selling Regulation (236/2012) (SSR), including the market making exemption, will continue to apply until the end of the transition period. Firms that intend to use market making exemptions from January 2021 need to notify the FCA before the end of the transition period on 31 December 2020.

The FCA has also published a new webpage on net short positions reporting which sets out what firms that report net short positions need to do during and after the transition period. During the transition period, the FCA expects holders of net short positions to continue to report to it at the existing reporting thresholds. Under the UK SSR (the onshored SSR), position holders will be required to report their net short positions in shares at the 0.20% threshold. The webpage also includes information on the UK list of exempted shares and electronic submissions.