Investment management update - March 2021

17 March 2021

Welcome to the March 2021 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:

  • HM Treasury call for input on review of UK funds regime;
  • FCA reports on asset management product governance review;
  • Joint Committee of ESAs statement on application of SFDR; and
  • FCA finalises guidance on fair treatment of vulnerable consumers.



HM Treasury call for input on review of UK funds regime

On 26 January 2021, HM Treasury published a call for input on its review of the UK funds regime. The deadline for comments is 20 April 2021. The government will analyse responses and consult on any specific proposals for reform.

The call for input sets out the scope and objectives of the review and invites stakeholders to provide views on which regulatory and taxation reforms should be taken forward and how these should be prioritised. In particular, the call for input seeks stakeholder views on the potential new Long Term Asset Fund, more information on which can be found in the Q&A with Lora Froud.

The overarching objective of the call for input  is to identify options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors' needs.

ESMA highlights priority areas for ELTIF Regulation review

On 3 February 2021, ESMA published a letter it has sent to the European Commission, highlighting the areas where it considers improvements could be made to the Regulation on European long-term investment funds (ELTIF Regulation).

ESMA believes that the use of the ELTIF, as an alternative vehicle to increase European long-term investments in the real economy, is not yet fully succeeding. ESMA believes that bringing ELTIFs more in line with the needs of investors, both retail and professional, would make it a more attractive investment vehicle for professional investors, as well as a savings' placement alternative for retail investors. It considers that the review of the ELTIF framework should aim to achieve the right balance between encouraging participation by retail investors while ensuring adequate standards of protection.

Importantly, in Annex II to the letter, ESMA sets out its proposed changes to the ELTIF Regulation, addressing issues including:

  • extending and clarifying the scope of an ELTIF’s eligible assets and investments;
  • the authorisation process, in particular the possibility of removing the separate ELTIF authorisation; and
  • portfolio composition and diversification, in particular lowering the number of investments which can be made by ELTIFs to which only professional investors have subscribed.
FCA speech: why does the FCA care about diversity and inclusion?

On 28 January 2021, the FCA published a speech given by Georgina Philippou, Senior Adviser to the FCA on the public sector equality duty, on why the FCA cares about diversity and inclusion.

In particular, Ms Philippou’s speech:

  • commented on the importance of safe cultures and its key role in supporting inclusion. Ms Philippou stated that “without an inclusive culture, the value of diversity will not be realised. Without inclusion, diversity will not lead to better decision making. Without inclusion, we will not be able to meet the needs of all consumers.”;
  • emphasised that the FCA wants to see a healthy financial services industry with cultures that reduce the potential for harm. She noted that “how a firm prioritises and embeds diversity and inclusion are clear indicators of its culture… There is no one size fits all model and we cannot prescribe what any firm’s culture should be, but it is the responsibility of us all, of everyone in the financial services industry, to create and maintain cultures which embody diversity and inclusion.”;
  • set out four key drivers which the FCA considers to be common elements of a healthy culture: a meaningful purpose; an appropriate governance structure to facilitate good decision making; effective leadership including the tone from the top; and people policies that incentivise behaviours which create an inclusive environment; and
  • recognised that crucial to harnessing an inclusive culture is creating an environment where employees feel safe to share ideas and speak up. Leaders must actively recognise how their behaviour and actions can influence and support an environment of psychological safety and collaboration.

We have considered the speech in greater detail in our blog.

FCA reports on asset management product governance review

On 26 February 2021, the FCA published a report on its review of product governance in a sample of asset management firms.

The review examined how eight asset management firms, as product providers (manufacturers), take into account the product governance rules in the FCA's Product Intervention and Product Governance sourcebook (PROD) throughout the product lifecycle. In particular, the FCA:

  • found that some asset managers are not undertaking activities in line with PROD, noting that there is “significant scope” for asset managers to improve product governance arrangements; and
  • noted specifically that distributors rarely pass necessary information on the end consumers on to manufacturers in line with PROD, hindering manufacturers’ ability to achieve best practice. The FCA therefore urged both manufacturers and distributors to prioritise cooperation and information sharing to avoid harm to consumers.

We have considered this review further in our blog.

ESMA launches common supervisory action with NCAs on MiFID II product governance rules

On 1 February 2021, ESMA published a press release announcing the launch of a common supervisory action (CSA) with national competent authorities (NCAs) on the application of MiFID II product governance rules. ESMA believes this initiative will help ensure the consistent implementation and application of the MiFID II product governance rules, and enhance investor protection.

The CSA will be conducted during 2021 and will allow ESMA and the NCAs to assess the progress made by manufacturers and distributors of financial products in the application of the MiFID II product governance requirements.

ESMA final report on draft ITS under Regulation on cross-border distribution of investment funds

On 1 February 2021, ESMA published a final report on draft implementing technical standards (ITS) produced under Articles 5(3), 10(3) and 13(3) of Regulation (EU) 2019/1156 of 20 June 2019 on facilitating cross-border distribution of collective investment undertakings.

The draft ITS would require national competent authorities (NCAs) to publish information on their websites regarding the national rules governing marketing requirements for funds, and the regulatory fees and charges levied by NCAs relating to fund managers' cross-border activities. The draft ITS would also require NCAs to notify certain information to ESMA for developing and maintaining a central database listing UCITS and alternative investment funds (AIFs) marketed cross-border on ESMA's website.

ESMA has previously consulted on the draft ITS in March 2020. Respondents generally welcomed the draft ITS. Most agreed that the information to be disclosed by NCAs on their websites, as well as central databases and registers to be developed by ESMA, would create greater transparency on the cross-border distribution of funds.

ESMA has submitted the draft Implementing Regulation to the European Commission for endorsement. The Commission has three months within which to decide whether to adopt it, but may extend this period by a further month.

FCA updated webpage on operation of UK MiFIR transparency regime

On 2 February 2021, the FCA published an updated webpage on the operation of the transparency regime under the retained EU law version of the Markets in Financial Instruments Regulation (UK MiFIR). The Markets in Financial Instruments (Switzerland Equivalence) Regulations 2021 came into force on 3 February 2021. They specify that the legal and supervisory framework for two stock exchanges in Switzerland (BX Swiss AG and SIX Swiss Exchange AG) meet at least equivalent outcomes to the UK's corresponding regime.

The FCA explains that it will soon be possible for UK firms to meet their obligations under the share trading obligation on the Swiss stock exchanges, and for UK trading venues to be able to offer trading in Swiss shares. The FCA is confirming how aspects of UK markets regulation will apply to Swiss shares that resume trading on UK trading venues.

For the purposes of calibrating the pre and post-trade transparency regime, the FCA advises that Swiss shares that resume trading on UK trading venues will be treated as if they are being traded on a UK trading venue for the first time. An estimate will be made of the relevant parameters based on the characteristics of the shares to apply from their first day of trading. These estimates will then be updated after six weeks based on data from the first four weeks of trading in the UK.

The same logic will apply for transparency parameters as for tick sizes, with an initial estimate updated after six weeks by a calculation based on data for the first four weeks of trading in the UK. These figures may result in different tick sizes than currently apply for trading of these instruments on exchanges in Switzerland. UK trading venues will be allowed to use the minimum tick size that applies in Switzerland where that is smaller than the minimum tick size based on the figures for the average daily number of transactions (ADNTE) that the FCA publishes through its Financial Instruments Transparency System (FITRS).

Findings from FCA multi-firm review on implementing technology change

On 5 February 2021, the FCA published the findings from its multi-firm review of how firms implement technology change, the impact of change failures and the practices used to help reduce the impact of incidents resulting from change management.

The FCA found that failed technology changes are one of the main causes for operational disruption within firms, accounting for a quarter of all high-severity incidents that cause harm to consumers and the market. It also found that:

  • changes made by firms with strong, well-established governance and day-to-day risk management strategies are more successful;
  • firms that allocated a higher proportion of their technology budget to change experienced fewer change related incidents;
  • frequent releases and agile delivery can help firms to reduce the likelihood and impact of change related incidents;
  • effective risk management is an important component of effective change management capabilities;
  • robust testing is an important part of the change process; and
  • while testing automation has benefits it also presents challenges.

The FCA notes that over 90% of surveyed firms rely on legacy technology in some form to deliver their services. It found that relying on high levels of legacy technology is linked to more failed and emergency changes.

While the FCA does not expect changes to be implemented without incident, firms can work towards reducing the disruption caused, making themselves and the wider industry more resilient. Although the Covid-19 pandemic has caused some delay to planned technology changes and system updates, the FCA stresses the importance of firms understanding how technology change activity can affect the services they provide, and investing in their resilience to protect themselves, consumers and the markets. This is especially important as firms increasingly use remote and flexible working.

FCA finalises guidance on fair treatment of vulnerable consumers

On 23 February 2021, the FCA published finalised guidance (FG21/1) for firms on the fair treatment of vulnerable consumers. The FCA states that the guidance is relevant to all firms involved in the supply of products and services to retail customers who are natural persons, even if they do not have a direct client relationship with the customers.

A vulnerable consumer is defined as someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.

The guidance sets out the FCA's expectations on the following issues:

  • understanding the needs of vulnerable consumers – firms should understand the nature and scale of characteristics of vulnerability in their target market and customer base and understand the impact of vulnerability on those consumers' needs;
  • skills and capability of staff – among other things, firms should embed the fair treatment of vulnerable consumers across their workforce and ensure that frontline staff have the necessary skills and capability to recognise vulnerability; and
  • taking practical action – firms should consider the characteristics of vulnerability present in their target market or customer base and how they can meet customers' needs (and avoid customer harm) through the design of products and services, their customer services and their communications.

In 2023-24, the FCA plans to evaluate what action firms have taken and whether it has seen improvements in the outcomes experienced by vulnerable customers.

European Commissioner outlines next steps for review of MiFID II

On 23 February 2021, the European Commission published a speech by Mairead McGuinness, European Commissioner for Financial Services, Financial Stability, and Capital Markets Union.

In the speech, among other things, Commissioner McGuiness considers next steps on the Commission's review of MiFID II and MiFIR. She states that the Commission intends to adopt a legislative proposal relating to the review of MiFID II at the end of 2021. She also indicates that the proposal may address the following issues:

  • strengthening transparency requirements – the Commission is aware of the decline in volume of trading in shares executed on transparent regulated exchanges, and the apparent growth in trading in more opaque alternative venues. It will assess whether different execution venues are operating on a level playing field and whether changes to the transparency requirements are necessary;
  • consolidated tape – the Commission intends to establish the right conditions for a consolidated tape that collects and aggregates indispensable trade transparency data reported by all EU execution venues in equity and corporate bonds; and
  • retail investment and investor protection – the Commission considers that there may be merit in looking at the investor's journey in a ‘horizontal way’, from the very beginning until the very end of the investment process, with the aim of ensuring that retail investors seize the investment potential of the internal market.
Joint Committee of ESAs statement on application of SFDR

On 25 February 2021, the European Supervisory Authorities (ESAs) (that is, the European Banking Authority, European Insurance and Occupational Pensions Authority and ESMA) each published a supervisory statement (JC 2021 06) made by the Joint Committee of the ESAs on the application of the Sustainable Finance Disclosure Regulation (SFDR or Disclosure Regulation).

The majority of the provisions on sustainability-related disclosures set out in the SFDR apply from 10 March 2021. However, the envisaged application date for the regulatory technical standards (RTS) supplementing the SFDR on the content, methodologies and presentation of sustainability-related disclosures is currently 1 January 2022. The Joint Committee submitted the final draft of these RTS to the European Commission on 4 February 2021.

In the statement, the Joint Committee recommends that the draft RTS should be used as a reference by national competent authorities (NCAs), financial market participants and financial advisers when applying the provisions of the SFDR in the interim period between the application of SFDR and the application of the RTS at a later date.

In an Annex to the statement, the Joint Committee sets out:

  • specific guidance on the application of timelines of some specific provisions of the SFDR, in particular on the application timeline for entity-level principal adverse impact disclosures and for financial products' periodic reporting; and
  • a summary table of the relevant application dates of the SFDR, the Taxonomy Regulation and the draft RTS.

The Joint Committee notes that the draft RTS have not yet been adopted by the Commission and that the European Parliament or the Council may object to the RTS once adopted by the Commission.

EU Securitisation Regulation: updated ESMA resources to assist with disclosure requirements

On 26 February 2021, the European Securities and Markets Authority (ESMA) issued a press release announcing the publication of a revised version of its Q&As on the EU Securitisation Regulation, including four new questions and eleven modifications to existing answers.

As part of this, ESMA published updated versions of its reporting instructions and XML schema and validation rules for disclosure templates to help market participants comply with the disclosure requirements under the EU Securitisation Regulation.

EU Prospectus Regulation: ESMA guidelines on disclosure requirements

On 4 March 2021, ESMA published its final guidelines on disclosure requirements under the EU Prospectus Regulation. The final guidelines are in the same form as published in ESMA's final report in July 2020.

The final guidelines apply from two months after the date of their publication on ESMA's website in all official languages of the EU.

IOSCO announces workstreams on liquidity risk management for collective investment schemes

On 5 March 2021, the International Organization of Securities Commissions (IOSCO) published a press release announcing that:

  • it has launched a thematic review on the implementation of its 2018 recommendations on liquidity risk management for collective investment schemes (CIS). The review is intended to assess the extent to which the recommendations have been implemented through member regulatory frameworks. It also aims to gather information about how the entities to whom the recommendations are directed (responsible entities) have implemented them in practice. IOSCO expects to publish the report relating to the review in autumn 2022;
  • together with the Financial Stability Board (FSB), it is conducting a joint analysis of the availability, use and impact of liquidity risk management tools for open-ended funds (OEFs). This analysis is examining the experience of OEFs that faced redemption pressures during the Covid-19 induced market stresses of March and April 2020, the availability, use and impact on the broader market of liquidity risk management tools and how these were linked to the liquidity of underlying assets; and
  • IOSCO has issued a market participants survey intended to inform both of these workstreams. It seeks information from responsible entities on their adoption and practical implementation of the recommendations and specific information on their liquidity risk management practices and experiences during the March 2020 market turmoil. The deadline for responses to the survey is 16 April 2021.
FCA speech on locking down market abuse

On 8 March 2021, the FCA published a speech by Mark Steward, FCA Executive Director of Enforcement and Market Oversight, on the FCA's recent work to tackle market abuse.

Points of interest

  • While the FCA saw an overall increase of 34% in transactions and transaction reports in 2020, it saw a reduction in suspicious transaction and order reports (STORs) during this period. However, since the first Covid-19 lockdown, STORs have returned to levels it would expect to see and the FCA is not concerned that total volumes for the year are lower than previous years.
  • The FCA increased its proactive market monitoring during 2020 in view of the unusual conditions and introduced a new approach to short selling reporting that enables short positions to be reported on its Electronic Submission System (ESS). The new short position reporting mechanism speeds up validation and introduces automated alerts that enable it to more readily identify issues. The FCA intends to roll this out for long position reporting too.
  • The FCA introduced a new market cleanliness measure in September 2020, the Potentially Anomalous Trading Ratio (PATR). Unlike the Abnormal Trading Volume (ATV) ratio, the PATR focuses on the underlying trading behaviour around specified price sensitive announcements and assesses whether the behaviour can be deemed anomalous (a more neutral term than suspicious though the behaviour may also be suspicious).
  • The FCA has been "busy and productive" on the enforcement front and Mr Steward highlights some recent market abuse and insider dealing cases.


FCA updates webpage on changes to regulatory reporting during pandemic

On 5 February 2021, the FCA updated its webpage on changes to regulatory reporting during the Covid-19 pandemic.

Due to the challenges faced by firms and their auditors preparing audited financial statements during the pandemic, the FCA will allow flexibility in the submission deadline for FIN-A (annual report and accounts). For this return only, firms may apply a two-month extension to the deadline for submissions due up to and including 31 July 2021.

The FCA notes that this flexibility is intended to cover the situation where the impacts of Covid-19 have made it impractical to finalise audited financial statements. If firms are able to submit FIN-A on time, then they should do so. In any event, firms should submit FIN-A as soon as they are reasonably able to, and no later than 30 September 2021.

Directive amending MiFID II Directive published in Official Journal (EU)

On 26 February 2021, the Directive amending the MiFID II Directive to help the EU's economic recovery from the COVID-19 pandemic was published in the Official Journal of the EU (OJ). The Directive entered into force on 27 February 2021 (that is, the day following that of its publication in the OJ).

The areas addressed by the Directive form part of the European Commission's capital markets recovery package. The proposed Directive seeks to remove unnecessary red tape in relation to information requirements, product governance and position limits to help the recovery from the Covid-19 pandemic and to make temporary exceptions that are deemed effective in order to mitigate the economic turmoil. In addition, the Directive extends the transposition deadline for the CRD V Directive as it applies to investment firms to 26 June 2021.

The proposals are often referred to as the MiFID "quick fix" proposals.

The Directive had been adopted by the Council of the EU on 15 February 2021, and by the European Parliament on 11 February 2021.

Regulation to amend Prospectus Regulation published in Official Journal (EU)

On 26 February 2021, the regulation amending the Prospectus Regulation as regards an EU Recovery prospectus and other amendments to facilitate the recapitalisation of companies affected by the COVID-19 pandemic was published in the Official Journal. The regulation is in substantially the same form as the draft regulation adopted by the Council on 15 February 2021. The regulation will come into force on 18 March 2021.


FCA speech on being ready for life without LIBOR

On 26 January 2021, FCA published a speech given by Edwin Schooling Latter, FCA Director of Markets and Wholesale Policy, on being ready for life without LIBOR from the end of 2021.

Key points of interest

  • As it stands, 12,500 firms have signed the ISDA® protocol on interbank offered rate (IBOR) fallbacks. On a jurisdictional basis, the US accounts for just over 10,000 of the signatories, followed by the UK with over 450. Mr Schooling Latter goes on to explain how important the protocol is to the overall LIBOR transition given that the FCA estimates there is $260tn in LIBOR-referencing contracts.
  • Firms should not underestimate the challenges associated with managing other LIBOR outstandings, notably in bond, securitisation, loan and mortgage markets.
  • The FCA is continuing to assess whether to consult on requiring continued publication on a synthetic basis under proposed new powers set out in the Financial Services Bill 2019-21. Where it requires continued publication of a LIBOR setting on a synthetic basis, this will be subject to a further consultation and decision on the specific settings.
Investment Association Dear CEO and CFO letter calls for active transition of GBP LIBOR referencing bonds

On 3 February 2021, the Investment Association (IA) published a Dear CEO and CFO letter addressed to companies issuing LIBOR-linked sterling bonds, encouraging them to actively transition from GBP LIBOR.

In the letter, the IA explains that as of early 2021, there remains a large number of outstanding LIBOR-referencing bonds that have not yet transitioned to a new rate. The IA notes the potential impact of these bonds not being transitioned before the end-2021 deadline is severe, with the risk of significant market disruption and harm to investors if bonds continue to reference a non-representative rate.

In a related press release, the FCA welcomes this IA initiative to help issuers of LIBOR securities reach out to IA members who hold their bonds to agree conversion through consent solicitation. It considers mutually agreed conversion from LIBOR to risk-free rates (RFRs) plus spreads consistent with industry recommendations on fair transition arrangements can enable both the bond's issuer and holders to avoid the uncertainty they will face on LIBOR's cessation. It also allows conversion to the market standard of the RFR compounded in arrears that has now developed in bond markets.

Working Group consults on successor rate to GBP LIBOR in legacy bonds

The Working Group on Sterling Risk-Free Reference Rates (Working Group) published a consultation on the successor rate to GBP LIBOR in legacy bonds referencing GBP LIBOR in February. The consultation seeks feedback on whether it would be helpful for the Working Group to make a recommendation on a successor rate to GBP LIBOR for bonds in connection with the operation of a fallback provision following the occurrence of a permanent cessation event or a pre-cessation event. It also seeks feedback on the preferred successor rate to be recommended.

The Working Group proposes the following successor rates for legacy bonds referencing GBP LIBOR:

  • overnight SONIA, compounded in arears; and
  • term SONIA.

The consultation paper outlines various factors which should be taken into account when considering the appropriate successor rate, including:

  • the stages of development of each of the rates, and their current usage (in the case of overnight SONIA, compounded in arrears) and expected use cases (in the case of term SONIA) in the SONIA-linked bond market; and
  • alignment with the existing SONIA-linked bond, derivatives and loan markets.

The consultation does not consider the successor rate applicable for participants who actively convert LIBOR-linked bonds to a SONIA-derived rate at an earlier stage than the trigger of a fallback provision in the bond documentation.

HM Treasury consults on supporting the wind-down of critical benchmarks

On 15 February 2021, HM Treasury published a consultation paper on supporting the wind-down of critical benchmarks.

The Financial Services Bill 2019-21 (FS Bill) amends the UK Benchmark Regulation (BMR) to enable the FCA to manage a situation in which a critical benchmark has become, or is at risk of becoming, unrepresentative and it may be impractical or undesirable to restore its representativeness.

The aim of the consultation is to understand the extent to which there is uncertainty over the continued application of a critical benchmark to contracts where the FCA has exercised its power to direct a change in how the benchmark is determined under the BMR, and the risk of associated litigation.

Since the introduction of the FS Bill to Parliament, a number of stakeholders have approached HM Treasury to suggest incorporating a supplementary legal "safe harbour" for relevant legacy contracts. Given the feedback, and HM Treasury's intention to allow for a smooth transition, it is seeking views on whether a legal safe harbour could be a helpful supplement to the provisions inserted into the BMR by the FS Bill.

Working Group paper on ending new use of GBP LIBOR in derivatives

On 24 February 2021, the Working Group on Sterling Risk-Free Reference Rates published a paper aimed at helping market participants meet its 2021 quarterly milestones for ending new use of GBP LIBOR in derivatives. Alongside the paper, the Working Group also published an update version of its Priorities and Roadmap document.

The Working Group's milestones for GBP LIBOR-linked derivatives include the need to cease initiation of new:

  • GBP LIBOR-linked linear derivatives expiring after the end of 2021, by the end of March 2021;
  • GBP LIBOR-linked non-linear derivatives, by the end of June 2021; and
  • cross-currency derivatives (with a LIBOR-linked sterling leg) expiring after the end of 2021, between the start of April and the end of September 2021.

The Working Group expects any new GBP LIBOR-linked derivatives, entered into after the relevant milestones and expiring after the end of 2021, to be based on SONIA.

The paper sets out five limited circumstances - linked to the risk management of existing positions - in which it might be appropriate to enter into new GBP LIBOR-linked derivatives beyond the recommended milestones, including certain GBP LIBOR hedging transactions, market making in support of a client activity related to existing GBP LIBOR contracts, and novations of GBP LIBOR transactions.

IBA feedback statement on intention to cease publication of LIBOR settings

On 5 March 2021, ICE Benchmark Administration (IBA) issued a press release announcing the publication of a feedback statement on its December 2020 consultation on IBA's intention to cease publication of all tenors of LIBOR settings.

On the same date, the FCA announced that panel bank submissions for all LIBOR settings will cease (after which representative LIBOR rates will no longer be available) on the following dates:

  • immediately after 31 December 2021, in the case of all euro, sterling, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
  • immediately after 30 June 2023, in the case of the remaining US dollar settings.

The IBA statement confirms that, as a result of insufficient panel bank support for continued contributions to LIBOR, it will no longer have access to the necessary input data to calculate LIBOR settings on a representative basis beyond the dates specified above. Accordingly, unless the FCA exercises its proposed new powers to require IBA to continue publishing these LIBOR settings on a synthetic basis, IBA will have to cease publication of the relevant LIBOR settings on a representative basis after such dates.

The FCA has confirmed to IBA that it does not expect any LIBOR settings to become unrepresentative before the above intended cessation dates for such settings.

FCA outlines approach to reporting references to LIBOR in OTC derivatives contracts and securities financing transactions

On 5 March 2021, the FCA updated its website to outline its expectations on the approach firms should take to reporting references to LIBOR in OTC derivative contracts under Article 9 of the retained EU law version of EMIR (UK EMIR) and in securities financing transactions under Article 4 of the retained EU law version of the Regulation on reporting and transparency of securities financing transactions (UK SFTR).

Under UK EMIR and UK SFTR, counterparties (and in the case of UK EMIR central counterparties), must report any modification of a derivative contract or an SFT they have concluded to a registered or recognised trade repository no later than the working day following the modification of the transaction or contract. The FCA explains that if the terms of a derivative contract or securities financing transaction say that, either immediately or at some other point in time, an alternative rate applies in the place of LIBOR, this would bring about a modification that is reportable under UK EMIR or UK SFTR, respectively. The FCA expects the modification to be reported at the time that the alternative rate takes effect.

The reporting requirement applies to all agreed terms that result in an alternative rate applying in place of LIBOR. In the case of OTC derivative contracts under UK EMIR, this includes fallbacks agreed on a bespoke basis and fallbacks that take effect as a result of ISDA's 2020 IBOR Fallbacks documents.

The FCA clarifies that it is of the view that amending a reference rate or adding a fallback would not trigger the application of margin or clearing requirements under UK EMIR, where this amendment relates to the treatment of legacy LIBOR trades.

Although the FCA expects firms to make necessary preparations to ensure the relevant reports are updated in a timely manner, it will take a proportionate and risk-based approach to applying its supervisory powers for these requirements.


European Commissioner outlines next steps for UK-EU relationship

On 25 January 2021, the European Commission published the opening remarks of Mairead McGuinness at a meeting of the European Parliament's Economic and Monetary Affairs Committee.

Among other things, Commissioner McGuiness explains that the Commission envisages a future framework for financial services similar to that between the EU and the US, involving a voluntary structure to compare regulatory initiatives, exchange views on international developments and discuss equivalence-related issues. She emphasises that this is not about restoring the market access rights the UK has lost nor will it constrain the EU’s unilateral equivalence process.

Once the working arrangements are agreed, the EU will be able to resume its unilateral equivalence assessments of the UK, using the same criteria as with all third countries, including in relation to anti-money laundering legislation. Commissioner McGuiness clarified that the Commission will only take decisions where they are in the EU’s interest.

FCA finalises approach document on international firms

On 3 February 2021, the FCA published its approach document on its approach to international firms, following a consultation in late 2020. It has also published a feedback statement on the feedback received to the consultation and the policy decisions it has taken in response.

In the document, the FCA sets out its general approach to the authorisation and supervision of international firms providing or seeking to provide financial services that require authorisation in the UK.

The document contains sections on:

  • an overview of the FCA's approach: this section includes a summary of the minimum standards for authorisation, issues relating to the choice between a branch and a subsidiary and the risks of harm relevant for international firms. It also considers the decisions the FCA may take following an assessment of an international firm's compliance with the minimum standards;
  • main considerations in the FCA approach: this section covers the FCA's general expectations for international firms, including their personnel and systems and controls. It also covers the FCA's approach to assessing an international firm's risks of harm, focusing on retail harm, client asset harm and wholesale harm; and
  • mitigating identified risks: this section covers the ways that international firms might mitigate the retail, client asset and wholesale harms identified in the FCA's assessment.

Read more in our in-depth article.

FCA responds to Treasury Committee inquiry into future of UK's financial services post-Brexit

On 2 March 2021, the House of Commons Treasury Committee published the FCA's written response to the committee's inquiry into the future of financial services in the UK after Brexit.

The FCA's response covers opportunities for the UK's financial services sector after EU withdrawal, development and scrutiny of financial services policy making after EU withdrawal, and the current challenges facing regulators.

Points of interest

  • Future trade agreements (FTAs) should respect the FCA's statutory objectives and regulatory and supervisory framework, by respecting the FCA's supervisory and regulatory autonomy, while providing a non-discriminatory environment for both UK and overseas firms. Market access should be grounded in shared commitments to international standards, and equivalent regulatory and supervisory outcomes. Each agreement should be tailored to include appropriate regulatory and supervisory safeguards, proportionate to the level of market access secured. The FCA will work closely with HM Treasury on aspects of the FTA negotiations that go beyond market access that have operational implications for it, such as data transfers and regulatory transparency.
  • The FCA states that important policy and practical considerations apply to changes in the way that Parliament sets the overall policy direction for financial services. The FCA suggests that it and firms could find a sector-based approach to setting policy in legislation through, for example, additional regulatory principles (or "have regards"), particularly challenging as it would artificially split the regulated sectors and does not reflect the way firms and markets operate. The FCA supports a move away from the EU sector dossier approach, which would allow it to take a more holistic approach across the industry.
  • The FCA believes that careful consideration should be given to amending existing accountability, scrutiny and transparency procedures, to avoid duplicating existing arrangements and adding cost, complexity or delay into the system.
  • The FCA supports the proposal to transfer the ability to maintain and make firm-facing rules from retained EU legislation to the regulators. However, it warns that this will involve a significant legislative programme that is likely to take several years, adding that it is vital that the transfer of responsibility is not left incomplete.