Investment management update - May 2021

27 May 2021

Welcome to the May 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 in the previous month.

Key things to keep an eye out for in this month's update

  • The outlines of the EU’s and UK’s post-Brexit relationship are beginning to be seen since the publication of the Memorandum of Understanding on Financial Services in March. In this edition, you can see an exchange of views between the CEOs of ESMA and the FCA. The UK has also shown signs of tentative regulatory divergence in respect of MiFID II.
  • The FCA has published the second of its much-anticipated consultations on the Investment Firms Prudential Review.
  • Policymakers have started to outline their future policy agenda with the EU focusing on retail investment and making financial services work for consumers. The FCA has provided its business plan for the coming year and has also described its sustainable finance agenda, ahead of expected announcements about the UK’s adoption (or not) of the EU’s ESG regulations.
  • The end of LIBOR is increasingly in view. In this edition, we include two announcements in respect of sterling.


FCA launches new version of Financial Services Register Extract Service

On 9 April 2021, the FCA updated its webpage to announce the launch of a new version of its Financial Services Register Extract Service (RES). It has also published a revised version of the Subscribers' Handbook for the RES.

The RES forms part of the FCA's publication scheme, which has been compiled in line with its obligations under the Freedom of Information Act 2000. It provides files containing a subset of FS Register data records (as opposed to the Financial Services Register which displays a single record at a time). The RES enables firms and consumers to subscribe to either firms' data or firms' and individuals' data on a regular or one-off basis. Records not included in the RES relate to money laundering regulations, exempt professional firms, directory for certified persons information and information regarding waivers and discretion or disciplinary procedures.

The Subscribers' Handbook provides an overview of the RES, including the information that is available, format and frequency, and explains how to become a subscriber. It also explains the structure and content of the files that comprise the RES, associated charges and provides answers to FAQs. The Handbook replaces the previous version that was published in July 2016.

ESMA and FCA CEO exchange of views on future co-operation

On 9 April 2021, ESMA published a summary of conclusions of the meeting of its Board of Supervisors on 23 February 2021, which includes minutes of an "exchange of views" with the FCA’s CEO, Nikhil Rathi on future co-operation between the FCA and ESMA.

The minutes record that the exchange of views focused on:

  • the importance of international standards and their consistent application;
  • the EU and the UK's commitment to promoting sustainable finance, in particular the concept of materiality;
  • the status of the amendments to the EU Packaged Retail and Insurance-based Investment Products Regulation (1286/2014) and its implementing acts; and
  • the Swiss franc London Inter-Bank Offered Rate (LIBOR).

It was agreed that a similar dialogue would take place twice a year.

Joint PRA and FCA Dear CEO letter on obtaining deposits through deposit aggregators

On 14 April 2021, the FCA published a joint Dear CEO letter sent by it and the PRA highlighting the risks associated with the increasing volumes of deposits that are placed with banks and building societies through deposit aggregators.

In the letter, the regulators explain that the core activity of a deposit aggregator may not be regulated, and they expect firms to carry out appropriate due diligence on deposit aggregators with whom they have relationships.

The risks identified by the regulators include that customers who place their deposits via a deposit aggregator may not fully understand how the relationships work or, in trust models, how they can differ from a direct-depositor relationship with firms. For example, in some cases customers may have less protection under the Financial Services Compensation Scheme (FSCS) than they expected. Firms must ensure that the content of and conduct relating to financial promotions for deposit accounts are relevant to these risks and ensure compliance with the relevant regulatory rules.

The deposit aggregator model also presents challenges relating to firms' preparations for resolution. Although deposits are generally covered by the FSCS, firms may need to plan ahead with deposit aggregators to ensure eligible claimant criteria are met and client-specific information is available to ensure a swift pay-out.

In addition, deposits through a deposit aggregator may present a concentrated liquidity risk. The regulators advise firms to factor this into their management of liquidity risk and funding needs.

The regulators list their expectations for firms. They should:

  • discuss at the appropriate level and consider addressing any aspects relating to deposit aggregators that are directly relevant to the firm or its business model. Senior management should have appropriate oversight over a firm's relationships with deposit aggregators;
  • consider how much their deposit book relies on business sourced through deposit aggregators and whether this requires any action;
  • consider how to achieve a faster customer repayment by the FSCS, if necessary;
  • look at widening the information they provide to the FSCS, FCA or PRA to include information on use of deposit aggregators and the level of deposits coming via them; and
  • consider the level of transparency regarding the beneficial owners of deposits sourced from deposit aggregators.

The regulators warn firms that in the future they may wish to discuss this matter with them and want them to be prepared to explain any actions taken in response to their letter.

European Commission findings from mini-sweep of consumer credit websites

On 16 April 2021, the European Commission published an updated webpage providing information on a mini-sweep of consumer credit websites.

The Commission explains that a "sweep" is a set of checks carried out on websites simultaneously to identify breaches of EU consumer law in a particular sector. Once a sweep has been carried out by the Commission and national enforcement authorities simultaneously, the national authorities are expected to ask relevant traders to take corrective actions.

To monitor and prevent the proliferation of unfair practices in the consumer credit sector, the Commission explains that consumer protection authorities from 13 member states and two European Economic Area (EEA) countries took part in a mini-sweep of websites advertising and selling consumer credit products.

The main objective of the mini-sweep was to check on various technical devices (PC, tablets and smartphones), whether traders comply with the EU rules on standard information in online consumer credit advertising, whether the overall presentation of consumer credit offers can mislead consumers, and whether the offers aggressively exploit consumer vulnerabilities.

In total, 118 websites were swept. In 42 instances, the websites were flagged for potential irregularities with EU consumer law. Among other things:

In 35 cases, consumer credit advertising that indicates an interest rate or any figures relating to the cost of credit did not include all the standard information by means of a representative example in a clear, concise and prominent way, as required by the Consumer Credit Directive (2008/48/EC) (CCD).

For websites checked by smartphones, the suspected infringement rate was higher than the average. In most instances, the suspected irregularity related to the standard information in advertising.

In 29 cases out of 85 of checked creditor websites, it was unclear how the creditworthiness assessment is performed, including the personal data used for that purpose and the possible use of machine learning.

In 8 out of 17 products identified as short-term high cost, the website or advert was flagged for further investigation for potential irregularities. In most of these cases, this was because the standard information required for advertising was not presented by means of a representative example in a clear, concise and prominent way.

Participating authorities will follow up on the flagged cases based on their national investigation and enforcement rules.

Second FCA consultation on Investment Firms Prudential Regime

On 19 April 2021, the FCA published its second consultation paper on the Investment Firms Prudential Regime (IFPR) (CP21/7).

Summary of the proposals

  • Own funds requirements. The FCA's proposals concerning own funds requirements are set out in chapters 4 and 5 of CP21/7, which supplement the proposals concerning own funds set out in CP20/24.
  • Basic liquid asset requirement. The FCA's proposals concerning the basic liquid asset requirement are set out in chapter 6 of CP21/7 and in proposed MIFIDPRU 6. The FCA proposes that all FCA investment firms should have a basic liquid asset requirement, based on holding an amount of core liquid assets equivalent to at least one third of the amount of their FOR.
  • Risk management and governance. The FCA's proposals concerning risk management and governance are set out in chapters 7 and 8 of CP21/7 and in proposed MIFIDPRU 7.
  • Remuneration. The FCA's proposals concerning remuneration are set out in chapters 9 to 12 of CP21/7. It intends to introduce a new MIFIDPRU Remuneration Code that will apply to all FCA investment firms, set out in the Senior Management Arrangements, Systems and Controls (SYSC) sourcebook at new SYSC 19G.
  • Regulatory reporting. The FCA's proposals concerning regulatory reporting, which supplement those considered in CP20/24, are set out in chapter 13 of CP21/7. These proposals relate to reporting on, among other things, the liquid asset requirement, the ICARA process and remuneration.
  • Applications and notifications. In chapter 15 of CP21/7, the FCA sets out its approach to applications and notifications under MIFIDPRU, as well as details of its proposed forms for applications and notifications. The FCA expects to open the gateway for draft IFPR applications and notifications in the summer of 2021.

You can read our analysis of the FCA’s consultation.

FCA consults on regulated fees and levies for 2021/22

On 20 April 2020, the FCA published a consultation paper on regulated fees and levies rates for 2021/22 (CP21/8).

In CP21/8, the FCA is consulting on its periodic fees rates for 2021/22 and further FCA fees policy proposals, as well as the Financial Ombudsman Service (FOS) general levy and Money and Pensions Service (MaPS), Devolved Authorities and HM Treasury illegal money-lending levies for 2021/22.

The proposed 2021/22 overall Annual Funding Requirement (AFR) is set at £616.5m, which represents an increase of 4.5% on 2020/21. The full breakdown of the AFR and allocation across fee-blocks is set out in chapter 2 of CP21/8.

The Department for Work and Pensions (DWP) has notified the FCA that it must collect £149.2m in total for MaPS in 2021/2. This is made up of amounts for three separate levy components (that is, money guidance and pensions guidance in the UK and debt advice in England). The FOS has requested the FCA recover £96m through the general levy, an increase of just over £12m (14%) compared to 2020/21.

The FCA recently consulted in CP20/22 on changes to how it will raise regulated fees and levies rates from 2021/22, publishing some feedback and final rules in March 2021. In chapter 7 of CP21/8, the FCA provides feedback on its CP20/22 proposals relating to authorisation application fees and introducing new charges for notifications under the senior managers regime (SMR) and controlled functions for appointed representatives (CF(AR)).

In chapter 8 of CP21/8, the FCA sets out its proposals for charging application fees for funeral plan firms when they seek authorisation, as well as the structure of periodic fees.

The draft instruments making the proposed changes to the Fees manual (FEES) are set out in CP21/8 in:

  • appendix 1, which contains a draft version of the Periodic Fees (2021/22) and Other fees Instrument 2021;
  • appendix 2, which contains a draft version of the Fees (Miscellaneous Amendments) (No 16) Instrument 2021; and
  • appendix 3, which contains a draft version of the Fees (Pre-paid Funeral Plan) Instrument 2021.

CP21/8 closes to responses on 25 May 2021. The FCA intends to publish feedback and the final fees and levy rates in a policy statement in July 2021, subject to FCA board approval in June 2021.

FCA to publish business plan 2021/22 in July 2021

On 20 April 2021, the FCA published a statement announcing it will be publishing its business plan for 2021/22 in July 2021, rather than April 2021.

The FCA advises that its business plan will be published alongside its 2020/21 Annual Report and Accounts and will include an update on plans for transforming the FCA.

European Commission speech on making financial services work for citizens

On 20 April 2021, the European Commission published a speech by Mairead McGuinness, European Commissioner for Financial Services, Financial Stability, and Capital Markets Union (CMU), in which she considers how to make financial services work for citizens.

Points of interest in Ms McGuinness' speech

  • The Commission will be working with the Organisation for Economic Co-operation and Development (OECD) to create a joint EU and OECD financial competence framework to establish a common understanding of what financial literacy means. This framework can be used to develop financial education strategies, tools and campaigns that can be tailored to specific groups like children, women, financially fragile households or older people.
  • As services increasingly become digital, it is important to ensure cash remains available and accepted. The Commission, with the European Central Bank (ECB), national central banks and treasuries, is monitoring the latest developments. If necessary, the Commission may decide to take action towards the end of 2021 to protect the availability of cash.
  • The single euro payments area (SEPA) gives consumers and businesses the right to make payments from their account to another bank account regardless of whether these two accounts are located in the same member state. However, consumers regularly complain that only domestic International Bank Account Number (IBAN) numbers are accepted by a company (or sometimes a public body) for a credit transfer or direct debit. This is a big issue for the single market and citizens, but also for some FinTech companies because it undermines their business model. The Commission is concerned about this lack of compliance and is stepping up efforts to ensure full enforcement of this rule since IBAN discrimination should not exist.
  • In early 2022, the Commission will publish its retail investment strategy, which will be an opportunity to place retail investors at the heart of its policies and assess the entirety of the retail investor journey. As a first step, the Commission will shortly launch a public consultation to gather views on how the current rules work and what might need to change.
  • The Commission's work on supervisory convergence continues, with the aim of developing a common set of rules that are consistently applied by all national regulators. The Commission is currently assessing progress towards this goal.
European Commission consults on roadmap on strategy for retail investors

On 21 April 2021, the European Commission published a roadmap on a retail investment strategy for the EU (Ares(2021)2651854 20/04/2021).

The strategy will assess the entire retail investor journey. It aims to provide a coherent approach to empower consumers to take financial decisions and benefit from the internal market, and to address the challenge of low capital market participation rates in the EU.

Currently, investor protection rules are set out in various sector specific legislative instruments, including the MiFID II Directive (2014/65/EU), the Insurance Distribution Directive ((EU) 2016/97) (IDD), the PRIIPs Regulation (1286/2014) and the UCITS Directive (2009/65/EC). The Commission has identified the following potential problems with this.

  • The rules and disclosures relating to investment and insurance advice and portfolio management, as well as product-related requirements, can differ from one piece of legislation to another. This may make it harder for consumers to make investment decisions that correspond to their needs.
  • Due to inducements, advice provided by intermediaries may sometimes be biased towards products with higher rewards for intermediaries. In addition, the effectiveness of suitability assessments (where the provider needs to assess the knowledge, experience, financial capacity and investment objectives of the retail investor) has been questioned.
  • Digital innovation (such as the role of social media, online brokerages and ease of access to retail investments for new types of investor) is increasingly a feature of the retail investment market. Its impact for retail investors needs assessing.
  • There may be other concerns including the general level of consumer understanding and familiarity with retail investment products, the possible need for further differentiation between different investor categories, the high complexity of some retail investment products and access to effective individual redress.

The roadmap closed for consultation on 18 May 2021.

The Commission has also commissioned a study, which involves consumer testing and mystery shopping, looking at disclosures to consumers, inducements and advice and the suitability and appropriateness assessment tests. It will publish the results in autumn 2021 and will represent an important input for the retail investment study.

Following the roadmap, the Commission intends to launch a three-month consultation on the strategy.

FCA information on climate change and sustainable finance

On 23 April 2021, the FCA published a webpage about climate change and sustainable finance.

The FCA explains it is working to broaden and deepen its sustainable finance strategy, which is based on the themes of transparency, trust, and tools, as set out in an October 2018 feedback statement (FS19/9). Key highlights on the page are summarised below.

  • The FCA is a member of the International Organization of Securities Commissions' (IOSCO) Sustainable Finance Taskforce (SFT). It is working with regulators to collaborate and share experiences. SFT work is focused on issuers' sustainability disclosures, improving asset managers’ sustainability disclosures and investor protection, as well as considering the role of ESG rating and data providers.
  • The work of the Climate Financial Risk Forum (CFRF), which has published a number of guides, covering topics such as disclosure, scenario analysis, risk management and innovation.
  • The work of the Task Force on Climate-related Financial Disclosures (TCFD), including a webpage on climate-related reporting requirements. The FCA reiterates one of its key priorities is to promote climate and wider sustainability-related financial disclosures along the investment chain, from listed companies, to market participants, to end-investors.
  • How the FCA is working closely with the Financial Reporting Council (FRC) on investor stewardship issues. Active investor stewardship is viewed as an important tool to support an effective transition to a net zero economy, and to promote wider sustainability objectives.
European Commission consults on draft Implementing Regulation extending transition period relating to treatment of exposures to third-country CCPs

On 28 April 2021, the European Commission published for consultation a draft Implementing Regulation (Ares(2021)2840260 - 28/04/2021) (accessible via a webpage) extending the transitional period during which EU institutions can treat exposures to a third-country central counterparty (CCP) that has not been recognised in accordance with EMIR (648/2012) as if they were exposures to a recognised (or qualifying) CCP.

Article 497(1) of the Capital Requirements Regulation (575/2013) (CRR) (as amended by the CRR II Regulation ((EU) 2019/876)) established a transitional period during which institutions may treat exposures to those third-country CCPs as exposures to qualifying CCPs. However, for third-country CCPs that submitted their application for recognition under Article 25(6) of EMIR before 27 June 2019, and are still awaiting recognition by ESMA, this transitional period will expire on 28 June 2021.

The Commission will not be able to adopt by 28 June 2021 decisions in accordance with Article 25(6) of EMIR for some of the jurisdictions in which those third-country CCPs are established (which is a prerequisite for ESMA to recognise third-country CCPs) and so ESMA will not be able to complete by that date the recognition procedures for the third-country CCPs awaiting recognition.

This means that EU institutions that have exposures to those third-country CCPs would be required to significantly increase their own funds for those exposures.

The extension of the transitional period would give the Commission time to finalise its equivalence assessments under Article 25(6) of EMIR and to adopt the relevant equivalence decisions where the required conditions are met. It would also give ESMA time to recognise the third-country CCPs concerned.

The draft Implementing Regulation extends the transitional period by 12 months until 28 June 2022.

The consultation closes on 26 May 2021.

FCA discussion paper on strengthening financial promotion rules for high-risk investments and firms approving financial promotions

On 29 April 2021, the FCA published a discussion paper (DP21/1) on strengthening its financial promotion rules for high-risk investments and firms approving financial promotions.

The FCA is asking for views on three areas where changes could be made to protect consumers from harm.

  1. Classification of high-risk investments. The FCA's classification of investments determines the level of marketing restrictions that applies to an investment. It is asking whether more types of investments should be subject to marketing restrictions and what marketing restrictions should apply.
  2. Segmentation of high-risk investment market. The FCA is concerned that despite its existing marketing restrictions, too many consumers are still investing in inappropriate high-risk investments. Among other things, it is considering what can reasonably be done to strengthen the investor categorisation process where access to a financial promotion is restricted to certain types of investor, and what improvements can be made to risk warnings. It is also considering how it can most effectively introduce more "positive friction" into a consumer's journey for high-risk investments.
  3. Responsibilities of firms approving financial promotions. Firms that approve financial promotions for unauthorised persons under section 21 of the Financial Services and Markets Act 2000 (FSMA) play a key role in ensuring those promotions meet the required standards. The FCA is seeking views on whether there should be more requirements for these firms to monitor a financial promotion on an ongoing basis, after approval, to ensure it remains clear, fair and not misleading.

Comments can be made on DP21/1 until 1 July 2021. The FCA will also be testing ideas informed by behavioural research to get better insight on how effective they might be and this, together with feedback to DP21/1, will help shape the changes the FCA intends to consult on later in 2021.

FCA insights from 2020 cyber co-ordination group meetings

On 29 April 2021, the FCA published a summary of insights from its cyber co-ordination group (CCG) meetings on current cyber risks and firms' practices for responding to them.

The key issues discussed at the FCA's 2020 quarterly CSG meetings related to emerging fields within cyber-security, supply chain security issues and some of the major cyber threats and risks that CCG member firms have been faced with. These included ransomware attacks, denial of service attacks, cloud security, insider threats and inadequate supply chain oversight and security.

It was also noted that the change to remote working due to the Covid-19 pandemic has put additional strain on cyber-security teams and systems. This often requires the need to re-evaluate existing cyber risks and controls, while the changed ways of working have further exacerbated the challenges caused by ransomware, supply chain security and insider threats.

With regard to supply chain security issues, the FCA identified common good practices including the following that can be used to mitigate the risks:

  • Members agreed that some of the better strategies to carry out third-party risk due diligence include independent audits of third-party systems, assurance that a third-party has strong security certifications and concise security questionnaires.
  • Members acknowledged that responses to document requests or questionnaires do not always answer all risk management questions, and that instead fostering a good relationship between a third-party supplier's security team and a firm's risk management team is an excellent way to gain more bespoke, targeted risk assurance.
  • Members agreed on the need to follow a standard approach if a third-party supplier is compromised, based on the degree and extent of impact.
  • Members agreed that when a third-party service changes, fresh due diligence is required to re-evaluate the risks.
  • Members discussed how best to vary risk management approaches depending on the size and nature of the third-party supplier, agreeing that there are positives and negatives to dealing with both large and smaller providers.
FCA fines firm for cum/ex trading financial crime control failings

On 6 May 2021, the FCA published the final notice it has issued to Sapien Capital Ltd, fining it £178,000 in relation to financial crime controls concerning cum/ex trading.The FCA found that the Solo trading was characterised by what appeared to be a circular pattern of extremely high value trades undertaken to avoid the normal need for payments and delivery of securities in the settlement process. The trading pattern involved the use of OTC equity trading, securities lending and forward transactions, involving EU equities, on or around the last cum-dividend date. (If in a suitable jurisdiction, this can then allow a party to claim a tax rebate on withholding tax (WHT), sometimes without entitlement.)

You can read our analysis here.

Markets and Trading

FCA update on reporting LEIs under UK SFTR

On 6 April 2021, the FCA updated its webpage on the retained EU law version of the Regulation on reporting and transparency of securities financing transactions ((EU) 2015/2365) (UK SFTR) in relation to reporting legal entity identifiers (LEIs) of non-EEA third country issuers under the UK SFTR.

Under Article 4 of the UK SFTR, reporting counterparties must use LEIs to identify entities when submitting transaction reports under the UK SFTR.

In January 2020, ESMA granted 12 months of forbearance from the entry into force of EU SFTR reporting requirements in relation to the reporting of LEIs of non-EEA third country issuers under the reporting technical standard. Although the industry has made progress in encouraging more widespread LEI coverage among non-EEA third country issuers, the FCA recognises that there are still many non-EEA third country issuers without an LEI.

To reduce market disruption, the FCA is extending the period during which reports under the UK SFTR without the LEI of a non-EEA third country issuer will be accepted until at least 13 April 2022. In the meantime, it expects reporting counterparties to continue engaging with non-EEA third country issuers to acquire an LEI. The FCA also expects reporting counterparties to report an LEI for non-EEA third country issuers where available.

European Commission report on possible exemption of post-trade risk reduction services from clearing under EMIR

On 12 April 2021, the European Commission published a report (COM(2021) 172 final) on whether certain trades should be exempted from the clearing obligation for OTC derivatives under EMIR (the Regulation on OTC derivatives, central counterparties (CCPs) and trade repositories) (648/2012), which is addressed to the European Parliament and the Council of the EU.

Article 85(3)(c) of EMIR (as amended by the EMIR Refit Regulation ((EU) 2019/834)) requires the Commission to report on whether trades that directly result from post-trade risk reduction (PTRR) services should be exempt from the clearing obligation referred to in Article 4(1) of EMIR.

The Commission explains that there is no harmonised or widespread definition of PTRR services. However, there are some common features that would allow PTRR services to be described, in a non-exhaustive way, as procedures or mechanisms by which counterparties reduce one or more types of risks of a portfolio, keeping their market exposure neutral and with the intervention of a PTRR service provider as a third party.

The Commission's report considers input received from ESMA in a November 2020 report, which focused on the PTRR services of portfolio compression and portfolio rebalancing.

The Commission considers that, generally, certain OTC derivatives should only be exempted from the clearing obligation where the risks of granting an exemption are smaller than the risks of keeping the position as it is currently. It notes that ESMA has undertaken an extensive and thorough analysis of PTRR services. However, the Commission believes that important open questions remain. Some of the aspects of the ESMA report require further quantitative assessment and analysis before the Commission can make a more informed decision on any potential proposal for legislative change. The Commission lists the issues that need further consideration, which include considering how different types of PTRR could be defined more concretely, and the materiality of the risk of circumventing the clearing obligation.

The Commission notes that further work on these issues, and more quantitative evidence, would enable a more comprehensive assessment of the issues. It considers that this could feed into the general EMIR assessment report that should be submitted to the Parliament and the Council by 18 June 2024.

ESMA interim templates for STS synthetic securitisation notifications

On 12 April 2021, ESMA published interim templates for simple, transparent and standardised (STS) synthetic securitisation notifications following amendments to the Securitisation Regulation ((EU) 2017/2402).

An accompanying press release explains that the interim templates allow originators to notify ESMA of synthetic securitisations that meet the STS criteria.

The amended Securitisation Regulation was published in the Official Journal of the European Union (OJ) on 6 April 2020 and entered into force on 12 April 2021. It extends the STS framework to synthetic securitisations. As with traditional securitisations, only those synthetic securitisations that meet pre-defined STS requirements will be published on ESMA's website.

Until the date of the application of the regulatory technical standards (RTS) specifying the content and the format of STS notifications for synthetic securitisations, originators can make the necessary information available to ESMA in writing during the interim period. The interim templates will help to ensure consistency across all STS notifications.

The interim STS notification templates may be used by originators on a voluntary basis, which may be subject to possible changes following the entry into force of the RTS.

ESMA updates statement on LEI reporting requirements for third-country issuers under SFTR

On 13 April 2021, ESMA published an updated statement (ESMA74-362-1934) on the implementation of legal entity identifier (LEI) requirements for third-country issuers under the reporting regime set out in the Regulation on reporting and transparency of securities financing transactions (SFTs) ((EU) 2015/2365) (SFTR).

ESMA first published the statement in January 2020. In the updated statement, ESMA notes that the start of SFTR reporting was delayed by three months to 13 July 2020 due to the COVID-19 pandemic. ESMA has been monitoring the evolution of the reporting of LEI issuer details. It has concluded that, currently, less than 16% of all open SFTs miss an issuer LEI, compared to 26% in September 2020. However, from an individual securities perspective, more than 75% lack an LEI of the third-country issuer in the SFT reports.

Given the still unsatisfactory level of LEI coverage on a global scale, ESMA acknowledges the potential reporting implementation issue regarding SFTs entered into by EU investors for securities of third-country issuers. ESMA expects competent authorities to continue to not prioritise their supervisory actions in relation to reporting of LEIs of third-country issuers. It has issued the updated statement to ensure co-ordinated supervisory actions are taken in response to the issues concerning the application of the SFTR, particularly the requirements regarding third-country issuer LEI reporting.

On third-country issuer LEI reporting, ESMA extends the position set out in the January 2020 version of the statement until 10 October 2022 at the latest. During this period, ESMA expects that:

  • trade repositories will not reject SFT reports of securities without a third-country issuer LEI that are lent, borrowed or provided as collateral in an SFT; and
  • counterparties and other entities participating in SFTs, such as agent lenders and tri-party agents, that lend, borrow or use as collateral securities issued by third-country entities that do not have an LEI will liaise with third-country issuers to ensure they are aware of the requirements under the SFTR.

ESMA will continue to engage with third-country competent authorities to make them aware of the SFTR LEI reporting requirement and solicit a broader coverage of LEIs in third countries. It will give advance notice to market participants before 10 October 2022 regarding its position on third-country issuer LEI reporting.

ESMA reports on quality of data published under EMIR and SFTR

On 15 April 2021, ESMA published its first data quality report (ESMA80-193-1713). The report highlights its supervisory activities relating to the quality of data reported to trade repositories (TRs) under EMIR (648/2012) and under the Regulation on reporting and transparency of securities financing transactions ((EU) 2015/2365) (SFTR).

The report aims to provide an overview of the state of play under the two reporting regimes, and also provide information on national competent authorities' (NCAs) and ESMA's ongoing work to improve the quality of the data.

In respect of EMIR data quality, ESMA's comments include that good progress has been made in recent years in improving the quality of EMIR data, which allows it to be used for regulatory and supervisory purposes. However, there are a significant number of derivatives that are being reported late or not in line with the EMIR format and content rules, as well as derivatives that do not reconcile or are not reported at all.

ESMA acknowledges that since the SFTR reporting regime was only launched recently, it was able to obtain only a limited overview of SFTR data quality in terms of key data quality indicators, such as rejection rates. It notes that, like EMIR, Brexit has also had a significant impact on the SFTR reporting landscape, with a nearly 50% decline in the number of open securities financing transactions (SFTs) immediately following Brexit. However, there has been an increase in the number of open SFTs since that time.

ESMA will publish its data quality report annually.

HM Treasury consults on regulation of non-transferable debt securities

On 19 April 2021, HM Treasury published a consultation paper on proposals to bring the issuance of non-transferable debt securities (NTDS) within the scope of financial services regulation.

NTDS, commonly referred to as "mini-bonds", are unlisted bonds typically issued by companies to retail investors to raise finance. Generally, the issuance of NTDS is not a regulated activity under the Financial Services and Markets Act 2000 (FSMA). As an unregulated activity, investors benefit from few regulatory protections, such as the Financial Ombudsman Scheme (FOS) and the Financial Services and Compensation Scheme (FSCS), when investing in mini-bonds.

The consultation proposes two options for regulatory reform:

  1. making the direct-to-market issuance of certain NTDS, where the proceeds of the issue are used to on-invest or on-lend, a regulated activity. If proceeding with this option, the government's initial view is to do so by amending the operation of article 18 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO), rather than extending the scope of the MiFID II Directive (2014/65/EU); and
  2. extending the scope of the Prospectus Regulation (Regulation 2017/1129) to cover NTDS, so that public offers of NTDS would require an FCA-approved prospectus. This option would mean that the issuance of an NTDS would remain an unregulated activity.

The government believes that of the above options, making the issuance of direct-to-market NTDS a regulated activity best addresses the issues identified with the current regulatory framework.

The consultation also refers to a third option of relying on other FCA and HM Treasury measures, such as future changes to the financial promotions regime. However, these changes will only address the marketing of NTDS and will mean there remains limited regulatory oversight in the design, governance and functioning of NTDS.

Comments can be made on the consultation until 21 July 2021.

Alongside the consultation, HM Treasury has published independent research into NTDS and their role in the economy.

European Commission adopts Delegated Regulation correcting MiFID II Delegated Regulation

On 21 April 2021, the European Commission adopted a Delegated Regulation (C(2021) 2618 final) (Amending Delegated Regulation) and Annex correcting Delegated Regulation (EU) 2017/565 supplementing Directive 2014/65/EU (the MiFID II Delegated Regulation) as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of the MiFID II Directive (2014/65/EU).

To fully comply with MiFID II, the Amending Delegated Regulation will:

  • correct Article 1, paragraph 1 of the MiFID II Delegated Regulation to clarify that it requires the application of Article 64(4), Article 65 and Chapter VIII of the MiFID II Delegated Regulation instead of Article 59(4), Article 60 and Chapter IV; and
  • correct errors that appeared in several cross-references in Annex I to the MiFID II Delegated Regulation relating to client assessment, order handling, client order and transactions, reporting to clients, communication with clients and organisational requirements.

The next step is for the Council of the EU and the European Parliament to consider the draft Amending Delegated Regulation. If neither the Council or the Parliament object, it will be published in the Official Journal of the European Union (OJ) and will enter into force on the twentieth day following that of its publication.

European Commission adopts Delegated Regulation on contractual recognition of stay powers under BRRD

On 22 April 2021, the European Commission adopted a Delegated Regulation (C(2021) 2656 final) on regulatory technical standards (RTS) determining the content of the contractual terms on recognition of resolution stay powers under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD).

Article 71a(1) of the BRRD (which was inserted by the BRRD II Directive ((EU) 2019/879)), requires institutions and entities to include in any financial contract governed by the laws of a third country a contractual term by which the parties recognise that the financial contract may be subject to the exercise of powers to suspend or restrict rights and obligations by the exercise of those powers by a member state resolution authority.

Article 71a(5) of the BRRD empowers the Commission to adopt delegated acts specifying the content of the terms required in Article 71a(1), taking into account institutions' and entities' different business models. The RTS sets out a list of mandatory components that must be present in the contractual terms required in the financial contracts.

The Council of the EU and the European Parliament will now scrutinise the draft Delegated Regulation. If neither object, the Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the European Union (OJ).

FCA consults on changes to conduct and organisational requirements under UK MiFID

On 28 April 2021, the FCA published a consultation paper (CP21/9) on changes to conduct and organisational requirements laid down in UK laws and regulations implementing the MiFID II Directive (2014/65/EU).

The FCA explains that this is the first consultation in its work on capital markets reform, which it is undertaking with HM Treasury, to ensure that the regulation of investment business in the UK is adapted to the structures of UK markets, and is underpinned by the highest regulatory standards.

The FCA's proposed changes, which relate primarily to the Conduct of Business sourcebook (COBS) are summarised below.

SMEs and fixed income, currencies and commodities (FICC) research

The FCA proposes to amend the inducements rules in COBS 2.3A relating to research to broaden the list of what are considered minor non-monetary benefits to include research on SMEs with a market cap below £200m and FICC research. It also suggests changes to how the inducement rules apply to openly available research and research provided by independent research providers.

Best execution reports

The FCA is proposing to amend the best execution rules in COBS 11.2A to remove the obligation on execution venues to publish a report on a variety of execution quality metrics to enable market participants to compare execution quality at different venues (RTS 27 reports), and to remove the obligation on investment firms who execute orders to produce an annual report setting out the top five venues used for executing client orders and a summary of the execution outcomes achieved (RTS 28 reports).

The FCA also intends to revoke the UK versions of Commission Delegated Regulation (EU) 2017/575 (RTS 27) and Commission Delegated Regulation (EU) 2017/576 (RTS 28).

Draft instruments

Appendix 1 to CP19/21 sets out the text of the draft instruments relating to the FCA's proposals:

  • The Conduct of Business Sourcebook (Amendment) Instrument 2021.
  • The Technical Standards (Markets in Financial Instruments Regulation) (Best Execution) Instrument 2021.
HM Treasury to remove UK MiFIR open access regime for ETDs

On 5 May 2021, HM Treasury updated its webpage on the open access regime for exchange traded derivatives (ETDs) to announce the outcome of its review of the regime.

HM Treasury states that it has concluded that the regime is not suitable in a UK-only context and that it intends to remove the regime permanently when parliamentary time allows. It also states that the decision has no bearing on the UK's continued support for the open access regimes in equity and OTC derivatives markets, which will continue to operate as normal.

Under the open access regime for ETDs set out in Articles 35 and 36 of the UK Markets in Financial Instruments Regulation (600/2014) (UK MiFIR), trading venues and CCPs may only deny access to ETDs where the operational risk and complexity arising from granting access would cause undue risk. Although EU MiFIR was amended by the EU CCP Recovery and Resolution Regulation ((EU) 2021/23) to delay the implementation of the regime, that amendment did not form part of retained EU law at the end of the Brexit transition period and consequently the regime continued to apply in the UK from January 2021. In December 2020, HM Treasury announced that it would conduct a review of the regime to assess its suitability for UK markets after the end of the transition period.

ESMA updated opinion on calculating market size of ancillary activity under MiFID II Directive: May 2021

On 6 May 2021, ESMA published an updated opinion (ESMA70-156-478) (dated 4 May 2021) on ancillary activity calculations under the MiFID II Directive (2014/65/EU).

Article 2(1)(j) of the MiFID II Directive provides an exemption from its scope for persons dealing on own account or providing investment services in specific cases, including where their activity is an ancillary activity to their main business (provided certain conditions are met). Commission Delegated Regulation (EU) 2017/592 further specifies the criteria for establishing when an activity is to be considered as ancillary for this purpose. It lays down rules for calculating the overall market trading activity, which ultimately determines whether an activity is ancillary and, as a consequence, whether a market participant falls within the scope of the MiFID II Directive.

In the updated opinion, ESMA provides the estimation of the market size of various commodity derivatives, including metals, oil and coal, as well as emission allowances for 2020. ESMA has prepared the estimations based on data collected from trading venues and data reported to trade repositories under EMIR (648/2012).

LR: FCA consultation on special purpose acquisition vehicles

The FCA has published a consultation paper, Investor protection measures for special purpose acquisition companies: Proposed changes to the Listing Rules (CP21/10), in which it proposes changes to the Listing Rules. The FCA intends to introduce amendments by the summer.

The FCA proposes to amend LR 5.6.8G (Reverse takeovers – requirement for a suspension) to provide that, when a reverse takeover between a shell company and target is announced or leaked, the FCA may agree that a suspension is also not required if satisfied that, where the company is an issuer falling within LR 5.6.5AR(2) (that is, a company whose predominant purpose or objective is to undertake an acquisition or merger, or a series of acquisitions or mergers), the company has sufficient measures in place to protect investors.


FCA extends guidance on cancellations and refunds

On 1 April 2021, the FCA published finalised guidance on cancellations and refunds aimed at credit and debit card firms and insurance providers.

Due to the Covid-19 pandemic, there has been an unprecedented number of cancellations of trips, holidays, and other events. In these circumstances, consumers are generally entitled to claim a refund from the travel or service provider or one of the travel guarantee schemes. Consumers might also be able to make a claim with their credit or debit card provider or their travel insurer.

The guidance is designed to ensure that such firms handle enquiries and claims from consumers in a reasonable timescale, fairly and in a way that minimises inconvenience to the consumer. It extends the guidance that was published in October 2020 and is due to expire on 2 April 2021.

The FCA consulted on extending the guidance in February 2021 due to the ongoing uncertainty around the Covid-19 pandemic. All respondents agreed with the proposed extension, although they had different views on how long it should be extended for. Detail on the feedback raised is in section 2 of the guidance.

The guidance will be effective from 2 April 2021 and will remain in force until varied or revoked.

The FCA will keep the guidance under review as the wider situation relating to Covid-19 develops and will consider whether it should make the guidance permanent, either in its current form or with some changes to it. Any permanent guidance will be subject to a full consultation.

FSB update on support measures and roadmap addressing climate-related financial risks

On 6 April 2021, the Financial Stability Board (FSB) published a letter (dated 30 March 2021) sent by Randal Quarles, FSB Chair, to G20 leaders ahead of their April 2021 summit.

Key points included in the letter

  • Managing the trade-offs of COVID-19 policy support measures going forward. Globally, most of the Covid-19 support measures instigated by the FSB remain in place. Policymakers need to form views on whether, when, and how to extend, amend, or end their support measures.
  • Relating to this, the FSB has published a report on policy considerations relating to the unwinding of support measures. It discusses the extent to which measures have been unwound so far and the matters to which policymakers should have regard when considering whether to extend, amend or end their economic and financial support measures.
  • The significant progress made on "too big to fail" reforms for banks. The FSB published a report on the reforms on 1 April 2020. The evaluation confirmed, among other things, that assessments of the financial stability implications of regulatory reforms call for a system-wide perspective. As non-bank financial institutions (NBFIs) have picked up market share, some risks have moved outside the banking system. The FSB notes the increasingly important role of vulnerabilities in the NBFI sector and is working to address these through its NBFI work program. A first important deliverable will be policy proposals to enhance money market fund resilience, which it will submit to the G20 in July 2021.
  • A roadmap for understanding and addressing climate-related financial risks. Three climate-related workstreams are currently underway in the FSB, covering data, disclosures and regulatory and supervisory practices. In July 2021, the FSB will provide the G20 with two reports. One on ways to promote consistent, high-quality climate disclosures in line with the recommendations of the task force for climate-related financial disclosures, and another on the data necessary to assess financial stability risks and related data gaps. Also, in summer 2021, the FSB will present a roadmap to address climate-related financial risk, which will leverage work being carried out by standard setting bodies and international organisations.
PRA updates statement on implementation of EBA guidelines on reporting and disclosure of exposures

On 27 April 2021, the PRA published an updated statement on the implementation of EBA guidelines addressing gaps in reporting data and public information in the context of the COVID-19 pandemic.

The EBA guidelines require firms to make disclosures in three templates. Templates one and two relate to loan moratoria, while template three relates to public guarantee schemes.

The PRA published a statement (dated 28 July 2020) noting the practical difficulties of complying with the guidelines by the original date and exercised flexibility in its assessment of the timeliness of the disclosures. Also in the statement, the PRA noted that it would keep the approach for disclosure periods under review.

In the light of the continued use of Covid-19 support measures in lending by UK firms, the PRA continues to see substantial benefit to its objectives in the disclosure of information on the effects of the measures that UK firms have taken in response to Covid-19. Firms should therefore continue to use the templates published with the PRA's statement on 28 July 2020 for semi-annual disclosure reference dates up to, and including, 31 December 2021.

Firms may continue to disclose on a semi-annual basis as at 30 June 2021 and 31 December 2021. Firms may also disclose at the half-year and year-end dates for their financial year, if they have an accounting reference date other than 31 December 2021.

PRA updates statement on implementation of EBA guidelines on reporting and disclosure of exposures

On 27 April 2021, the PRA published an updated statement on the implementation of EBA guidelines addressing gaps in reporting data and public information in the context of the Covid-19 pandemic.

The EBA guidelines require firms to make disclosures in three templates. Templates one and two relate to loan moratoria, while template three relates to public guarantee schemes.

The PRA published a statement (dated 28 July 2020) noting the practical difficulties of complying with the guidelines by the original date and exercised flexibility in its assessment of the timeliness of the disclosures. Also in the statement, the PRA noted that it would keep the approach for disclosure periods under review.

In the light of the continued use of COVID-19 support measures in lending by UK firms, the PRA continues to see substantial benefit to its objectives in the disclosure of information on the effects of the measures that UK firms have taken in response to Covid-19. Firms should therefore continue to use the templates published with the PRA's statement on 28 July 2020 for semi-annual disclosure reference dates up to, and including, 31 December 2021.

Firms may continue to disclose on a semi-annual basis as at 30 June 2021 and 31 December 2021. Firms may also disclose at the half-year and year-end dates for their financial year, if they have an accounting reference date other than 31 December 2021.

BCBS, CPMI and IOSCO launch survey on margin calls

On 5 May 2021, the International Organisation of Securities Commissions (IOSCO) published a press release announcing that it, the Basel Committee on Banking Supervision (BCBS), and the Committee on Payments and Market Infrastructures (CPMI) (the Committees) have established a joint working group on margin (JWGM) to assess the use of margin calls as part of an examination into liquidity shortfalls during the early stages of the COVID-19 pandemic (that is, during March and April 2020).

The Committees have launched a voluntary survey, which is split into two parts. One part is addressed to clients (that is, entities that participate in the securities markets through an intermediary), the other is addressed to non-bank intermediaries.

The JWGM is examining the following areas, looking at both initial and variation margins:

  • margin in cleared and uncleared markets during the March 2020 market turmoil, including clearing member-client dynamics;
  • margin practice transparency, predictability and volatility during the March 2020 market turmoil across various markets, jurisdictions and margining models; and
  • market participants' (especially non-banks') liquidity management preparedness to meet margin calls and the actions they took to do so (for example, firms' ability to use or transform high quality liquid assets).

Separately the Committees are collecting data from central counterparties (CCPs) and bank intermediaries.

IOSCO refers in the press release to the Financial Stability Board's (FSB) November 2020 report setting out the findings of its holistic review of the March 2020 market turmoil, in which the FSB noted that some market participants in the non-bank financial intermediation (NBFI) sector experienced a Covid-19 related liquidity shock in March 2020. IOSCO explains that as part of the work programme to enhance the resilience of the NBFI sector, the G20 had agreed that the FSB should co-ordinate with the Committees to look at issues around margin calls during the early stages of the COVID-19 pandemic. The results of this work will be incorporated in the overall FSB NBFI work and delivered to the G20 by the FSB.

Clients and non-bank intermediaries are requested to respond to the survey by 17 May 2021. The Committees will be holding an information session to provide additional context to the surveys and to answer questions.


Working Group paper supporting transition from LIBOR in sterling structured products

On 19 April 2021, the Working Group on Sterling Risk-Free Reference Rates published a paper that supports the transition of legacy structured products where GBP LIBOR is in use and considers how a sterling structured products market could be designed using compounded in arrears SONIA.

The Working Group's priorities and roadmap envisage a broad-based transition from GBP LIBOR to SONIA by the end of 2021 across sterling bond, loan and derivatives markets. This includes the sterling structured products market, which has links to a number of areas within these broad product categories. The paper addresses various types of structured products, including on-balance sheet issuances and repackaging transactions (new and legacy).

To help market participants complete their operational transition plans for structured products by the end of 2021, the paper encourages participants to consider issuing new structured products based on compounded in arrears SONIA.

To date, the customary convention for new issuance in the sterling bond and securitisation markets is to use compounded in arrears SONIA for the purposes of interest determination, and the Working Group anticipates that this will readily apply to new structured product issuance too. Where such structured products have a derivative-linked pay-out or coupon, the development of a new structured products market would be inherently linked to a compounded in arrears SONIA derivatives market.

The Working Group encourages market participants to amend their legacy GBP LIBOR referencing structured products now where it is feasible to do so.

The paper states that consent solicitation or other forms of liability management could be a means to accelerate active transition away from GBP LIBOR. The Working Group also encourages market participants to consider publicly disclosing, where appropriate, transactions referencing compounded in arrears SONIA (together with any disclosable information around the transition mechanisms).

Sterling Working Group statement on LIBOR transition and paper on fallbacks in uncleared derivatives

On 23 April 2021, the Working Group on Sterling Risk-Free Reference Rates (Sterling Working Group) released a statement recommending that participants across the bond, loan and derivatives markets actively transition legacy sterling LIBOR contracts to SONIA as soon as possible, to ensure contractual certainty ahead of LIBOR cessation.

For derivatives markets participants, the Sterling Working Group also published a paper outlining key considerations for counterparties that are preparing for the operation of IBOR fallbacks in non-cleared sterling LIBOR derivatives.

The paper examines a number of themes covering operational aspects of non-cleared sterling LIBOR derivatives, including trade and market infrastructure, risk and accounting processes, and regulatory reporting. It describes issues that may arise when contractual fallbacks take effect, and suggests further steps that counterparties can take to mitigate risks.

The Sterling Working Group has previously encouraged early adherence to the ISDA IBOR Fallbacks Protocol, which enables parties to incorporate fallbacks into legacy LIBOR referencing contracts. The Sterling Working Group views these fallbacks as a critical tool to reduce risks associated with LIBOR cessation.

However, counterparties should also consider whether, in their particular circumstances, it may be more appropriate to actively transition legacy contracts from sterling LIBOR to SONIA, rather than relying on ISDA's IBOR fallbacks.

The Sterling Working Group statement compares the two approaches and the advantages and disadvantages of each, in relation to sterling bilateral swaps.


FCA information on changes for consumer credit firms post-Brexit

On 13 April 2021, the FCA published a statement relating to changes certain consumer credit firms will have to make to pre-contract consumer credit information forms post-Brexit.

The FCA reminds firms that there are upcoming changes for firms subject to regulations 8, 10 and 11 of the Consumer Credit (Disclosure of Information) Regulations 2010 (SI 2010/1013) (Disclosure Regulations) and the relevant rules in the FCA Handbook.

On an accompanying webpage, the FCA explains that, from 1 June 2021:

  • firms subject to regulation 8 of the Disclosure Regulations must only use the new (post-Brexit) pre-contract credit information form; and
  • firms subject to regulations 10 and 11 of the Disclosure Regulations and CONC 2.7.2R(4)(a) of the FCA Handbook must only use the new pre-contract consumer credit information (overdrafts) form.

Among other things, the updated forms amend references on the forms from "representative in your member state of residence" to "representative in United Kingdom" and delete references to "Standard European Consumer Credit Information". The changes were made by the Consumer Credit (Amendment) (EU Exit) Regulations 2018 (SI 2018/1038), which were published in October 2018.

If the Disclosure Regulations are not complied with, a credit agreement is only enforceable against the debtor on an order of the court under the Consumer Credit Act 1974 (CCA).