Investment management update - September 2021

22 September 2021

Welcome to the September 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:

  • the FCA’s third and final consultation on the Investment Firms Prudential Review;
  • a significant development in the Frensham case, in which the Upper Tribunal decided that the FCA misapplied the fit and proper persons test;
  • the European Commission is consulting on the timing of the application of the PRIIPs Key Information Document to UCITS funds; and
  • final EU rules have been adopted for Money Market Funds’ investment rules.



FCA Board considers Google's plan to change terms and conditions relating to financial products and services adverts

On 4 August 2021, the FCA published minutes from its Board meeting held on 24 June 2021.

Among other things, at the meeting, Nikhil Rathi, FCA Chief Executive, briefed the Board about Google. He advised that Google intended to change its terms and conditions requiring those wishing to run Google adverts relating to financial products and services to either be authorised or have their adverts approved by an authorised firm. Google planned to consult on this requirement during July and August 2021, with a view to introducing the requirement in September 2021.

The Board advised that it was keen to be kept updated on these developments, including evidence of their effectiveness.

Third FCA consultation on Investment Firms Prudential Regime

On 6 August 2021, the FCA published its third consultation paper on the Investment Firms Prudential Regime (IFPR) (CP21/26).

The FCA proposes that:

  • FCA investment firms that are not small and non-interconnected (that is, non-SNIs) should disclose information about their risk management and governance arrangements, their own funds, own funds requirements and investment policy;
  • any small and non-interconnected (SNI) firm that has issued additional tier 1 (AT1) instruments should disclose information about their risk management arrangements; and
  • all FCA investment firms must make some disclosure on their remuneration policies and practices, proportionate to the size and type of firm.

It plans to consult separately on requirements for firms to make disclosures on environmental, social and governance (ESG) issues.

The FCA proposes to introduce a rule covering where partners in a partnership or members in a limited liability partnership (LLP) take drawings from the business that exceed the profits made. This is where excess drawings are made by partners without being recorded as a loss but are, instead, treated as a loan to partners or members. The new rule would require an FCA investment firm that is a partnership or LLP to deduct excess drawings by its partners or members that exceed the profits of the firm.

Appendix 1 to CP21/26 contains draft versions of the Handbook instruments relating to the FCA's proposals:

  • Investment Firms Prudential Regime (No. 2) Instrument 2021; and
  • Investment Firms Prudential Regime (Consequential Amendments) Instrument 2021.

Appendix 2 to CP21/26 contains a draft version of the Technical Standards instrument: Technical Standards (Financial Conglomerates Directive) (Amendment) Instrument 2021.

The consultation closed on 17 September 2021. The FCA will consider the feedback and publish a policy statement and final rules for the whole of the IFPR in autumn 2021.

FCA updates digital sandbox webpage with information on planned sustainability cohort

On 10 August 2021, the FCA updated its webpage on the digital sandbox to provide further information about the second phase of the initiative, which will focus on providing support to innovators looking to develop and validate solutions in the area of ESG data and disclosure.

The FCA stated that it opened the application window for the sustainability cohort on 6 September 2021, with a view to opening the sandbox to successful participants in November 2021 and providing access to the testing environment from January 2022.

It will assess applications on the following eligibility criteria:

  • genuine innovation: the solution or product is sufficiently different from what already exists in the market;
  • in scope: the solution would benefit UK consumers or financial services firms by solving one of the ESG data and disclosure use cases. Companies do not need to be domiciled in the UK, but their solution needs to be intended for use in the UK market;
  • need for a digital sandbox: the solution requires digital sandbox features in order to be developed or improved; and
  • credible testing plan: the application has proposed a well-designed testing plan, detailing success criteria and future steps.

Applicants must submit their applications through the online application form on the digital sandbox website, which went live on 6 September.

The FCA states that it will publish more information in the coming weeks.

FCA Regulation round-up: August 2021

On 19 August 2021, the FCA published its Regulation Round-up for August 2021, which includes the following items of interest.

  • Strong customer authentication (SCA) and mobile-based authentication. The FCA expects all firms to develop SCA solutions that work for all customers, in line with paragraph 20.21 of the guidance in its approach document on payment services and electronic money. Firms must also consider their obligations under the Equality Act 2010. They should provide appropriate means of authentication to meet the needs of those in vulnerable circumstances, including customers who are unable to use a mobile phone. The FCA expects digital-only firms to develop contingency arrangements for customers, should their circumstances change. Firms not offering appropriate means of authentication should do so as soon as possible, to avoid the risk of regulatory action.
  • Firm details and directory persons. Firms have told the FCA they are confused about the processes to follow to ensure the details it holds are correct. The FCA has therefore updated its dedicated webpage setting out the steps to follow in relation to firm details and directory persons. The webpage now explains more clearly what is required. To be compliant, it is vitally important to update or attest to the accuracy of these details in the right way and within the right timeframe.
  • FCA sustainable finance innovation programme. FCA Innovation are launching a programme of work to support firms and regulators in overcoming sustainable finance and climate challenges, as well as developing and launching new products and solutions. As noted in the item above, applications for the digital sandbox opened on 6 September 2021. Applications for the Green FinTech Challenge 2021 opened on the same date; more information is available on the FCA's dedicated Green FinTech Challenge webpage. The FCA held its pilot Green FinTech Challenge in October 2018.

The FCA is also hosting a TechSprint, from 18-21 October 2021, bringing together the FCA and industry to explore better use of technology on ESG data and disclosures.

FCA portfolio letter for investment-based crowdfunding firms

On 17 August 2021, the FCA published a portfolio strategy letter (dated 2 July 2021) for firms that are active in the investment-based crowdfunding (IBCF) market.

The FCA's objective concerning the supervision of IBCF firms is to ensure that these firms promote investment opportunities appropriately so that consumers can understand the risks posed by these investments, which the FCA regards as "speculative and high-risk".

In the letter, the FCA sets out details of the following key risks that it has observed in the market, as well as its expectations of firms and a summary of its planned work.

  • Inappropriate investments. The FCA sets out its expectations of how firms should address the risk of consumers investing in inappropriate high-risk investments that do not meet their needs, including gathering of information on customers, disclosures to customers and the management of conflicts of interest.
  • Scams. The FCA sets out its expectations of how firms should address the risk of consumers' exposure to fraud and investment scams when using crowdfunding platforms, including conducting thorough due diligence procedures and educating consumers about the risk of scams. Firms should also maintain a high standard of operational resilience.
  • Appointed representatives oversight. The FCA expects chief executives of IBCF firms to understand their responsibilities and accountability for the actions and conduct of their firms' appointed representatives and to ensure that firms have robust systems and controls for oversight of their activities. It will seek assurances from chief executives on these issues.
  • Disorderly firm failure. The FCA expects firms to have a good understanding of their regulatory capital requirements and reporting requirements, to undertake regular reviews of the adequacy of their capital and liquidity and to have a credible wind-down plan that includes appropriate and timely triggers for implementation.

The FCA will monitor firms' activities in respect of these issues. It emphasises that chief executives are responsible for ensuring that their firm meets FCA requirements and should take all necessary actions to ensure these are met. It warns that it will use the Senior Managers and Certification Regime (SM&CR) to engage directly with accountable individuals on areas of concern.

FCA statement reminding firms about financial crime risks linked to Afghanistan

On 31 August 2021, the FCA published a statement reminding firms about potential financial crime risks linked to Afghanistan.

It explains that developments in Afghanistan have highlighted the continuing need for robust systems and controls that respond to changing risks. Firms should be aware of the possible impact these events may have on patterns of financial activity when they assess risks related to particular customers and flows of funds.

Among other things, the FCA reminds firms that the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (Money Laundering Regulations 2017 or MLRs 2017) provisions related to firm risk assessments (regulation 18), customer due diligence (CDD) (regulations 27 to 32), enhanced due diligence (EDD) (regulation 33) and transaction monitoring (regulation 28(11)) are particularly relevant in this context.

The FCA notes that while Afghanistan is not currently listed as a high-risk jurisdiction in Schedule 3ZA of the MLRs 2017, firms are required by regulation 33(1)(a) to apply risk sensitive EDD measures where there is a high risk of money laundering or terrorist financing. Regulation 33(6) sets out factors that firms may use in their assessment including, but not limited to, country risks.

Firms are expected to consider the impact of these developments on their anti-money laundering (AML) policies and procedures in a risk-based manner, and take the steps necessary to ensure they continue to meet their legal and regulatory AML and reporting obligations. Specifically, firms should:

  • ensure that they appropriately monitor and assess transactions to Afghanistan to mitigate the risks of being exploited to launder money or finance terrorism;
  • continue to ensure that suspicious activity is reported to the UK Financial Intelligence Unit (UKFIU); and
  • continue to meet their obligations under MLRs 2017 and terrorist financing legislation.

The FCA also reminds firms that they should continue to screen against the UK financial sanctions list and, in particular, the regime-specific list for Afghanistan.

Upper Tribunal dismisses reference concerning FCA decision notice for non-financial misconduct

On 31 August 2021, the Upper Tribunal (Tax and Chancery Chamber) published a decision relating to Jon Frensham.

Mr Frensham made a reference to the Tribunal of a decision notice issued by the FCA on 1 October 2020. The decision notice sets out the FCA's decision to withdraw Mr Frensham's approval and prohibit him from performing any function in relation to any regulated activities. The FCA considers that Mr Frensham is not a fit and proper person as he was convicted of attempting to meet a child following sexual grooming. He also failed to be open and transparent.

Mr Frensham contended that the FCA wrongly applied the fitness and properness test to the facts. In particular, he argued that the FCA allowed irrelevant considerations to affect its judgment and did not have sufficient, or any, regard to relevant factors, including that the conviction did not relate to his regulated activity, it was not for a dishonesty offence and there are no indirect connections between the criminal offence and his regulated activity. He argued that a prohibition order is wholly disproportionate and should not be applied where there has been no dishonesty finding relating to conduct which, while very serious, took place outside the professional sphere.

This is the first time the Tribunal has had to consider a case where the FCA is seeking a prohibition order against an individual based on a conviction for a criminal offence not involving dishonesty in circumstances where the behaviour concerned was unrelated to the individual's regulated activity. The Tribunal applied principles derived from cases relating to solicitors, as it considered they can by analogy be applied in the context of the activities the FCA regulates.

The Tribunal dismissed Mr Frensham's reference. It identified some flaws in the FCA's approach to the relevance of the conviction, but found that the way Mr Frensham dealt with the consequences of his conviction demonstrated a lack of integrity. The Tribunal advised that if it had been asked to decide the case on the basis of the conviction alone, it is likely it would have asked the FCA to reconsider its decision.


EU Platform on Sustainable Finance draft report and call for feedback on preliminary recommendations for technical screening criteria for EU taxonomy

On 4 August 2021, the European Commission published a draft report produced by the EU Platform on Sustainable Finance on preliminary recommendations for technical screening criteria (TSC) for the EU taxonomy, with an accompanying call for feedback.

The draft report is a working document by the Platform and contains preliminary TSC developed by the Platform's Technical Working Group (TWG). Part A of the report and its Annex describe the EU taxonomy approach, the activities considered and the methodological framework followed. Part B of the report and its Annex include the feedback materials, comprising the questions on which stakeholders are invited to provide feedback and the proposed draft TSC.

The TWG's focus in the draft report is primarily on presenting a first set of priority economic activities and draft recommendations for associated substantial contribution and do no significant harm (DNSH) TSC regarding the four non-climate environmental objects covering water, circular economy, pollution prevention and biodiversity and ecosystems. However, a small number of economic activities and corresponding draft recommendations for TSC related to the climate mitigation and adaptation objectives have also been included. Non-inclusion by the Platform in the first set of priority activities does not imply that the activity will not be considered for inclusion in the EU taxonomy.

The call for feedback (to be submitted via an online questionnaire) closes to responses on 24 September 2021. A related webpage states that this is not an official Commission consultation and that the call for feedback neither commits the Commission nor precludes any policy outcomes.

The Platform will analyse the feedback received and submit its final report to the Commission in November 2021. The Commission will then analyse and consider the recommendations as part of its preparations for a delegated act containing activities and associated TSC for the remaining four environmental objectives and some additional activities and according criteria for the climate objectives.

European Commission consults on amendments to UCITS Directive on PRIIPs KID exemption

On 5 August 2021, the European Commission published a consultation on its legislative proposal COM(2021) 399 for a Directive amending the UCITS Directive (2009/65/EC) as regards the use of key information documents (KIDs) by management companies of UCITS (2021/0219(COD)).

The Commission adopted the legislative proposal in July 2021.

The proposed Directive inserts a new Article 82a in the UCITS Directive. This states that where a KID is drawn up, provided, revised and translated for a UCITS pursuant to PRIIPs Regulation (1286/2014), it should be considered as satisfying the requirements applicable to key investor information for the purposes of the UCITS Directive. Member states are expected to apply measures implementing the amending Directive from 1 July 2022.

The deadline for comments on the legislative proposal was 9 September 2021. The Commission will summarise all feedback it receives and present it to the European Parliament and Council of the EU with the aim of feeding into the legislative debate.



FCA publishes text of SEC MoU on OTC derivatives substituted compliance

On 6 August 2021, the FCA published the text of a memorandum of understanding (MoU) it and the Bank of England (BoE) (including in its capacity as the PRA) have entered into with the US Securities and Exchange Commission (SEC) on consultation, co-operation and the exchange of information relating to the supervision and oversight of certain cross-border OTC derivatives entities (covered firms) in connection with the use of substituted compliance.

Under Rule 3a71-6 of the US Securities Exchange Act of 1934, the SEC can issue an order relating to the UK financial regulatory system determining that an SEC-registered security-based swap dealer or major security-based swap participant may comply with specified UK requirements to satisfy US requirements. Before the SEC issues the order, it must determine that UK requirements applicable to a covered firm or its activities are comparable to US requirements. The SEC must also have entered into a MoU or other arrangement that addresses supervisory and enforcement co-operation.

The MoU, which came into force on 30 July 2021:

  • addresses the requirement to have a MoU in place; and
  • provides the SEC with the necessary tools to monitor and enforce ongoing compliance by covered firms with any substituted compliance order and applicable US laws and regulations. Among other things, the MoU covers data protection, information sharing, and site visits.


ESMA updates Q&As on Market Abuse Regulation: August 2021

On 6 August 2021, ESMA published an updated version of its Q&As on the Market Abuse Regulation (Regulation 596/2014) (MAR) (ESMA70-145-111, Version 15).

ESMA has updated the document to provide new Q&As on:

  • interaction between MAR and the CRA Regulation (1060/2009) (CRAR): Article 7 MAR and Article 10(2a) CRAR;
  • disclosure to the public of credit ratings and inside information: Article 7 MAR and Article 10(2a) CRAR; and
  • distribution of subscription ratings and disclosure of inside information: Article 7 MAR and Article 10(2a) CRAR.
Delegated Regulation on investment requirements under MMF Regulation published in OJ

On 23 August 2021, Commission Delegated Regulation (EU) 2021/1383 amending Delegated Regulation (EU) 2018/990 with regards to requirements for assets received by money market funds (MMFs) as part of reverse repurchase agreements was published in the Official Journal of the European Union.

The new Delegated Regulation, made under Article 15(7) of the MMF Regulation ((EU) 2017/1131) (MMF Regulation), came into force on 12 September 2021 (that is, twenty days following its publication in the Official Journal).

ESMA consults on draft RTS on suitability assessments of DRSP management body members under MiFIR

On 24 August 2021, ESMA published a consultation paper on the first stage in the development of draft regulatory technical standards (RTS) on suitability assessments of data reporting services providers' (DRSPs) management body members under the Markets in Financial Instruments Regulation (600/2014) (MiFIR).

The draft RTS build on existing ESMA guidelines that were published in September 2017, which clarify how market operators and DRSPs should record information to make it available to national competent authorities (NCAs) for the exercise of their supervisory duties.

ESMA is mandated to develop the draft RTS under Article 27f(5) of MiFIR, taking account of the different roles and functions carried out by the management body of DRSPs and the need to avoid conflicts of interest between management body members and users of the approved publication arrangement (APA), consolidated tape provider (CTP) or approved reporting mechanism (ARM).

ESMA proposes introducing requirements covering good repute, honesty and integrity, sufficient time commitment, knowledge, skills and experience, independence, induction and training, diversity, and record-keeping.

The deadline for comments on the draft RTS is 24 September 2021. ESMA intends to finalise and submit the draft RTS to the European Commission by Q1/Q2 2022.

Delegated Regulation on co-operation and exchange of information under Securitisation Regulation published in OJ

On 30 August 2021, Commission Delegated Regulation (EU) 2021/1415 supplementing the Securitisation Regulation ((EU) 2017/2402) with regard to regulatory technical standards (RTS) on the co-operation, exchange of information and notification obligations between competent authorities and ESMA, EIOPA and the EBA, was published in the Official Journal of the European Union.

The Delegated Regulation, which was adopted on 5 May 2021, has been made to ensure that co-operation and exchange of information under Article 36(1) of the Securitisation Regulation takes place in an efficient and timely manner. It establishes common procedures and forms to be used for requesting co-operation or information and responding to these requests.

The Delegated Regulation is based on draft RTS that ESMA submitted to the European Commission. ESMA did not consult on the draft RTS or analyse the potential costs and benefits as it considered that this would have been highly disproportionate to the scope and impact of the RTS, taking account of the fact they mainly concern competent authorities and the European Supervisory Authorities (ESAs).

The Delegated Regulation was made under Article 36(8) of the Securitisation Regulation and came into force on 19 September 2021 (that is, 20 days after publication in the Official Journal).