Investment management update - Summer 2021 round-up

08 September 2021

Welcome to the latest edition of our investment management update, covering a round-up of developments over the summer. 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 update include:

  • a raft of ESG-related publications, including the FCA’s consultation on asset managers’ climate disclosures and guiding principles on ESG, several rules under the EU’s Taxonomy Regulation, and the EU’s new sustainable finance strategy;
  • the FCA has published the informative conclusions of its multi-firm reviews into AFMs and into fund managers’ annual value assessments;
  • the FCA has published two out of three policy statements on the Investment Firm Prudential Review; and
  • the UK authorities have published their intended policy actions arising from the review into liquidity risk management in open-ended funds.



FCA announces successful applicants to seventh cohort of regulatory sandbox

On 10 June 2021, the FCA published a new webpage providing details of the 13 firms that were successful in applying to begin testing in the seventh cohort of the regulatory sandbox.

The FCA received 58 applications, with applications coming from firms operating in the UK and overseas. Applications primarily came from firms looking to operate in the retail banking and retail lending sectors.

The FCA explains that, in the light of the Covid-19 pandemic, it was interested in more innovation and testing from firms developing businesses, products or services designed to detect fraud and scams, support the financial resilience of vulnerable consumers, or improve access to finance for SMEs.

The FCA also refers to the cross-border testing environment developed by the Global Financial Innovation Network (GFIN), which it chairs with a network of 72 financial regulators and related organisations, to enable certain innovative firms to trial their products or services across multiple jurisdictions. It states that the GFIN is working with a select group of firms to agree cross-border testing plans, and two firms have been accepted to begin domestic tests in the FCA's regulatory sandbox.

Although the regulatory sandbox is currently run on a cohort basis, with application windows opened periodically throughout the year, the FCA says that it intends to move to "always open" later in 2021, and make the regulatory sandbox available throughout the year. It will also expand and clarify the scope of qualifying propositions. The FCA will make further announcements about these changes.

On 2 August 2021, the FCA also published a guide to assist firms making a regulatory sandbox application.

The regulatory sandbox enables firms to test innovative propositions in a live environment and the guide includes information about the FCA's eligibility criteria.

The FCA has also updated its webpage on the regulatory sandbox to confirm that it is now always open. This means firms can submit applications at any point throughout the year. Previously the regulatory sandbox operated on a cohort basis, which meant that firms could only apply during a specific window in the calendar year.

FCA consults on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers

On 22 June 2021, the FCA published a consultation paper on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (CP21/17).

In CP21/17, the FCA sets out its proposals to introduce the following climate-related financial disclosure rules and guidance, consistent with the recommendations and recommended disclosures developed by the Task Force on Climate-related Financial Disclosures (TCFD).

  • Entity-level disclosures. Firms would be required to publish, annually, an entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers.
  • Product or portfolio-level disclosures. Firms would be required to produce, annually, a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.

The FCA intends to introduce a new environmental, social and governance (ESG) sourcebook to set out its proposed rules and guidance. The proposals in CP21/17 relate solely to climate-related disclosures, but the FCA anticipates that the ESG sourcebook will expand over time to include new rules and guidance on other climate-related and wider ESG topics.

The scope of the proposed rules and guidance would cover 98% of assets under management in both the UK asset management market and held by UK asset owners, representing £12.1tn in assets managed in the UK. However, the FCA's proposals would not apply to firms with less than £5bn in assets relating to relevant activities.

The proposed FCA Handbook text is set out in Appendix 1 to CP21/17, which contains a draft version of the Disclosure of Climate-Related Financial Information (Asset Manager and Asset Owner) Instrument 2021.

CP21/17 closes to responses on 10 September 2021. The FCA intends to confirm its final policy on climate-related disclosures before the end of 2021.

In developing its proposals, the FCA notes it has focused on outcomes and taken into account other related requirements that firms face internationally, including the Sustainable Finance Disclosure Regulation ((EU) 2019/2088) (SFDR). It will continue to consider the interaction with these requirements as the UK government further develops its policy position.

FCA speech on building a regulatory environment for future

On 22 June 2021, the FCA published a speech by Nikhil Rathi, FCA Chief Executive, on building a regulatory environment for the future.

In his speech, Mr Rathi explains the FCA must be agile and confident to build and operate an effective regulatory regime for the firms and consumers of the future. He highlights three ways the FCA is doing this, namely: meeting the needs of UK markets, setting the bar high at the gateway for entry to regulation and intervening assertively to deal with misconduct, as well as playing its part in international regulatory discussions.

Points of interest

  • The FCA's attention is turning to the broader MiFID regime. It has contributed to an HM Treasury consultation to be published in summer 2021. The proposals are the product of the FCA's experience of the EU regime, listening to the views of market participants and reflecting the future of UK markets. Areas most in need of reform include market structure, the operation of the transparency regime, the regulation of commodity derivatives markets and improving access to market data.
  • In July 2021, the FCA will consult on removing other barriers to companies listing. This will increase opportunities for investors without compromising on safeguards. The consultation will include a wider discussion seeking views on the purpose of the listing regime and whether wider-reaching reforms could improve its effectiveness.
  • Co-operation with the EU is generally working well. However, the lack of mutual equivalence in certain areas creates market inefficiencies and results in increased consumer costs. The FCA has dealt with potential challenges in a pragmatic way (for example, using its temporary transitional power (TTP)), but it will, in time, have to consider the extent to which its objectives are at risk and whether the current position is sustainable.
  • There are 1,450 EEA firms currently accessing UK markets via the temporary permissions regime (TPR). The move to a more permanent arrangement requires a rigorous review of all firms seeking to enter the UK authorisation gateway. The FCA's robust approach continues in its supervision of firms. It will act quickly to remove firms' permissions where they are not using their authorisation or are misusing it. The FCA also anticipates that, where there are significant risks, it will need to supervise overseas firms accessing the UK market more directly to ensure they meet the required standards.
HM Treasury review of UK Securitisation Regulation

On 24 June 2021, HM Treasury published a call for evidence to inform its review of the retained EU law version of the Securitisation Regulation ((EU) 2017/2402) (UK Securitisation Regulation).

A key aim of the review is to assess the regulatory approach of the UK Securitisation Regulation and its effect on the UK securitisation market, as well as any wider implications for financial stability.

In particular, the review will examine:

  • risk retention requirements, including whether the different retention methods available to market participants are still appropriate;
  • the scope of information captured by existing disclosure requirements, and whether this is a determining factor in structuring private or public securitisations;
  • the development of a green securitisation framework;
  • the appropriateness of the third-party verification regime given the limited number of UK authorised verifiers;
  • the role of securitisation special purpose entities in effectively facilitating securitisations; and
  • Alternative investment fund managers (AIFMs) and the definition of institutional investor.

The review will also consider the potential for a third-country equivalence regime for simple, transparent and standardised (STS) securitisations. The regime would enable overseas securitisations to qualify as STS under the UK Securitisation Regulation, subject to STS equivalence determinations by HM Treasury.

The deadline for responses to the call for evidence was 2 September 2021.

First and second FCA policy statements on Investment Firms Prudential Regime

On 29 June 2021, the FCA published its first policy statement on the implementation of the Investment Firms Prudential Regime (IFPR) (PS21/6).

The IFPR is a revised prudential regime for FCA-authorised investment firms that is heavily based on the Investment Firms Regulation ((EU) 2019/2033) (IFR) and the Investment Firms Directive ((EU) 2019/2034) (IFD). The IFPR is expected to take effect on 1 January 2022. The legislative basis for the IFPR is set out in the Financial Services Act 2021 (FS Act) and in statutory instruments to be made under the FS Act. The majority of the rules relating to the IFPR will be set out in a new prudential sourcebook: the Prudential sourcebook for MiFID Investment Firms (MIFIDPRU).

PS21/6 sets out the FCA's current timetable for the IFPR.

  • A third consultation paper to be published in early Q3 2021. The FCA envisages that it will cover:
    • disclosure;
    • consequential amendments to the Handbook and technical standards relating to the UK CRR;
    • issues relating to the UK implementation of the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) and the Financial Conglomerates Directive (2002/87/EC) (FICOD); and
    • final application provisions.
  • The policy statement to CP21/7 to be published in early Q3 2021. This will contain a consolidated set of near-final rules, reflecting the overall position adopted by the FCA across the first two consultations.
  • The policy statement to the third consultation paper to be published in Q4 2021.

On 26 July 2021, the FCA published its second policy statement on the implementation of the Investment Firms Prudential Regime (IFPR) (PS21/9).

The FCA states that it has largely implemented its proposals as consulted on in CP21/7, although it has made some amendments to provide more clarity in response to some of the feedback received. Chapter 15 of PS21/9 has a detailed summary of the amendments to the rules consulted on in CP21/7.

Appendix 1 to PS21/9 contains a draft version of the Handbook instruments containing near-final views on the issues consulted on in CP21/7: the Investment Firms Prudential Regime Instrument 2021 and the Investment Firms Prudential Regime (Consequential Amendments to Other Prudential Sourcebooks) Instrument 2021.

The locations of the proposed rules in the near-final version of the Investment Firms Prudential Regime Instrument 2021 are set out below. The text of the instrument reflects the near-final policy set out in PS21/6, as well as PS21/9, so that firms have the key IFPR requirements in one location.

The FCA intends to publish a third consultation paper in Q3 2021. The FCA envisages that it will cover:

  • disclosure (MIFIDPRU 8);
  • consequential amendments to the Handbook and technical standards relating to the UK Capital Requirements Regulation (575/2013) (UK CRR);
  • issues relating to the UK implementation of the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) and the Financial Conglomerates Directive (2002/87/EC) (FICOD); and
  • final application provisions.

The FCA intends to publish a third policy statement in Q4 2021. It will publish final rules once the relevant statutory instruments under the FS Act have been made.

FCA multi-firm review into activities of host AFM firms

On 30 June 2021, the FCA published a webpage setting out the findings and next steps following its multi-firm review into authorised fund managers (AFMs) that delegate investment management to third parties outside their corporate group (known as host AFMs or host authorised corporate directors (ACDs)).

From Q4 2019 to Q4 2020, the FCA visited a sample of host AFMs to review the effectiveness of their governance, controls and monitoring and ask questions about the risks in their business models. These firms operate a significant number of authorised funds.

The FCA's key observations are summarised in four main areas.

  1. Due diligence over delegated third-party investment managers and funds.
  2. Oversight of delegated third-party investment managers and funds.
  3. Governance and oversight.
  4. Financial resources.

In broad terms, the FCA found that some firms were operating effectively, but others did not meet required standards. In particular, it identified weaknesses in governance structures, conflicts of interest management and operational controls. The FCA also found some firms referring to funds as if they were solely operated by delegate third-party investment managers or fund sponsors rather than themselves, and a lack of focus on controlling the risk of harm from investors exposed to inappropriate or poor value products.

The FCA is providing written feedback to all the firms reviewed and will use tools, including skilled person reports, to improve compliance in the host AFM sector. The FCA intends to review the progress of each firm in the next 12 - 18 months.

Where firms have deficiencies in either financial or non-financial resources, the FCA will ensure they take the necessary steps to resolve this. This could involve the FCA assessing their financial resources, including capital and liquidity positions.

Although the review mainly focused on AFMs managing UK UCITS funds through a host model, the FCA expects all AFMs, regardless of their business model, to consider the review's findings and assess whether there are weaknesses in their own systems that need addressing. In addition, while the FCA's observations are focused on conflicts and issues arising in a host model, it believes there are also useful lessons for firms operating within a group structure.

The FCA describes the review findings as "significant" and advises it intends to conduct further work to identify whether it is appropriate to make changes to its regulatory framework. This could potentially involve rule changes, on which the FCA would consult.

FCA multi-firm review on AFMs assessment of funds' value

On 6 July 2021, the FCA published its findings, on a webpage, following a multi-firm review of the processes used by different authorised fund managers (AFMs) when carrying out assessments of value (AoV) for the funds they operate.

Between July 2020 and May 2021, the FCA visited a sample of AFMs (18 firms, covering different business models and sizes) to review their AoV arrangements. It evaluated its findings against requirements and guidance in COBS and COLL. The FCA found that most of the AFMs reviewed had not implemented the AoV arrangements it expects to comply with its rules. Many had not implemented assessments meeting the minimum consideration requirements and several practices fell short of the FCA's expectations.

Summary of the FCA's key findings

  • Applying AoV rules. Some firms assessed value in the abstract, rather than weighing up the value delivered against the costs and charges investors pay to invest in the fund.
  • Assessment of service quality. Many firms considered service quality only at a firm level rather than by fund and unit class, even when variations in service levels between funds and unit classes were likely. Firms could not provide evidence for why a one-size-fits-all approach was appropriate, or what might trigger a fund or unit class level service quality assessment.
  • Assessment of performance. The FCA found that sometimes fund performance was assessed using measures that do not reflect a fund's investment policy and strategy.
  • General assessment of AFM costs. Many firms incorrectly implemented the requirement in COLL 6.6.21R(3). Rather than seeing this as a consideration of fees and charges incurred by investors in the context of costs incurred by the AFM in operating the fund, firms compared total fund charges with those of competitors' funds.

In the light of its findings, the FCA has published a statement. Among other things, it states that it expects more rigour from AFMs when assessing value in funds. The FCA expects all AFMs to consider the findings from its review and use them to assess their AoV processes. Where necessary, AFMs should make changes to address shortcomings.

The FCA intends to review firms again within the next 12 to 18 months and will assess how well firms have reacted to its feedback. It will consider other regulatory tools if it finds firms are not meeting the standards it expects to comply with its rules.

Joint FCA, PRA and BoE discussion paper on diversity and inclusion in the financial sector

On 7 July 2021, the FCA, PRA, and Bank of England (BoE) (in its capacity of supervising financial market infrastructure (FMI) firms) published a joint discussion paper (DP21/2) setting out policy options to improve diversity and inclusion in financial services. The FCA has also published a paper providing a review of research literature that provides evidence of the impact of diversity and inclusion in the workplace.

In DP21/2, the regulators explain their role, including how improving diversity and inclusion links to their objectives and public sector equality duty, and also the steps they have taken to improve diversity and inclusion internally. They go on to summarise current expectations and requirements on diversity for UK‑regulated firms and note that the fact that many existing policies have been driven by sector‑specific developments has resulted in fragmented requirements for different types of firms.

The regulators explain why good data is critical and discuss the importance of measuring progress and reporting to improve progress on diversity and inclusion. They also set out suggestions for developing metrics to monitor progress.

Finally, they outline different policy initiatives that they believe could effectively drive and support change. These generally build on existing requirements, and the regulators' wider policy and supervisory frameworks. They note that some of their proposals are better suited to larger firms and that they are very conscious of the need for proportionality, as well as taking into account the differences in the existing legal and regulatory framework for different types of firm. The regulators are requesting views on how any changes could be tailored to specific categories of firms to ensure they are proportionate.

To assess progress the regulators plan to collect data from firms about their workforce. Before this they will launch a one-off, pilot survey later in 2021, which will help to develop the proposals set out in DP21/2 and test how firms can provide data with a view to considering regular reporting in the future.

Responses to DP21/2 are requested by 30 September 2021. The feedback and data received will be used to develop detailed proposals, with a joint consultation planned for Q1 2022, followed by a policy statement in Q3 2022. The BoE will separately consider how to develop proposals to promote diversity and inclusion for FMIs. The FCA is also considering its approach to diversity in listed firms and will provide more detail in the coming months.

New FCA webpage on MoUs and other agreements with overseas regulators

On 8 July 2021, the FCA published a new webpage on the multilateral and bilateral memoranda of understanding (MoUs) and other agreements it has signed with overseas regulators.

It explains that these agreements help it to co-operate and exchange information with other regulators and that working with its overseas counterparts helps it meet its objectives, tackle shared risks and supervise cross-border firms effectively.

It notes that the list is not exhaustive and some agreements are confidential.

The FCA entered many of the MoUs in contemplation of the UK's departure from the EU and they came into force at the end of the Brexit transition period.

FCA update on implementing recommendations from London Capital & Finance review

On 15 July 2021, the FCA published a report setting out the work undertaken, to July 2021, to implement the recommendations and lessons from the independent investigation into the FCA's regulation of London Capital & Finance plc (the Gloster Report) and the independent review into the FSA and FCA's handling of the Connaught Income Fund Series 1 and connected companies (the Parker Report).

The update identifies each recommendation and explains the work the FCA has undertaken in response, which includes the below.

  • The FCA is taking robust action so that firms holding an FCA permission use it for the purpose intended, thereby reducing the risk of a "halo" effect. Where appropriate, the FCA increasingly looks at firms' business models holistically. The FCA is also amending its existing policies and guidelines across Authorisations and Supervision to identify the circumstances where staff should review a firm holistically.
  • The FCA has completed a "use it or lose it" pilot in which it takes action to remove permissions for regulated activities that are not being actively used where it considers the out-of-date permissions may cause harm to consumers. Use it or lose it will become part of the FCA's existing business-as-usual suite of strategies to cancel the permissions of firms that do not conduct the regulated activities for which they have permission, as well as those that do not pay their fees or fail to provide required information.
  • The FCA is increasing the number of specialist resources across Authorisations and Supervision to bolster its existing skills in respect of financial analysis. Its prudential specialists assist with making judgements on firms' financial position when required.
  • The FCA has further enhanced its capabilities to detect, assess, monitor and take appropriate supervisory action through developing its regular management information, including key risk indicator trends for escalation to senior management within Supervision.
  • The FCA has implemented new policies, processes and procedures to tackle repeat breaches by firms of the financial promotion rules.

The FCA states that its work should be seen in the broader context of its transformation programme, which it gives further details about in its Business Plan 2021/22.

BoE and FCA conclusions on review into UK open-ended funds

On 13 July 2021, the BoE and the FCA set out the conclusions of their joint review into UK open-ended funds in a section on the BoE webpage on its market-based finance resilience report and a section of the July 2021 Financial Stability Report (FSR).

The BoE and the FCA launched a review on how funds' redemption terms might be better aligned with the liquidity of their assets in July 2019. In March 2021, the BoE and the FCA published the results of a survey on liquidity management in open-ended funds.

The BoE and the FCA have used the survey's results to develop possible frameworks for:

  • A consistent and realistic classification of the liquidity of funds' assets. Among other things, the BoE and the FCA consider that an effective liquidity classification framework would capture the full spectrum of liquid and illiquid assets, would play a role in the design of a fund and in determining appropriate redemption terms and could be used to enhance funds' internal risk management practices, particularly stress testing.
  • Enhancing the calculation and use of swing pricing. The BoE and the FCA consider that more consistent and complete swing pricing could be developed to better reflect the costs of exiting a fund and also to promote financial stability by reducing first mover advantage. They set out principles on which swing pricing adjustments should be based. They also suggest that these adjustments should be subject to periodic review to assess whether they remain valid and ensure reasonable levels of confidence around estimates and that consideration should be given to adequate levels of transparency concerning swing pricing.

In the FSR, the BoE confirms that its Financial Policy Committee (FPC) has fully endorsed these conclusions. It recognises that further technical work is needed to consider how the principles could be applied and several operational changes would need to be addressed before any final policy could be designed and implemented.

FCA's 2021/22 business plan

On 15 July 2021, the FCA published its 2021/22 business plan, which sets out its business priorities for the year ahead.

In the business plan, the FCA sets out how it intends to become a more innovative, assertive and adaptive regulator to enable it to address the challenges that it now faces. This will involve:

  • significant changes to the FCA's own operations and approach to regulation, with a particular focus on using data more effectively; and
  • a new accountability framework, with specified outcomes and metrics for measuring the FCA's progress on those outcomes. From April 2022, the FCA will report on its progress against these outcomes and metrics.

The business plan also outlines the FCA's priorities for:

  • consumer markets – the FCA will take forward the four priorities identified in the 2020/21 business plan as well as seeking to improve consumer outcomes through the new consumer duty;
  • wholesale markets – the FCA sets out its approach to specific issues, including the review of the primary and secondary markets rules, the transition from LIBOR and reforms to asset management and non-bank finance; and
  • Cross-market issues – the FCA sets out its plans relating to key cross-market issues, including operational resilience, diversity and inclusion and sustainable finance.

The FCA intends to publish its wholesale and retail strategies in early 2022 to set out its ambitions for those markets.

FCA guiding principles on ESG and sustainable investment funds

On 19 July 2021, the FCA published a Dear Chair letter addressed to the chairs of authorised fund managers (AFMs) on improving the quality and clarity of authorised ESG and sustainable investment funds.

In the annex to the letter, the FCA sets out guiding principles that should be considered when an authorised investment fund pursues a responsible or sustainable investment strategy and claims to pursue ESG or sustainability characteristics, themes or outcomes. The principles do not apply to funds that integrate ESG considerations into mainstream investment processes.

The guiding principles comprise an overarching principle and three supporting principles, with each principle being accompanied by a set of key considerations.

You can read more about the guiding principles in our blog post here.

FCA statement on non-enforcement of financial promotion breaches concerning relevant UK markets

On 21 July 2021, the FCA published a statement on information for firms that use certain exemptions to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (FPO) concerning communications relating to relevant markets.

The FCA states that the effect of changes to the FPO made during the Brexit onshoring process means that the definition of "relevant market" used in the FPO inadvertently no longer includes relevant UK markets. As a consequence, the exemptions under articles 37, 41, 67, 68, 69 of the FPO do not cover financial promotions relating to relevant UK markets or investments traded on such markets. These exemptions relate to financial markets, promotions required or permitted by market rules, promotions in connection with admission to certain EEA markets and promotions of securities already admitted to certain markets.

The FCA states that the government will make a statutory instrument (SI) that will restore these exemptions. Until the date that the SI comes into force, it does not propose to take enforcement action against persons for breach of the financial promotion restriction if the breach only arises because the relevant exemption no longer applies because of this error. The FCA reserves the right to pursue enforcement action where there is misconduct by an affected person that goes beyond a failure to meet the criteria for exemption.

FCA portfolio letter on approach to supervising platforms

On 26 July 2021, the FCA published a portfolio strategy letter updating platforms on its focus over the coming months on priority areas of harm. The letter covers the below topics.

  • Technology and operational resilience: it refers to the IT outages and severe operational issues some firms experienced in November 2020 due to a surge in trading activities. It summarises its expectations of firms in this area and states that it will shortly be asking them for specific data about service disruptions on an ongoing basis, which will help it to identify outliers and take appropriate action. It expects firms to be familiar with its policy statement PS21/3, which sets out its final rules and guidance on building operational resilience.
  • SUP 15 notification requirements: it expects firms to notify it of any matter that could have a significant adverse impact on their reputation or affect their ability to continue to provide adequate services to their customers. This includes material service degradation incidents, such as operational disruptions. To date, it does not believe firms are reporting all material incidents to it and it expects this to change.
  • Transfer times: it supports the progress STAR (a not-for-profit industry joint venture) has made on improving transfer performance to date. It will continue to monitor metrics related to transfer times and focus on firms seen as outliers. In 2022, it will review the progress made and consider whether it needs to take further regulatory action. It will be reviewing the STAR management information published ahead of the planned review. If any IT changes are required to meet STAR requirements, it expects firms to budget and plan accordingly and share their plans with it for compliance.
  • Brexit: it expects firms to have considered how the end of the transition period affects them and their customers and taken any required actions.
  • Diversity and inclusion (D&I) discussion paper: it encourages firms to contribute to DP21/2 and expects them to take D&I seriously.
FCA Dear Remuneration Committee Chair letter on 2021/22 remuneration approach

On 3 August 2021, the FCA published a Dear Remuneration Committee Chair letter setting out its approach to remuneration for 2021/22 and highlighting areas for firms to consider.

The letter covers the below points.

  • Remuneration policies. Firms should remain satisfied that their remuneration policies are aligned with their firm's purpose, business strategy and values and incentivise the right behaviours.
  • Accountability. The Senior Managers and Certification Regime (SMCR) is a key tool to ensure high standards of conduct and culture within firms and can provide a clear and evidenced link between behaviours and remuneration outcomes. For instances of poor behaviour or misconduct, ex-post risk adjustments should be made that are appropriate and timely. The reasons for adjustments should be transparent to the individuals concerned.
  • Non-financial measures. The FCA expects to see more firms using non-financial measures in scorecards to support environmental, social and governance factors.
  • Diversity and inclusion. The FCA urges firms to review pay data across all protected characteristics and to act swiftly to address any disparities.
  • FCA international work. The FCA refers to the Financial Stability Board's peer review of how the UK has implemented its remuneration standards, which was published in April 2021. It states that firms may find it useful to consider whether there are any points that they could incorporate into their remuneration policies and practices.

The letter concludes with the FCA setting out its remuneration approach for 2021/22. It reminds firms that, in line with the PRA's May 2021 statement, they should submit their remuneration policy statement (RPS) by 30 September 2021. It should be submitted together with a short summary of the key points in the RPS with cross-references to the full RPS, including any key changes made in the last year. It should also include an explanation of how the Chair of the Remuneration Committee has assured themselves that the firm's overall remuneration policies support the firm's purpose, business strategy and values and incentivise the right behaviours, and how the firm's approach to paying variable remuneration will be considered in the continuing context of the Covid-19 pandemic.


European Commission adopts Taxonomy Climate Delegated Act

On 4 June 2021, the European Commission updated a webpage to confirm it has adopted Commission Delegated Regulation supplementing the Taxonomy Regulation ((EU) 2020/852) relating to climate change mitigation and adaptation (known as the Taxonomy Climate Delegated Act).

The text of the adopted Taxonomy Climate Delegated Act has also been published (along with Annex 1 and Annex 2 to it). The legislation contains a set of technical screening criteria that define which activities contribute to environmental objectives contained in the Taxonomy Regulation (climate change adaptation and climate change mitigation).

Adoption of the Taxonomy Climate Delegated Act follows political agreement being reached in April 2021.

The Taxonomy Climate Delegated Act will enter into force 20 days after it has been published in the Official Journal of the European Union. It will apply from 1 January 2022.

European Commission adopts amendments to Delegated Regulation on investment requirements under MMF Regulation

On 15 June 2021, the European Commission adopted a Delegated Regulation amending Commission Delegated Regulation (EU) 2018/990 in respect of requirements for assets received by money market funds (MMFs) as part of reverse repurchase agreements (C(2021) 4143) (Amending Regulation).

Under Article 2 of Delegated Regulation (EU) 2018/990, which supplements the Regulation on money market funds ((EU) 2017/1131) (MMF Regulation), eligible investments in reverse repurchase agreements by managers of MMFs are subject to supplementary qualitative and quantitative requirements. These requirements do not apply to transactions entered into with credit institutions, investment firms and insurance undertakings that are established in the EU or that are covered by an equivalence decision.

The Amending Regulation revises Article 2(6) of Delegated Regulation (EU) 2018/990 to specify the relevant provisions in the Capital Requirements Regulation (575/2013) (CRR), the MiFID II Directive (2014/65/EU) and the Solvency II Directive (2009/138/EC) on which equivalence decisions should be adopted for the exemption to be applied in relation to these entities.

The Commission states that it adopted the Amending Regulation following a request by ESMA to clarify the legal bases for the references to equivalence in Article 2(6).

The next step will be for the Council of the EU and the European Parliament to consider the Amending Regulation. If neither the Council nor the Parliament object, it will be published in the Official Journal of the European Union and will enter into force 20 days after its publication.

European Commission publishes EU Taxonomy Compass

On 16 June 2021, the European Commission published the EU Taxonomy Compass and a new webpage relating to this.

The Commission explains that the EU Taxonomy Compass provides a visual representation of the contents of the EU Taxonomy. It aims to enable a variety of users to access the contents of the EU Taxonomy more easily, by allowing them to check which activities are included in the EU Taxonomy (taxonomy-eligible activities), which objectives they substantially contribute to and what criteria they have to meet. It also aims to make it easier to integrate the criteria into business databases and other IT systems by including a number of download options.

The webpage contains two tabs that users can click on to access the contents of the Compass.

  • The "EU Taxonomy Compass" tab contains a matrix that displays the economic activities per environmental objective. The criteria for a given activity can be accessed by clicking on the activity name in the matrix or by clicking on the button for an activity-objective combination of interest. An "E" or "T" indicates if the activity is an enabling or transitional activity (if meeting the criteria).
  • The "Activities by sector" tab allows users to check which economic activities for a given sector are considered taxonomy-relevant and view the technical screening criteria applicable to them. This second access route is useful for users who want to browse a specific sector or activity.

The Commission explains that, to start with, the EU Taxonomy Compass covers the Commission Delegated Regulation supplementing the Taxonomy Regulation ((EU) 2020/852) relating to climate change mitigation and adaptation (known as the Taxonomy Climate Delegated Act), which was adopted on 4 June 2021 but has not yet entered into force. However, it plans to update the Compass over time to include future delegated acts specifying technical screening criteria for additional economic activities substantially contributing to the climate objectives and the other environmental objectives of the Taxonomy Regulation. It will also reflect any future reviews of the delegated acts.

Official translations of ESMA guidelines addressing leverage risks under AIFMD

On 23 June 2021, ESMA published a webpage with the official translations, including the English language version, of its guidelines (ESMA34-32-701) to address leverage risks under Article 25 of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD).

The guidelines provide national competent authorities (NCAs) with a set of indicators to consider when performing their risk assessment and a set of principles to take into account when calibrating and imposing leverage limits. They follow the two-step approach introduced by the International Organization of Securities Commissions (IOSCO) and translate this approach into the EU framework.

The guidelines state that they apply from two months after the date of their publication on ESMA's website in all EU official languages (that is, 23 August 2021).

NCAs must make every effort to comply with the guidelines by incorporating them into their national legal and supervisory frameworks, as appropriate. Within the two-month period, NCAs must notify ESMA whether they comply, or intend to comply. Reasons must be given for non-compliance.

European Commission communication on strategy for financing transition to sustainable economy

On 6 July 2021, the European Commission published a communication (COM(2021) 390 final) to the European Parliament, the Council of the EU and the European Economic and Social Committee and the Committee of Regions, together with an annex and staff working document, on a strategy for financing the transition to a sustainable economy.

The new sustainable finance strategy aims to support the financing of the transition to a sustainable economy by proposing action in four areas: transition finance, inclusiveness, resilience and contribution of the financial system and global ambition. It includes six sets of actions to:

  • extend the existing sustainable finance toolbox to facilitate access to transition finance;
  • improve the inclusiveness of SMEs, and consumers, by giving them the right tools and incentives to access transition finance. This includes the Commission asking the EBA for an opinion on the definition of and support for green loans and mortgages and increasing access of citizens and SMEs to sustainable finance advisory services;
  • enhance the resilience of the economic and financial system to sustainability risks. The Commission will, among other things, take action to ensure that relevant environment, social and governance (ESG) risks are systematically captured in credit ratings and rating outlooks in a transparent manner, taking into account further assessment by ESMA. It will also propose amendments to the Capital Requirements Regulation (575/2013) (CRR), CRD IV Directive (2013/36/EU) and the Solvency II Directive (2009/138/EC). This is to ensure that there is consistent integration of sustainability risks in risk management systems of banks and insurers, including climate change stress tests;
  • increase the contribution of the financial sector to sustainability;
  • ensure the integrity of the EU financial system and monitor its orderly transition to sustainability; and
  • develop international sustainable finance initiatives and standards, and support EU partner countries.

The Commission has also published a factsheet on the new EU sustainable finance strategy. It intends to report on the strategy's implementation by the end of 2023.

European Commission adopts Delegated Regulation containing disclosure obligations under Taxonomy Regulation

On 6 July 2021, the European Commission adopted a Delegated Regulation (C(2021) 4987 final) supplementing Article 8 of the Taxonomy Regulation ((EU) 2020/852) by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of the Non-Financial Reporting Directive (2014/95/EU) (NFRD) concerning environmentally sustainable economic activities and the methodology to comply with that disclosure obligation.

Article 8 of the Taxonomy Regulation requires large corporates to include in their non-financial statements, information on how and to what extent their activities are associated with environmentally sustainable economic activities. The Delegated Regulation specifies the content and presentation of information to be disclosed by non-financial undertakings, asset managers, credit institutions, investment firms, and insurance and reinsurance undertakings. It also sets out common rules relating to key performance indicators.

The Council of the EU and the European Parliament will now scrutinise the Delegated Regulation.

The Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the European Union. Article 10 provides that it will apply from 1 January 2022 (the requirements will depend on the type of entity).

On the same webpage as the Delegated Regulation, the Commission has also published accompanying annexes and a staff working document (SWD(2021) 183 final).

ESMA updates Q&As on application of AIFMD: July 2021

On 16 July 2021, ESMA published an updated version of its Q&As (ESMA34-32-352) on the application of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD).

ESMA has added new Q&As relating to ESMA's guidelines on performance fees in UCITS and certain types of alternative investment funds (AIFs) relating to performance fee scenarios where:

  • an authorised alternative investment fund manager (AIFM) has delegated the portfolio management function to different delegated portfolio managers; and
  • a new compartment or share class in an existing AIF has been created in the course of its financial year or where a new AIF has been created.
European Commission consults on legislative proposals to implement anti-money laundering (AML) and counter-terrorist financing (CTF) action plan

On 22 July 2021, the European Commission launched consultations on the legislative proposals it has adopted to strengthen the EU's anti-money laundering and countering terrorism financing (AML/CTF) rules.

The proposals were adopted by the Commission on 20 July 2021.

The Commission has published the following new webpages inviting feedback on all four legislative proposals by 17 September 2021.

  1. Webpage for a Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (COM(2021)420). The webpage also links to four newly published annexes to the proposed Regulation.
  2. Webpage for a Regulation establishing a new EU AML/CFT authority, the AML Authority (AMLA) (COM(2021)421). The webpage also links to a newly published Annex 1 to the proposed Directive.
  3. Webpage for a Directive on the mechanisms to be put in place by the member states for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing Directive (EU) 2015/849 (COM(2021)423) (proposed MLD6). The webpage also links to a newly published Annex to the proposed Directive.
  4. Webpage for a proposal revising the Regulation on information accompanying transfers of funds (2015/847/EU) to allow tracing of transfers of cryptoassets (COM(2021)422). The webpage also links to two newly published Annexes to the proposed Regulation.
ESMA annual reports on penalties and measures issued under UCITS Directive and AIFMD in 2020

On 20 July 2021, ESMA published its annual report (ESMA34-45-1269) on penalties and measures issued under the UCITS Directive (2009/65/EC) and its annual report (ESMA34-32-865) on penalties and measures issued under the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD).

In the reports, ESMA provides an overview of the applicable legal framework and information on the sanctions imposed by national competent authorities (NCAs) from 1 January 2020 to 31 December 2020.

In the UCITS report, overall, 13 NCAs imposed a total of 57 penalties. The total aggregated value of financial penalties imposed amounted to approximately €1,100,986. 11 NCAs imposed a total of 43 measures. 13 NCAs did not impose any sanction (penalty or measure) during this period. ESMA noted that the data gathered under the sanction reports continues to show that the sanctioning powers are not equally used among NCAs and, except for certain NCAs, the number and amount of sanctions issued at national level seems relatively low.

In the AIFMD report, overall, 11 NCAs imposed a total of 61 penalties. The total aggregated value of financial penalties imposed amounted to approximately €3,354,407. 12 NCAs imposed a total of 70 measures. 13 NCAs did not impose any sanction (penalty or measure) during this period. ESMA commented that a small number of NCAs are responsible for a majority of sanctions, and in general the numbers on a national level appear low.

ESMA will continue its work to foster supervisory convergence in the application of the UCITS Directive and the AIFMD and will continue to issue reports on an annual basis for future reporting periods.

European Commission call for advice to ESMA and EIOPA on retail investment strategy

On 2 August 2021, EIOPA published a call for advice (dated 27 July 2021) from the European Commission relating to its Retail Investment Strategy for the EU, and ESMA did likewise.

The Commission published a consultation paper on its Retail Investment Strategy in May 2021. To help the Commission prepare its legislative proposals implementing aspects of the Retail Investment Strategy, it has asked EIOPA to provide advice on a number of focused areas. These include:

Addressing and enhancing investor engagement with disclosures. The Commission asks for ESMA's perspective on matters including identifying any significant overlaps, gaps, redundancies and inconsistencies across investor protection legislation that might have a detrimental effect on investors. ESMA is also invited to reflect on how the rules work from a retail investor perspective. This includes whether they have fully attained the objective of ensuring that consumers can make informed choices and adequately reflect behavioural insights, avoid information overload and overly complex information, and the specific challenges for different types of products.

Drawing out the benefits of digital disclosures. ESMA is asked to assess how regulatory disclosures and communications can work best for consumers in a digital, and in particular smartphone, age, and provide possible options as to how existing rules might be adapted, such as allowing layered information.

Assessing the risks and opportunities presented by new digital tools and channels. ESMA is asked to assess both risks and opportunities with respect to retail investing stemming from both the increasing availability of digital tools and the increasing levels of direct investor participation, in particular via online trading platforms and robo advisors. In particular, the assessment should consider whether the existing regulatory requirements continue to be appropriate given these new risks, with a focus on the efficiency of safeguards such as best execution requirements and risk warnings provided to clients.

The Commission requests ESMA and EIOPA to deliver its advice by 30 April 2022.

EBA consults on new guidelines on role of AML/CFT compliance officers under MLD4

On 2 August 2021, the EBA published a consultation paper (EBA/CP/2021/31) (dated 29 July 2021) on new guidelines on the role, tasks and responsibilities of anti-money laundering and countering the financing of terrorism (AML/CFT) compliance officers under Article 8 and Chapter VI of the Fourth Money Laundering Directive ((EU) 2015/849) (MLD4).

The draft guidelines address, for the first time at EU level, the whole AML/CFT governance set-up. They set clear expectations of the role, tasks, and responsibilities of the AML/CFT compliance officer and the management body and how they interact. AML/CFT compliance officers need to have a sufficient level of seniority, which entails the powers to propose, on their own initiative, all necessary or appropriate measures to ensure the compliance and effectiveness of the internal AML/CFT measures to the management body in its supervisory and management function.

The draft guidelines also specify the tasks and role of the member of the management board, or the senior manager where no management board exists, who are in charge of AML/CFT overall, and on the role of group AML/CFT compliance officers. As information reaching the management body needs to be sufficiently comprehensive to enable informed decision-making, the draft guidelines set out which information should be included in the activity report of the AML/CFT compliance officer to the management body.

Where a financial services operator is part of a group, the draft guidelines provide that a group AML/CFT compliance officer in the parent company should be appointed. This is to ensure, among other things, the establishment and implementation of effective group-wide AML/CFT policies and procedures.

The provisions set out in the guidelines should be applied in a manner that is effective and proportionate to the financial sector operator's type, size, internal organisation, the nature, scope and complexity of its activities, and the money laundering and terrorism financing risks to which the financial sector operator is exposed. They complement, but do not replace, relevant guidelines issued by the European Supervisory Authorities on wider governance arrangements and suitability checks.

Comments can be made on the draft guidelines until 2 November 2021. The EBA will hold a virtual public hearing on the draft guidelines on 28 September 2021.



Listing regime: FCA Primary Markets Effectiveness Review

On 5 July 2021, the FCA published Consultation Paper CP21/21, Primary Markets Effectiveness Review. The paper is divided into two parts. The first part is a discussion on the purpose and value of the listing regime which is intended to inform how the listing regime may be made more effective in the future. The second part is a consultation on measures to remove barriers to listing, to ensure the listing regime continues to uphold the highest standards of market integrity and to improve the accessibility of the FCA rulebooks.

Chapters four to nine of the consultation paper set out the FCA's proposals for changes to the listing regime. The cost-benefit analyses of these proposals is in annexes 2 to 5 and draft FCA Handbook text is in Appendices 1 to 4. The proposals have been identified through engagement with stakeholders, review of industry surveys, the UK Listing Review and the Kalifa Review.

It is intended that the proposals should reduce barriers and costs for companies considering listing, which should encourage more companies to become or stay listed in the UK. This should increase broader investor confidence in the UK listed markets and the reputation of UK listing.

The proposals relating to dual class share structures (DCSS), free float and track record are aimed at reducing the barrier to entry to listing for companies in a proportionate and controlled way. Raising the minimum market capitalisation requirement aims to ensure the listing regime continues to uphold the highest standards of market integrity. The final set of miscellaneous FCA Handbook changes are minor but aim to improve the accessibility of the FCA rulebooks.

The consultation closes on 14 September 2021. Subject to consultation feedback and FCA Board approval, the FCA will seek to make relevant rules by late 2021. With regard to the discussion subjects, the FCA will provide feedback and issue a potential further consultation on the wider listing regime changes in due course, if appropriate.

FCA statement on supervision of commodity position limits

On 9 July 2021, the FCA published a statement on supervision of commodity position limits.

The FCA refers to HM Treasury's proposals in its July 2021 Wholesale Markets Review to limit the scope of the MiFID II position limits regime to agricultural contracts and physically settled contracts. The FCA supports these proposals, and has decided that while changes to the scope of the regime is being considered, it will not take supervisory or enforcement action in relation to commodity derivative positions that exceed position limits on cash-settled commodity derivative contracts, unless the underlying is an agricultural commodity. However, it will keep this position under review, and reconsider if there are indications of market abuse.

The FCA clarifies that its existing supervisory and enforcement approach relating to position limits remains for physically deliverable and agricultural commodity derivative contracts. In addition, its approach does not affect the responsibilities of members or participants of a trading venue under the position management rules of that venue, or the FCA's expectation that firms trading or arranging trades in commodity derivatives comply with their other market conduct obligations.


EMIR Delegated Regulation extending clearing obligation exemption for pension scheme arrangements for further year published in OJ

On 16 June 2021, Commission Delegated Regulation (EU) 2021/962 extending the transitional period under Article 89(1) of EMIR (648/2012) was published in the Official Journal of the European Union (OJ).

The Delegated Regulation extends the central clearing exemption for pension scheme arrangements (PSAs) by a further year until 18 June 2022.

It entered into force on 17 June 2021 and be directly applicable in all EU member states.

European Commission adopts report on CSDR review

On 1 July 2021, the European Commission published its report (COM(2021) 348 final) to the European Parliament and the Council of the EU following a review of the EU rules on central securities depositories (CSDs) under the Central Securities Depositories Regulation (909/2014) (CSDR).

On 30 June 2021, a draft interim report was made available. It appears that the only difference between two versions of the report is that the version adopted by the Commission is dated and has a reference number.

On a related webpage, the Commission notes that the report concludes, in broad terms, that the CSDR is achieving its original objectives to enhance the efficiency of settlement in the EU and the soundness of CSDs. In most areas, significant changes to the CSDR would be premature given the relatively recent application of the requirements.

However, concerns regarding the implementation of specific CSDR rules have been raised. These concerns relate to (among other things) the cross-border provision of services, access to commercial bank money, settlement discipline and the framework for third-country CSDs.

The report identifies areas where further action may be required to achieve the CSDR's objectives in a more proportionate, effective and efficient manner. In view of the important issues raised, and as announced in the 2021 Commission work programme and the second Capital Markets Union (CMU) action plan, the Commission is considering presenting a legislative proposal to amend the CSDR, subject to an impact assessment that will examine the most appropriate solutions in more depth. Such a proposal would aim to ensure an effective post-trading infrastructure, enhance competition among CSDs and strengthen cross-border investment, contributing to the development of a genuine single market for capital in the EU.

ESMA consults on MiFIR transparency requirements for equity and non-equity instruments

On 9 July 2021, ESMA published a consultation paper (ESMA70-156-4236) on its review of transparency requirements for equity and non-equity instruments under the Markets in Financial Instruments Regulation (600/2014) (MiFIR).

The paper sets out ESMA's proposals for amending Commission Delegated Regulation (EU) 2017/587 (RTS 1) and Commission Delegated Regulation (EU) 2017/583 (RTS 2), which further specify the MiFIR pre- and post-trade transparency requirements for equity instruments (shares, depositary receipts, exchange traded funds (ETFs) and certificates) and non-equity instruments (bonds, structured finance products (SFPs), emission allowances and derivatives).

In respect of RTS 1, ESMA's proposals include increasing the pre- and post-trade large in scale (LIS)- thresholds for ETFs, developing a more consistent and clearer approach on non-price forming transactions and strengthening the pre-trade transparency requirements by introducing tailored requirements for frequent batch auction (FBA) and hybrid systems as well as specifying fields to be populated when disclosing pre-trade transparency information.

For RTS 2, ESMA proposes a number of changes mirroring those for RTS 1. It also seeks feedback on the potential review of the calibration of non-equity instruments other than commodity derivatives. For commodity derivatives, the proposed changes cover three areas: the way in which the contracts are aggregated into sub-classes, ensuring that contracts with different liquidity profiles are not bundled together; improvements to the identification of liquid instruments; and the calculation of the liquidity thresholds (LIS and size specific to the instrument (SSTI)) to ensure that the most liquid contracts have larger thresholds than less liquid ones.

The consultation also discusses (among other things) the need for giving stakeholders, including ESMA, sufficient time after the entry into force of the amendments, for implementing the proposed changes to the calibration of commodity derivatives as well as for the proposed changes to reporting of quantitative and reference data to ESMA. It suggests a minimum implementation period of six months.

The consultation closes on 1 October 2021. ESMA will analyse the feedback in Q4 2021 and aims to publish a final report and submit draft RTS to the European Commission for endorsement in Q1 2022.

ESMA consults on draft guidelines for reporting under EMIR

On 13 July 2021, ESMA published a consultation paper (dated 8 July 2021) on draft guidelines for reporting trades in derivatives under Article 9 of EMIR (648/2012) and on obligations for trade repositories (TRs) under Articles 78 and 81 (ESMA74-362-1893).

The draft guidelines will apply to financial and non-financial counterparties to trades in derivatives as defined in Articles 2(8) and 2(9) of EMIR, to TRs as defined in Article 2(2) of EMIR and to national competent authorities (NCAs).

They cover a wide set of topics relating to reporting, data quality and data access under the EMIR Refit Regulation ((EU) 2019/834). They are intended to clarify provisions of the draft regulatory technical standards (RTS) and implementing technical standards (ITS) on reporting that ESMA submitted to the European Commission on 16 December 2020.

The consultation closes on 30 September 2021. Since any potential changes to the draft ITS and RTS on reporting will need to be reflected in the guidelines, ESMA will only publish its final report on the guidelines after the Commission has adopted the delegated acts incorporating the technical standards. This is expected to be towards end of 2021 or early 2022. The guidelines will apply from the date of application of the technical standards referred to in Article 9 of the draft RTS on reporting.

European Commission adopts Delegated Regulation specifying criteria for ancillary activity test under MiFID II

On 14 July 2021, the European Commission adopted a Delegated Regulation (C(2021) 5115 final), supplementing the MiFID II Directive (2014/65/EU) by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level.

Article 2(1)(j) of the MiFID II Directive exempts persons dealing on own account, or providing investment services to clients, in commodity derivatives, emission allowances or related derivatives, provided this is an ancillary activity to their main business on a group basis and the main business is not the provision of investment services.

The Commission adopted Delegated Regulation (EU) 2017/592 (RTS 20) specifying the criteria for establishing when an activity is to be considered ancillary to the main business of a group. The MiFID Quick Fix Directive ((EU) 2021/338) amended the ancillary activity exemption and empowered the Commission to adopt a Delegated Regulation to replace RTS 20.

The changes triggered by the amended ancillary activity exemption are the deletion of the overall market size test in Article 2 of RTS 20 and the introduction of the new de-minimis threshold test.

The Delegated Regulation continues to apply the established calculation methodologies and principles of RTS 20.

It also retains a calculation period of three years set out in RTS 20 to address the legal uncertainty that would arise for non-financial groups that do not have a complete and representative set of data covering their main and ancillary activities. If calculated annually, the amount of capital employed and the size of the trading activity in financial instruments might fluctuate from year to year (for example, periodic events might require increased hedging in some years but not others). This could cause a non-financial group to fall within the scope of MiFID II because it fulfils the relevant criteria in one year, but it may qualify for an exemption in another year. Therefore, the Delegated Regulation maintains that calculations to be undertaken to verify whether non-hedging trading is ancillary or not should cover a rolling average of three years.

The Council of the EU and the European Parliament will now scrutinise the Delegated Regulation.

The Delegated Regulation will enter into force 20 days after its publication in the Official Journal of the European Union.

ESMA consults on draft guidelines on certain aspects of MiFID II remuneration requirements

On 19 July 2021, ESMA published a consultation paper (ESMA35-36-2324) on draft guidelines on certain aspects of the remuneration requirements under the MiFID II Directive (2014/65/EU).

The purpose of the draft guidelines (which are set out in Annex III of the consultation paper) is to enhance clarity and foster convergence in the implementation of certain aspects of the MiFID II remuneration requirements. ESMA considers that the implementation of the guidelines should strengthen investor protection, which is one of its key objectives.

ESMA proposes that the new remuneration guidelines will replace the existing ones, which it issued in October 2013. The consultation paper builds on the text of the 2013 guidelines, which ESMA has substantially confirmed (albeit clarified, refined and supplemented where necessary). To avoid any unnecessary repetitions, ESMA has deleted those of the 2013 guidelines that have been incorporated directly into the MiFID II framework or that have become unnecessary (for instance, guideline 8 on competent authorities' supervision and enforcement of remuneration policies and practices). The paper also takes account of new requirements under MiFID II and the results of supervisory activities conducted by national competent authorities (NCAs) on the topic.

To reflect these considerations, ESMA has reorganised the guidelines and divided them into the following sections:

  • design of remuneration policies and practices;
  • governance; and
  • controlling risks that remuneration policies and practices create.

To help stakeholders read the paper, Annex IV contains a correlation table between the new draft guidelines and the original ones.

The paper is addressed to investment firms and credit institutions providing investment services and activities, investment firms and credit institutions when selling structured deposits, UCITS management companies and external alternative investment fund managers (AIFMs) when providing investment services and activities in accordance with the UCITS Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD).

The deadline for comments on the consultation paper is 19 October 2021. ESMA will consider the responses it receives and expects to publish the final report and guidelines by the end of Q1 2022.

ESMA report on sanctions and measures imposed under MiFID II: July 2021

On 19 July 2021, ESMA published its third report on sanctions and measures imposed under the MiFID II Directive (2014/65/EU) (ESMA35-43-2751).

In the report, ESMA sets out an overview of the sanctions and measures imposed by national competent authorities (NCAs) under the MiFID II framework in 2020. It states that in 23 (out of 30) EU and EEA member states, NCAs imposed a total of 613 sanctions and measures and that they were of an aggregated value of EUR8,400,430. This means that NCAs' activity on imposing sanctions and measures under MiFID II has increased compared to the past two years, both in terms of sanctions and measures and pecuniary amounts.

The tables in section 5 of the report list the total number of fines issued in each jurisdiction and details of the levels of fines issued for breaches of specific provisions in the MiFID II framework.

ESMA states that the information reported to it and included in the report will inform its ongoing work in fostering supervisory convergence in the application of the MiFID II Directive and contribute to its goal to develop an EU outcome-focused supervisory and enforcement culture.

EC consultation on the functioning of the EU securitisation framework

On 23 July 2021, the European Commission published a consultation on the functioning of the EU securitisation framework.

The consultation forms parts of the Commission's efforts to complete a comprehensive review of the EU securitisation framework in accordance with the its action plan on the Capital Markets Union (CMU), published in September 2020.

The CMU's aim to conduct a review of the EU securitisation framework stems from the requirement, under Article 46 of the EU Securitisation Regulation, for the Commission to present a report to the European Parliament and the Council on the functioning of the EU Securitisation Regulation, accompanied, if appropriate, by a legislative proposal by 1 January 2022.

The consultation, which is in the form of an online questionnaire, seeks market feedback on a wide range of issues, including:

  • the effects of the EU Securitisation Regulation;
  • private securitisations;
  • due diligence;
  • the need for an equivalence regime in the area of simple, transparent and standardised (STS) securitisations;
  • disclosure of information on environmental performance and sustainability;
  • the need for establishing a system of limited licensed banks performing the functions of securitisation special purpose entities;
  • treatment of STS securitisations and asset-backed commercial paper (ABCP) securitisations for the liquidity coverage ratio; and
  • amendments to the Capital Requirements Regulation.

The Commission is inviting responses by 17 September 2021.



FSB interim report on lessons learnt from a financial stability perspective

On 13 July 2021, the Financial Stability Board (FSB) published an interim report on the lessons learnt from the Covid-19 pandemic from a financial stability perspective.

The Covid-19 pandemic is the first major test of the global financial system since the G20 reforms were put in place following the financial crisis of 2008. The aim of the report, which has been prepared in collaboration with standard-setting bodies, is to identify preliminary lessons for financial stability from the Covid-19 experience and aspects related to the functioning of the G20 financial regulatory reforms that may warrant further attention at the international level.

Key findings of the report

  • So far, the global financial system has weathered the pandemic thanks to greater resilience, supported by the G20 reforms, and the swift, determined, and bold international policy response. The FSB found that the strong international standards the G20 put in place post-2008, and the flexibility built into those, supported an effective policy response during the initial phase of Covid-19.
  • The March 2020 market turmoil has underscored the need to strengthen resilience in the non-bank financial intermediation sector.
  • The functioning of capital and liquidity buffers may warrant further consideration and some concerns about excessive financial system pro-cyclicality remain.
  • The pandemic highlights the importance of effective operational risk management arrangements being in place before a shock hits. Authorities should continue to take steps to further enhance crisis management preparedness.
  • Identifying systemic vulnerabilities early on remains a priority.
  • The Covid-19 experience reinforces the importance of completing remaining elements of the G20 reform agenda. Those parts of the global financial system where implementation of post-crisis reforms is most advanced displayed resilience.
  • Covid-19 has reinforced the need to promote resilience amidst rapid technological change in the economy and the global financial system. Effective management of outsourcing to third-party providers across the supply chain is essential to mitigating operational and cyber risk.

The interim report will be used to engage with external stakeholders on preliminary findings and issues raised from the analysis to date. The FSB will publish the final report in October 2021 and this will set out any next steps.

Covid-19: FCA update on workstreams delayed due to pandemic

On 16 July 2021, the FCA published a statement providing an update on the following key workstreams that had been delayed in the light of the Covid-19 pandemic.

  • Assessing Suitability Review (ASR 2). The FCA put this on hold in April 2020. It has decided not to continue work on ASR 2 in 2021/22 to allow it to focus on other priority work, including defined benefit pension transfers work and the issues raised in the 2020 consumer investments call for input. The FCA will continue to monitor the market, and if it identifies concerns it will consider the need for additional work.
  • Diagnostic review of business models. The FCA is not continuing with this. The aim was to identify retail lending business models that benefit from consumers not repaying their debts. The work was postponed for much of 2020 and resumed late that year. The FCA states that its success in identifying indicators of business models that may benefit from consumers not repaying debts has meant that it has embedded its methodology and findings into wider business model analysis, which is now integral to its oversight of relevant sectors.
  • Rules extending SME access to Financial Ombudsman Service (FOS). Following its October 2018 policy statement (PS18/21), the FCA planned to start a post-implementation review of these rules. However, since the full impact of Covid-19 on SMEs is still unknown, it is delaying this review to allow it to include upcoming developments with SME complaints. It will assess this position by April 2023.
  • De-anchoring remedy for credit cards. In July 2018, the FCA announced its intention to consult on requiring removal of the minimum repayment anchor. However, it put the work on hold due to the pandemic, and it remains on hold. As indicated in its policy statement on persistent debt and earlier intervention, the FCA intends to review the effectiveness of the credit card market study remedies in 2022. It has begun planning for this review. Its outcome will indicate whether there is still a need for a de-anchoring remedy.



Sterling Working Group updates Best Practice Guide for GBP Loans and GBP Loan Market Q&A

On 4 June 2021, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) published a revised version of its Best Practice Guide for GBP Loans. The guide addresses conventions for new sterling SONIA-referencing loans (including refinancing and renewals) and for transitioning legacy sterling LIBOR-referencing loans. It was originally published in February 2021 and previously updated in March 2021. The June 2021 update deals with calculating SONIA-based cost of carry for loans traded on the secondary market.

FCA and BoE call on US dollar interest rate swaps market participants to transition to SOFR from 26 July 2021

On 16 June 2021, the FCA published a press release on the transition from USD LIBOR to the Secured Overnight Financing Rate (SOFR) by UK market participants in the US dollar interest rate swaps market. The Bank of England (BoE) has published an identical press release.

In the press releases, the FCA and the BoE state that they support and encourage all participants in the interdealer US dollar interest rate swaps market to take the steps necessary to prepare for and implement a switch in interdealer trading conventions for USD linear interest rate swaps from USD LIBOR to SOFR from 26 July 2021. The change will involve interdealer brokers (IDBs) moving the primary basis of their pricing screens and curve construction for interest rate swaps from USD LIBOR to SOFR, so that SOFR swaps become the primary pricing point.

The FCA and the BoE expect that USD LIBOR will be accessible only as a basis swap to SOFR in the interdealer broker market from 26 July 2021. Screens for outright LIBOR swaps and LIBOR-based swap spreads are expected to remain available for informational purposes, but not trading activity, until 22 October 2021.

FCA clarifies expectations for submitting UK MiFIR transaction reports and instrument reference data in context of LIBOR transition

On 9 July 2021, the FCA published a new webpage aiming to clarify expectations for investment firms and trading venues submitting transaction reports and instrument reference data under the retained EU law version of the Markets in Financial Instruments Regulation (600/2014) (UK MiFIR) in relation to LIBOR transition.

The FCA raises and addresses the following two questions.

  1. Should a transaction report be submitted when the reference rate for a previously reported contract changes from LIBOR to an alternative rate? The FCA advises that where the only amendment to the contract is the reference rate and associated spread, a new transaction report should not be submitted. Where other amendments are made to the contract that result in a reportable transaction, for example a change in notional, a new transaction report should be submitted.
  2. Must trading venues amend financial instrument reference data when the reference rate for an instrument changes from LIBOR to an alternative rate? The FCA advises that where the change in reference rate would result in a new ISIN being generated on request, trading venues should request the new ISIN, terminate the existing instrument and submit financial instrument reference data for the new instrument in accordance with Delegated Regulation (EU) 2017/585 (RTS 23), as onshored. However, if the change would not cause a new ISIN to be generated, and no other changes are being made to the instrument that would result in a new ISIN being generated, trading venues need take no action.
FCA provides further clarity on reporting under UK EMIR in context of LIBOR transition

On 9 July 2021, the FCA published an updated webpage providing a follow-up statement on 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 (648/2012) (UK EMIR).

The FCA refers to the clarification it published in March 2021 that an amendment to a reference rate or applying a fallback in place of LIBOR would constitute a modification that is reportable under UK EMIR. Its update provides further clarity on how it expects this modification to be reported.

The FCA's advice covers:

  • reporting of fallbacks in accordance with the second FCA protocol;
  • reporting of bespoke fallbacks; and
  • reporting where a reference rate is otherwise amended.

The FCA reiterates the statement it made in its March 2021 update that, while it expects firms to make the necessary preparations to ensure the relevant UK EMIR reports are updated in a timely manner, it will apply its supervisory powers for this requirement in a proportionate and risk-based manner.

FCA consults on LIBOR transition and UK MiFIR derivatives trading obligation

On 14 July 2021, the FCA published a consultation paper on LIBOR transition and the derivatives trading obligation (DTO) (CP21/22).

The DTO, which is set out in Article 28 of the UK Markets in Financial Instruments Regulation (600/2014) (MiFIR), requires certain counterparties to conclude transactions in standardised and liquid OTC derivatives only on regulated trading venues. Article 32 of UK MiFIR specifies that derivatives that are subject to the DTO must be subject to the derivatives clearing obligation (DCO) under UK EMIR (648/2012), admitted to trading on at least one regulated trading venue and be sufficiently liquid to trade only on those venues.

The FCA intends to amend the UK regulatory technical standards (RTS) on the trading obligation for certain derivatives (DTO RTS), which are set out in the onshored version of Commission Delegated Regulation (EU) 2017/2417, to remove derivatives referencing GBP LIBOR from the current DTO and replace them with overnight indexed swaps (OIS) referencing SONIA. The FCA's liquidity analysis indicates that SONIA OIS as a class of OTC derivatives is sufficiently liquid to impose a DTO.

The FCA's proposals follow on from the Bank of England's May 2021 consultation paper on changes to the DCO, which will remove contracts referencing GBP LIBOR from the DCO's scope, replacing them with contracts referencing SONIA.

The FCA intends to monitor market developments and liquidity in OIS referencing €STR and SOFR over the coming months. Its view is that OIS referencing €STR do not yet display the same level of liquidity of EURIBOR or other products currently subject to the DTO and OIS referencing SOFR may also not yet meet relevant criteria to be sufficiently liquid.

The instrument making the proposed amendments to the DTO RTS, the Technical Standards (Markets in Financial Instruments Regulation) (Derivatives Trading Obligation) Instrument 2021, is set out in Appendix 1 to CP21/22. The FCA intends for it to enter into force on 20 December 2021.

The deadline for responses is 25 August 2021. The FCA intends to publish a policy statement in late Q3 or early Q4 2021.

FCA and BoE encourage switch to RDRs in LIBOR cross-currency swaps market

On 21 July 2021, the FCA and Bank of England (BoE) published an identical press release encouraging liquidity providers in the LIBOR cross-currency swaps market to adopt new quoting conventions for interdealer trading based on risk-free rates (RFRs) instead of LIBOR from 21 September 2021.

The FCA has engaged with UK market participants, including liquidity providers and interdealer brokers (IDBs), to determine support for a change in the quoting conventions of LIBOR cross-currency swaps in the interdealer market. The survey identified strong support for a change in the interdealer quoting convention, which will mean RFRs rather than LIBOR become the default price from 21 September 2021. Therefore, the FCA and BoE encourage participants to take necessary steps to implement these changes to market conventions.

In the period leading up to 21 September 2021, the FCA and the BoE will continue to engage with market participants and international authorities to determine whether market conditions allow the switch to proceed. The press release sets out technical notes explaining the changes to quoting conventions.

The aim of the change is to facilitate market liquidity towards RFRs. It follows a Dear CEO letter from the PRA and FCA that states firms are expected to meet the milestones set by the Working Group on Sterling Risk Free Reference Rates (RFRWG) and US recommendations relating to the Secured Overnight Financing Rate (SOFR).


European Commission, EBA, ECB and ESMA encourage market participants to cease use of all LIBOR settings

On 24 June 2021, the European Commission issued a joint statement with the EBA, ESMA and the European Central Bank in its banking supervisory capacity (ECB Supervision) (together, the authorities), strongly encouraging all market participants to cease their use of all LIBOR settings.

In the statement, the authorities note that LIBOR will shortly cease to be published. To ensure a smooth transition away from LIBOR, market participants are encouraged to actively reduce their exposure to LIBOR and not wait for the exercise by the Commission of its new powers to designate a replacement for LIBOR under Article 23b of the Benchmarks Regulation ((EU) 2016/1011) (BMR).

The authorities therefore strongly encourage market participants to use the time remaining until the cessation or loss of representativeness of USD LIBOR, GBP LIBOR, JPY LIBOR, CHF LIBOR and EUR LIBOR to substantially reduce their exposure to these interest rates by:

  • stopping the use of the 35 LIBOR settings, including USD LIBOR, as a reference rate in new contracts as soon as practicable and in any event by 31 December 2021;
  • limiting the use of any LIBOR setting published under a changed methodology (also known as synthetic LIBOR) only to contracts that are particularly difficult to amend before LIBOR's cessation. Such contracts are commonly referred to as "tough legacy contracts"; and
  • including robust fallback clauses nominating alternative rates in all contracts referencing LIBOR.

The authorities will continue to closely monitor the situation and LIBOR exposures.

LIBOR removed from list of critical benchmarks under BMR

On 9 July 2021, European Commission Implementing Regulation (EU) 2021/1122 amending Implementing Regulation (EU) 2016/1368 adding the Norwegian Interbank Offered Rate to and removing LIBOR from the list of critical benchmarks used in financial markets established pursuant to the Benchmarks Regulation ((EU) 2016/1011) (BMR) was published in the Official Journal of the European Union (OJ).

The Implementing Regulation entered into force on 10 July 2021 (that is, the day following its publication in the OJ).

European Commission consults on draft Implementing Regulations on designating replacement rates for CHF LIBOR and EONIA benchmark

On 3 August 2021, the European Commission published the following for consultation.

  • A draft Implementing Regulation (Ares (2021) 4932489) on the designation of a statutory replacement for certain settings of Swiss Franc (CHF) LIBOR. The draft Implementing Regulation is accessible from a dedicated consultation webpage.

    The Commission consulted on designating a statutory replacement rate for certain settings of CHF LIBOR in March 2021.
  • A draft Implementing Regulation (Ares (2021) 4932792) on the designation of a replacement for the EONIA benchmark, which will be discontinued from 3 January 2022. The draft Implementing Regulation is accessible from a dedicated consultation webpage.

    The replacement rate is calculated using an already updated EONIA methodology that is based on recommendations by the relevant industry working group and the consensus of relevant stakeholders. The designated rate will replace contractual references to EONIA in the EU on 3 January 2022.

    The transition of EONIA to €STR is supported by the Commission's Working Group on Euro Risk-Free Rates.

Comments could be made on both consultations until 31 August 2021.


ESMA updates Q&As on Benchmarks Regulation: 29 July 2021

On 29 July 2021, ESMA published an updated version of its Q&As (ESMA70-145-114, version 21) on the Benchmarks Regulation ((EU) 2016/1011) (BMR).

ESMA has updated the Q&As to add a new Q&A 4.7 clarifying that no BMR provision specifies that only public authorities located in the EU may be excluded from the BMR's scope of application. Accordingly, supervised entities in the EU can continue to use benchmarks provided by public authorities located in third countries after the end of the transitional period applicable to third country benchmarks where those public authorities meet the definition in article 3(1)(29) of the BMR and comply with the conditions set out in Article 2(2)(b) of the BMR.

This answer was provided by the European Commission.