Investment Management Update
- FCA consultation on implementation of FAMR
- IOSCO thematic review on protection of client assets
- ESMA Opinion on asset segregation and depository delegation rules
- ESAs advise on PRIIPs with environmental or social objectives
The FCA has published Consultation Paper 17/18 on rules and guidance relating to two of the recommendations made by the Financial Advice Market Review (FAMR) in its final report; guidance developed by the Advice Unit; and guidance on insistent clients.
FAMR was launched to explore ways in which government, industry and regulators could stimulate the development of a market which delivers affordable and accessible financial advice and guidance.
The FAMR’s final report set out a series of recommendations intended to tackle the barriers to consumers accessing advice and guidance. The guidance now proposed aims to address two of those recommendations:
- The FCA is updating its rules and guidance to reflect an amendment to the scope of the regulated activity of “advising on investments” in the Regulated Activities Order, being the requirement that there be a personal recommendation; and
- The FCA is introducing new guidance to support firms offering services that help consumers make their own investment decisions without a personal recommendation.
Following FAMR, the FCA established an Advice Unit to provide regulatory feedback to firms developing automated models to deliver lower cost advice, or lower cost discretionary investment management services, to consumers. The Advice Unit has identified some common areas of uncertainty with FCA rules and so the second limb of the Paper is proposed new guidance which will form part of the “tools and resources” made available to firms by the Advice Unit.
Finally, the Paper also includes guidance for firms on dealing with “insistent clients”. The FCA uses that term to describe an individual who has received a personal recommendation and chooses to do something other than follow the adviser’s personal recommendation.
The FCA invites responses by 2 October 2017.
The Board of the International Organization of Securities Commissions (IOSCO) has published its Thematic Review of the Adoption of the Principles set forth in IOSCO’s Report: Recommendations Regarding the Protection of Client Assets.
The thematic review identifies the implementation progress of 38 IOSCO members from 36 jurisdictions in adopting legislation, regulation and other policies in relation to intermediaries holding client assets addressed by the principles for the protection of client assets.
The principles outline:
- the intermediary’s responsibility to ensure compliance with rules and regulations governing client assets, including the development of risk management systems and internal controls to monitor compliance;
- the intermediary’s responsibility to reconcile the client’s accounts and records with those of the third party where the intermediary places client assets with third parties; and
- the regulator’s role in supervising the intermediary’s compliance with the applicable domestic rules and maintaining a regime that promotes effective safeguarding of client assets.
In general, the review found that the majority of participating jurisdictions have adopted a client asset protection regime described by the principles.
Most EU jurisdictions reported having final adoption measures across all principles. Canada and the US have taken adoption measures across all principles, with the exception of principle 6 (Waiver or Modification) being not applicable in those jurisdictions. In some other regions, including Latin America, implementation progress was less advanced.
Principles 2 (Statement of Accounts), 7 (Compliance with Domestic Requirements) and 8 (Information on Foreign Jurisdictions) were the most implemented, with 35 out of 36 jurisdictions having adoption measures in place, while principle 3 (Arrangements to Safeguard Client’ Rights) was the least implemented, with only 24 out of 36 jurisdictions having adoption measures in place.
Some jurisdictions were found not to have taken adoption measures as described by the principles due to the manner in which they addressed the holding of client assets by certain categories of market intermediaries within the scope of this report.
The review includes a detailed discussion of implementation on a Principle-by-Principle basis and also sets out overarching themes and describes differences in approaches and adoption measures taken by participating jurisdictions under each of the eight Principles.
The European Securities Markets Authority (ESMA) delivered an opinion to the European Parliament; setting out its view on the most effective approach to asset segregation under AIFMD and UCITS on the application of depository delegation rules to central security depositaries (CSDs).
This opinion is driven by a policy goal set out by ESMA: “to provide an EU framework with strong client asset protection, especially in insolvency, for the safe-keeping of assets which are, in accordance with both UCITS and AIFMD Directives, required to be held in custody”. ESMA outlines the need for a regime where assets can be clearly identified as belonging to the AIF / UCITS and in the case of insolvency, investors are protected as the ownership of the assets will not be called into question. The opinion aims to set out minimum EU-wide segregation requirements thus allowing Member States to decide if stricter requirements are required.
ESMA distinguishes between Issuer CSDs and Investor CSDs and sets out the following regime.
Issuer CSDs (which provide core services)
- Depositaries should not have to apply the delegation rules in their capacity as Issuer CSDs. Accordingly:
- there would be no specific segregations requirements at the level of the Issuer CSD;
- a depositary would not need to perform any due diligence on an Issuer CSD; and
- if a financial instrument is lost at the level of an Issuer CSD this would be considered an external event outside the reasonable control of the depositary.
Investor CSDs (which participate in settlement systems operated by third parties)
- Depositaries should have to apply the delegation rules in their capacity as Investor CSDs. Therefore:
- investor CSDs would be subject to asset segregation requirements, though the opinion has revised these;
- due diligence requirements of the AIFMD and UCITS Directive must be complied with; and
- a depositary that delegates to an Investor CSD would still be subject to the liability regime set out in AIFMD and UCITS.
The European Supervisory Authorities (The ESAs) have presented to the European Commission their Technical Advice in relation to Packaged Retail and Insurance-based Investment Products manufacturers with a focus on environmental or social objectives (EOS PRIIPs). The Advice sets out the minimum requirements that the manufacturer of an EOS PRIIP should meet in order to ensure that these products satisfy the retail investor’s needs.
The manufacturer of an EOS PRIIP must install specific governance measures to ensure sustained compliance with the environmental or social objectives of the product. This is coupled with a requirement to demonstrate the relevance of these objectives to the product’s retail investors.
The advice targets four areas of regulatory attention and considers existing rules and potential recommendations to be adopted by the Commission, summarised below:
1. Specific environmental or social objectives
The manufacturer of an EOS PRIIP must clearly state the environmental or social objectives of the product and explain a proportionate strategy to achieve them.
2. Disclosure of specific investment policy
The manufacturer of an EOS PRIIP should disclose the environmental or social objectives and the strategy to achieve them to the product’s retail investors. The ESAs advise that:
- The KID should set out this information in a section titled “What is this product?”. The section titled “Other relevant information” should provide the retail investor with advice on where to find the all of the details of the product’s objectives and strategies.
- The KID should also include information regarding the type of investor that the PRIIP is intended for.
- Risks outside the control of the PRIIP manufacturer that may impact the specific identified environmental or social objectives should also be set out.
- This information is intended to enable the retail investor to assess the PRIIP in view of his or her desired environmental or social objectives.
3. Governance procedures and controls
The manufacturer of an EOS PRIIP must ensure that effective governance and monitoring procedures are in place and well-documented. These should be proportionate to the specific environmental or social objectives of the product in question.
4. Review of progress
The manufacturer of an EOS PRIIP should regularly review the performance of the product to ensure that it’s environmental or social objectives are met.
In light of the above, the ESAs concludes that the establishment of specific and detailed standalone obligations intended solely for PRIIPS that target specific environmental or social objectives are not required.