Investment Management Update

A round-up of recent legal and regulatory developments of interest to the investment management sector.

This issue includes:


Draft Brexit statutory instrument: EEA Passport Rights (Amendment, etc, and Transitional Provisions) (EU Exit) Regulations 2018

The government has published an explanatory memorandum and final draft of the statutory instrument (SI) on EEA Passport Rights which will implement the Temporary Permissions Regime (TRP). In addition to removing references to the passporting framework in UK legislation, the SI makes provision for the TRP which will enable EEA firms to continue with their activities passported into the UK for a limited period after the UK leaves the EU. The revised draft of the SI has been laid before Parliament and includes updated cross-references and new regulations relating to tax and persons who cease to be authorised to carry on a regulated activity before exit day.

‘No-deal’ Brexit: Treasury guidance on banking, insurance and other financial services

The government has published a series of technical notes addressing the implications of a ‘no deal’ Brexit where the UK leaves the EU without an agreement or transitional period. Among the series is guidance titled ‘Banking, insurance and other financial services if there’s no Brexit deal’. The guidance covers the following areas of interest:

  • implications for individuals and business customers;
  • individual and business customers - UK-based customers of UK based providers;
  • individual and business customers - UK-based customers of EEA firms operating in the UK;
  • individual and business customers - EEA customers (including UK citizens living abroad) of UK firms operating in the EEA;
  • financial services firms and funds; and
  • financial Market Infrastructure.

In addition, the Treasury indicates that the government will publish a separate technical note on transfers of personal data between the UK and the EU in an event of a ‘no-deal’.

Regulatory and supervisory relationships between EU and third countries: ECON report

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published a report on the relationship between the EU and third countries concerning financial services regulation and supervision. This is particularly pertinent as the UK will become a third country when it leaves the EU. ECON believes that a consistent framework for ongoing supervision of an equivalent third-country regime should be developed and the report includes a motion for a European Parliament resolution calling for greater transparency by the Commission in relation to third country equivalence decisions. The motion includes calls for the Commission to:

  • consider the current equivalence regime and to assess whether it contributes to achieving a level playing field between EU and third-country financial institutions, while preserving the financial stability of the EU or of one or more of its Member States, market integrity, investor and consumer protection and the functioning of the internal market. This review, together with proposals for improvement where applicable, should be made public;
  • review and provide a clear framework for a transparent, coherent and consistent application of equivalence procedures which introduces an improved process for the determination, review, suspension or withdrawal of equivalence;
  • allow equivalence decisions to be subject to ongoing monitoring by the relevant European Supervisory Authority (ESA) and for the outcome of such monitoring to be made public;
  • allow ESAs to make ad hoc assessments of developments in third countries based on reasoned requests from Parliament, the Council and the Commission;
  • annually report to the European Parliament all decisions on equivalence, including equivalence granted, suspended and withdrawn, and to explain the rationale for those decisions; and
  • introduce transparent procedures governing the adoption, withdrawal or suspension of equivalence decisions. ECON believes that the European Parliament should be consulted in an appropriate manner, in principle before such a withdrawal decision is taken.

The European Parliament is likely to consider the report in its plenary session which is currently taking place, from 10 September to 13 September 2018.

Draft Brexit statutory instrument: Capital Requirements (Amendment) (EU Exit) Regulations 2018

The Treasury has published draft Capital Requirements (Amendment) (EU Exit) Regulations 2018, together with a related explanatory memorandum. The statutory instrument (SI), once in force, will make amendments to UK legislation that implements the Capital Requirements Regulation and Directive (CRD IV).

Changes introduced by the SI include amendments relating to group consolidation, EU27 exposures, macroprudential measures, transfer of functions, equivalence, information sharing and cooperation requirements between UK and EEA regulators, savings provision, binding technical standards and definitional links to other EU dossiers. The FCA and the PRA will update their rules and relevant binding technical standards to mirror the changes introduced by the SI; they will consult on these changes in the autumn.

The SI is subject to change prior to being laid before Parliament during autumn 2018.


Automation in financial advice: Joint Committee of ESAs monitoring report

The Joint Committee of the European Supervisory Authorities (ESAs) has published a report on the results of its monitoring exercise on automation in financial advice. The 2018 report is a follow up of a Discussion Paper published in 2015 and a Final Report published on 16 December 2016 which outlined the benefits and risks of automated advice to consumers and financial institutions. The 2016 report acknowledged the early stages of the ‘phenomenon’ and warranted an ongoing monitoring of automation in financial advice given its growth potential. The 2018 report presents the results of the monitoring activity and covers the following:

  • a brief summary of the recent sectoral work carried out by the ESAs in the area of automated financial advice, including ESMA’s finalised guidelines on suitability, the EBA’s Roadmap on FinTech, EIOPA’s opinion on sales via the internet of insurance and pension products, EIOPA’s report on good practices on comparison websites and an upcoming thematic review by EIOPA on Big Data; and
  • results of the monitoring exercise on the evolution of the market in financial advice and related regulatory/supervisory activities in the different Member States/sectors.

The ESAs conclude that, considering the results of the analysis, in terms of limited growth of the phenomenon and lack of materialisation of the identified risks, no immediate action by the ESAs is necessary. The ESAs will carry out a new monitoring exercise if development of the market and market risks warrant this work in the future.

Prudential requirements

EU review of prudential treatment of investment firms: ECB Opinion

Following the Commission’s proposals for a Regulation on the prudential requirements of investment firms and a proposal for a Directive on the prudential supervision of investment firms in December 2017, the European Central Bank (ECB) has published an Opinion commenting on the Commission’s proposals. The ECB generally endorses the proposals but flags issues for further consideration relating to the following:

  • classification of investment firms as credit institutions;
  • authorisation of certain investment firms as credit institutions;
  • statistical implications of definition changes;
  • macro-prudential perspective on investment firms;
  • provision of services by third country firms; and
  • alignment of the proposals with MiFID II Directive, Capital Requirements Directive IV and the Capital Requirements Regulation.

In the Opinion, the ECB also outlines proposed drafting amendments to the Commission’s proposals.

Financial crime and sanctions

Frozen assets reports deadline 12 October 2018

The Office of Financial Sanctions Implementation (OFSI) has published a financial sanctions notice reminding firms that the deadline for a frozen assets report is 12 October 2018. Any persons, legal or natural, that hold or control funds or economic resources belonging to or controlled by a designated person is required to provide a report to the OFSI with the details of those assets. There is no need to provide a nil return to OFSI, however, if a firm submitted a report last year disclosing frozen assets and no longer hold those assets, it should submit a nil return this year to update OFSI.

Frozen assets reports should include details of all funds or economic resources frozen in the UK and overseas (where the overseas resources are subject to UK sanctions legislation) and the value of all such assets. The notice includes additional guidance.

Failure to comply with the financial sanctions legislation is a criminal offence which can result in monetary penalty or criminal prosecution. All newly frozen funds or economic resources should be notified immediately and not wait until the 12 October deadline.

Fourth Money Laundering Directive: Commission adopts Delegated Regulation to add Pakistan to the list of high-risk third countries

The European Commission adopted a Delegated Regulation on 27 July 2018 (published on 22 August 2018) adding Pakistan to the list of high-risk countries in Delegated Regulation (EU) 2016/1675, which supplements the Fourth Money Laundering Directive. The Commission has identified strategic deficiencies in Pakistan’s anti-money laundering and counter-terrorist financing framework. Examples include non-robust records of terrorist financing investigations and prosecutions and the lack of prevention of illegal cross-border transportation of currency. Pakistan has committed to address the deficiencies by liaising with the Financial Action Task Force on an action plan. The Commission will reassess the status of Pakistan upon the implementation of the agreed action plan.

The Delegated Regulation is subject to approval by the Council of the EU and the European Parliament, following which it will enter into force 20 days after its publication in the Official Journal.