On 7 November 2018, the Financial Conduct Authority (FCA) launched the Cost Transparency Initiative (CTI). The CTI is an independent group working to improve cost transparency for institutional investors. It has the responsibility for progressing the pre-existing work on this issue undertaken by the Institutional Disclosure Working Group (IDWG) which was set up following the FCA's asset management market study (AMMS). The creation of an independent working group was recommended by the IDWG to the FCA to curate and update the disclosure framework. The CTI is supported by the Pensions and Lifetime Savings Association (PLSA), the Investment Association (IA) and the Local Government Pension Scheme Advisory Board (LGPSAB).

The aims of the CTI are to:

provide a clear voice for the interests of asset owners as it improves cost transparency;
run a pilot phase to test the new cost transparency templates and supporting technical and communications materials until January 2019; and
following the pilot, roll-out the templates to the asset management and pensions industries to encourage fully transparent and standardised cost and charge information for institutional investors.

The CTI is taking applications to participate in the pilot to test the templates with a number of schemes before rolling it out more widely across the industry. The templates comprise:

a main account-level template which covers most product types;
a user template summarising the account-level data; and
three further sub-templates where costs specific to certain asset classes are needed (covering private equities, physical assets and ancillary services or custody).

The FCA notes that the templates were designed to align with the relevant disclosure obligations under MiFID II (although firms are responsible for ensuring they meet all relevant regulatory requirements).

In its recommendations following the AMMS, the FCA stated that it wanted to see more consistent and standardised disclosure of costs and charges to institutional investors. It thought that a standardised disclosure template should provide institutional investors with a clearer understanding of the costs and charges for a given fund or mandate. It remains to be seen whether these objectives will be achieved through this voluntary initiative. The FCA is joining the CTI as an observer.

Equivalence of confidentiality regimes of non-EU authorities: EBA final report on recommendations

The European Banking Authority (EBA) has published a final report on recommendations on the equivalence of confidentiality regimes. The report amends its recommendation, originally published in April 2015, on the equivalence under Article 116(6) of the CRD IV Directive of confidentiality regimes applicable to third country authorities. The EBA adds the following third-country authorities to the recommendation as equivalent:

the Abu Dhabi Global Market Financial Services Regulation Authority;
the Republic of South Kora Financial Supervisory Service;
the National Bank of Moldova; and
the Hong Kong Securities and Futures Commission.

CMA investigation into the financial services sector

The Competition and Markets Authority (CMA) has announced that it has launched an investigation into suspected anti-competitive arrangements in the financial services sector. It gives no further details on the nature of the investigation.

While the CMA and the FCA have concurrent functions to enforce competition law infringements in the financial services sector, it has been agreed that the CMA will exercise those functions in relation to this investigation.

The CMA states that the investigation is at an early stage and no assumption should be made at this point that competition law has been infringed. The CMA has not reached a view as to whether there is sufficient evidence of an infringement of competition law for it to issue a statement of objections to any of the parties under investigation. As a result, the CMA states it would not be appropriate to include any further estimates of the timing of any later investigative steps at this stage. The CMA webpage estimates that the investigation stage will take place from now until August 2019.

Brexit

FCA directs EEA firms to make temporary permissions notifications

The FCA has published a direction stating that any EEA firm that is carrying on a regulated activity in the UK under an EU passporting arrangement needs to notify the FCA if they intend to obtain a deemed permission or variation under the incoming temporary permissions regime (TPR). This regime will come into place in March 2019 if the UK leaves the EU without a deal or a transition period. The direction states that in order to utilise the regime, firms must submit a Temporary Permission Notification Form through the Connect system. The form must be completed between 7 January 2019 and 28 March 2019. Firms that fail to submit a notification during this time period will not be able to take advantage of the TPR. Therefore, any firm contemplating using the regime should begin preparing to make a notification.

Brexit SI: EEA Passport Rights (Amendment etc., and Transitional Provisions) (EU Exit) Regulations 2018

On 7 November 2018, the EEA Passport Rights (Amendment etc., and Transitional Provisions) (EU Exit) Regulations 2018 (SI 2018/1149) were published, accompanied by an explanatory memorandum. The statutory instrument (SI) establishes a temporary permissions regime whereby EEA firms currently operating in the UK using an EAA financial services passport are granted UK authorisation for a limited time until the Prudential Regulation Authority (PRA) and the FCA determine their applications for UK authorisation.

The SI also removes references in UK law to the provisions that implement the EEA financial services passport. The SI came into force on 7 November 2018, except for regulations 2, 3, 4 and 24 which will come into force on the day the UK leaves the EU. The regulations were published in draft form on 12 September 2018 as reported in our Update of 12 September 2018.

Draft Brexit SI laid before Parliament: EuVECA and EuSEF regulations

On 13 November, a draft version of the Venture Capital Funds (Amendment) (EU Exit) Regulations 2018, accompanied by an explanatory memorandum (for the Regulation on European Venture Capital Funds (EuVECA)) and a draft version of the Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018, along with an explanatory memorandum (for the Regulation on European Social Entrepreneurship Funds (EuSEF)), as laid before Parliament, were published. For further information on the SIs, please see our Update of 7 November 2018. The SIs are due to come into force on the day the UK leaves the EU.

MiFID II

MiFID II guidelines on certain aspects of the suitability requirements: official translations published by ESMA

ESMA has published official translations of its guidelines on certain aspects of the suitability requirements under MiFID II triggering the date of 6 January 2019 by which national competent authorities must notify ESMA whether they comply, or intend to comply, with the guidelines. The guidelines will apply from 7 March 2019 and will supersede the existing guidelines on suitability which were published in July 2012.

MiFID II suitability rules: ESMA updates supervisory briefing

ESMA has published an updated version of its supervisory briefing, aimed at national competent authorities (NCAs) and market participants, taking into account the new version of ESMA’s guidelines on certain aspects of the MiFID II suitability requirements. The briefing summarises the key elements of the suitability rules, explains the associated objectives and outcomes and provides questions for supervisors or firms to consider when assessing the approach to the application of the MiFID II rules.

The supervisory briefing is not subject to any "comply or explain" mechanism for NCAs and is non-binding. The revised guidelines will apply from 7 March 2019, superseding ESMA’s 2012 briefing.

Investment funds

Amendments to Delegated Regulation on PRIIPs KID: ESAs consultation paper

The Joint Committee of the European Supervisory Authorities (ESAs) has published a consultation paper on draft amendments to Commission Delegated Regulation (EU) 2017/653 on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs) (the PRIIPs Delegated Regulation). The ESAs have determined that a targeted review of the PRIIPs Delegated Regulation is necessary, in particular to ensure that it is appropriately applied to UCITS and certain non-UCITS funds. However, the consultation deals only with the most urgent amendments deemed necessary.

Currently, under Article 32 of the PRIIPs Delegated Regulation, UCITS are exempt from the requirement to prepare a PRIIPs KID. However, this exemption expires on 31 December 2019. UCITS currently have to provide a key investor information document (KII), which has significant overlap with KIDs. When the exemption expires, if no changes are made, UCITS will need to produce a KID and a KII.

The ESAs are consulting on:

preventing duplication, as investors are unlikely to read both the KID and the KII due to the considerable overlap between the documents;
amendments to the PRIIPs Delegated Regulation so as to include certain relevant sections of the UCITS Directive in respect of the KII and whether these should be extended to KIDs after the exemption no longer applies;
extending the KII requirements on content to the KIDs in respect of PRIIPs as the information proves to be complimentary;
the information that is used to calculate the summary risk indicator, so as to better reflect the risks associated with PRIIPs;
the possibility of requiring KIDs to include information about past performance of the particular product, so as to increase transparency in respect of the product and bring it in line with current KII requirements;
the possibility that the various future performance scenarios could be laid out more clearly, and made clearer that they are simulations; and
proposing several alternative options to indicate past and future performance to indicate more clearly the expected success of the product.

The deadline for responding to the consultation is 6 December 2018 and the ESAs intend to publish a final report, including feedback on the consultation, in January 2019. The ESAs envisages that the amendments, which will take the form of regulatory technical standards, will apply from 1 January 2020.

Reporting to NCAs under MMF Regulation: ESMA consultation on draft guidelines

ESMA has published a consultation paper on draft guidelines on reporting to NCAs under Article 37 of the Regulation on money market funds (MMF Regulation). Under Article 37 of the MMF Regulation, money market fund (MMF) managers are required to report certain information regarding each MMF under their management to the relevant NCA. Information should be reported on a quarterly basis at least, or annually for an MMF for which assets under management does not exceed €100m.

ESMA has already developed the implementing technical standards (ITS) to establish a reporting template incorporating the relevant information required under Article 37 of the MMF Regulation. This consultation relates to its work to produce guidelines providing further specification to MMF managers on how to complete the ITS template with all necessary information. The consultation closes on 14 February 2019.

ESMA confirms that managers must send their first quarterly reports required under Article 37 to NCAs in the first quarter of 2020. There will be no requirement to retroactively provide historical data for any period prior to the reporting start date.

Framework for assessing leverage in investment funds: IOSCO consultation paper

Following a 2017 recommendation by the Financial Stability Board (FSB) that the International Organisation of Securities Commissions (IOSCO) looks into meaningful monitoring of leverage in funds for financial stability purposes, IOSCO has published a consultation paper proposing a framework for assessing leverage in investment funds. IOSCO proposes that the framework will consist of a two-step process which is aimed at achieving an effective and consistent assessment of global leverage, as part of an effort to address any risks that may arise from certain asset management activities. The first step would use the measures of leverage identified and / or developed, with a view to identify and analyse funds that may pose a risk to financial stability. Step two would involve further analysis of this sub-set of funds. The consultation focuses mainly on the first step, although it also invites feedback on the second step and the articulation of the two-step approach.

The deadline for responding to the consultation is 1 February 2019.

Sustainable finance

Environment Audit Committee’s recommendations on green finance: government response

The Environmental Audit Committee (EAC) has published the UK Government’s response to its June 2018 report, Greening Finance: embedding sustainability in financial decision making. In its report, the EAC identified deficiencies in the UK’s framework of financial regulation management of climate change risk and made subsequent recommendations. The government responds to the EAC’s recommendations and:

agrees to clarify that trustees have a fiduciary duty to consider long term risk and opportunities, including environmental ones; and
agrees that it is good practice for pension scheme trustees to inform the design of investment strategies with an understanding of their members.

Financial crime

Co-operation and information exchange between national supervisors under MLD4: ESAs consultation paper

The Joint Committee of the ESAs have published a consultation paper on the draft guidelines on co-operation and information exchange between NCAs. There is currently little detail as to how NCAs are to achieve their obligations under both the Fourth and Fifth Money Laundering Directives and this has led the ESAs to produce these guidelines with the aim of enabling NCAs to more easily and consistently comply with their obligations.

The guidelines suggest co-operation can be improved through the creation of anti-money laundering and counter-terrorist finance (AML / CTF) colleges and that NCAs should carry out mapping exercises for each supervised firm to enable them to identify which firms, as a result of their cross border business, require a college to be set up. The guidelines define the process for bilateral exchanges of information between NCAs for firms which only operate in two member states, and emphasise the need for AML / CTF and prudential supervisors to exchange information.

The consultation period closes on 8 February 2019 and a public hearing on the draft guidelines will be hosted at the EBA's London offices on 18 December 2019.

REP-CRIM: FCA report analysing first year of data

Following the introduction of the requirement on firms to submit to the FCA an annual financial crime data return (REP-CRIM), the FCA has published a report analysing the first year of data submitted to it. Firms submitted their returns covering 2017 on their accounting reference date, providing data for the previous 12 month period. Because this date differs between firms, not all figures submitted will cover the same 12 month period. However, the report gives aggregate data on:

the number of customers posing a higher risk;
the steps taken by the industry in tackling financial crime;
fraud risks by type and the associated industry perceptions; and
a ranking of how frequently firms consider jurisdictions to be of high risk.

Given the difficulties in the past in acquiring robust figures on financial crime, the FCA states that the data obtained from the REP-CRIM is an important step, enabling it to track the evolution of threats over time.

Authors

Lora Froud Partner

Authors

Lora Froud Partner

More information

Investment Management Update

General

Brexit

MiFID II

Investment funds

Sustainable finance

Financial crime

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