Investment Management Update

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

This issue includes items under the following headings:


Temporary permissions regime for inbound firms and funds: FCA consultation

The Financial Conduct Authority (FCA) has published a consultation paper (CP18/29) on the temporary permissions regime (TPR) for inbound firms and funds.  The policy drive behind the establishment of the TPR is to deter the risks posed to consumer protection and market integrity which can be caused by an abrupt loss of passporting rights on exit day in the event that withdrawal agreement is not signed and there is no agreed implementation period. The intention of the FCA is to preserve the status quo for temporary permission (TP) firms as far as possible. The relevant stakeholders of the consultation paper include EEA firms that are passporting to the UK under FSMA and Treaty firms, managers of EEA-domiciled UCITS (including money market funds authorised under the MMF Regulation) marketed in the UK and managers of EEA-domiciled AIFs (including EuVECAs, ELTIFs and AIFs that are authorised as MMFs) marketed in the UK.

The TPR enables TP firms and TP marketing fund managers to continue activities for up to three years post-exit day. The period will vary, as the FCA will allocate each firm a three-month “landing slot” (application window) in which to apply for authorisation, registration or recognition in the UK. Landing slots will begin October to December 2019 with five further slots, the last one closing at the end of March 2021. The FCA will publish further information on the notification window and how firms should complete the notification process. Once the window is closed, firms cannot use the TPR.

Under the TPR, a TP firm is treated as an “authorised person” under FSMA. This means that they are subject to additional FCA supervision. Legal advice may be necessary on the implications of a TP firm coming under FCA supervision and also on whether using the TPR is necessary for the firm to continue access into the UK market.

The FCA will publish rule changes in due course to give effect to its proposals for TP firms relating to the Financial Services Compensation Scheme, the Financial Ombudsman Scheme (FOS), the approved persons regime and the Senior Managers and Certification Regime (SM&CR).

The FCA’s general approach is that it will apply to TP firms:

  • all FCA rules which currently apply to them;
  • all FCA rules which implement a requirement of an EU Directive (but allowing ‘substituted compliance’ in certain circumstances); and
  • certain additional FCA rules which the FCA believes are necessary to provide appropriate consumer protection or relate to funding requirements.

However, the FCA rules provide a carve-out where compliance with pre-exit day home state rules would result in the TP firm breaching home state rules. An example given by the FCA as to when this may be relevant is a TP fund manager managing a UK UCITS scheme (requiring application of UCITS rules) which, following exit day, will be classified as a third country AIF by the TP firms’ home state (requiring application of AIFMD).

If there is no Brexit implementation period and the firm has notified the FCA that it needs TP, it will come into effect on exit day. It is expected that notifications can be made early in 2019.

The FCA is seeking feedback on Chapters 4 (applying FCA rules to the TPR) and 7 (funding the TPR) of the consultation paper only and the closing date of the consultation is 7 December 2018. The FCA intends to give feedback in early 2019 and publish final versions of these materials shortly before exit day.

Draft Brexit SI: Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018

HM Treasury has published a draft version of the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations and an accompanying explanatory note. The statutory instrument (SI) will make amendments to retained EU law related to the Alternative Investment Fund Managers Directive (AIFMD) for investment funds and their managers to ensure it continues to operate effectively after Brexit. The SI:

  • amends the definition of an AIF (regulation 3(5)(a)) so that all non-UK funds, including EEA UCITS, will be defined as AIFs;
  • disapplies the national private placement regime (NPPR) information and reporting requirements for funds that are recognised under section 272 of the Financial Services and Markets Act 2000 (FSMA) for marketing to retail investors (Regulation 10(9)(e));
  • sets out the design and structure of the temporary passporting regime for AIFs and AIFMs (including EuVECAs, EuSEFs, ELTIFs and MMFs which use an AIF structure) (Regulation 14);
  • amends regulation 14 relating to EEA AIFMs marketing third country AIFs.  This draft SI aligns the treatment of EEA AIFMs with that of other third country AIFs by requiring them to notify under regulation 59 of the AIFM Regulations (which implemented Article 42 of AIFMD). The SI will enable the EEA AIFM to enter the temporary permissions regime, and market the relevant fund on the same terms and subject to the same conditions as it could have been before exit day, before notifying and becoming recognised under regulation 59;
  • requires new EEA AIFs marketed in the UK after exit day to notify the FCA under the NPPR, as is required for the marketing of third country AIFs;
  • removes the requirement for a UK AIFM to report and make disclosures when it acquires control of an EU company. A UK AIFM will only need to report when it acquires control of a UK company; and
  • removes provisions in the legislation requiring cooperation and information sharing between UK supervisors and EU authorities.

The FCA will make relevant rulebook and binding technical standards changes to reflect the amendments introduced through this SI. The FCA intends to consult on these changes in the autumn of 2018. HM Treasury will lay this instrument before Parliament in the autumn of 2018.

Draft Brexit SI: Collective Investment Schemes (Amendment etc) (EU Exit) Regulations 2018

HM Treasury has published a draft version of the Collective Investment Schemes (Amendment etc) (EU Exit) Regulations 2018 and an accompanying explanatory note. The SI will make amendments to retained EU law related to the UCITS Directive for investment funds and their managers to ensure it continues to operate effectively after Brexit. The SI:

  • introduces a UK UCITS regime for funds established and authorised in the UK. These funds will be called “UK UCITS”;
  • maintains the existing investment rules for UK UCITS, as under the UCITS Directive;
  • continues to allow the cash of a UK UCITS to be booked in accounts opened with any EEA credit institution;
  • sets out the temporary permissions regime for EEA UCITS (including Money Market Funds which use a UCITS structure);
  • introduces, for EEA UCITS marketing in the UK after exit day, a transitional arrangement which will disapply incorporation requirements of the depositary, trustee, operator and/or manager after exit, for as long as the firm has the temporary permissions needed to continue to carry out the relevant regulated activity in the UK;
  • deletes provisions enabling or referring to cross-border mergers and retains provisions enabling or referring to domestic mergers; and
  • removes provisions in the legislation requiring cooperation and information sharing between UK supervisors and EU authorities.

The FCA will be making relevant rulebook and binding technical standards changes to reflect the amendments introduced through this SI. The FCA intends to consult on these changes in the autumn of 2018. HM Treasury will lay this instrument before Parliament in the autumn of 2018.

Draft Brexit SI laid before Parliament: Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018

On 18 October 2018, the draft version of the Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018, as laid before Parliament, was published, accompanied by a draft explanatory memorandum. The draft SI relates to the onshoring of the MiFID II Directive and MiFIR to ensure they operate effectively following the UK’s departure from the EU. Regulations 1, 2, 3, 15(5) and 20 will come into force on the day after the day the draft Regulations are made, and the remaining provisions will come into force on exit day.

The FCA and the Prudential Regulation Authority (PRA) will provide further information in due course on how they intend to use the powers conferred to them under the draft Regulations. See our Investment Management Update of 10 October 2018 for discussion of an earlier draft of the SI.

Temporary transitional power for BofE, FCA and PRA: HM Treasury proposal

HM Treasury has published guidance on a proposal for temporarily empowering the UK financial regulators (the Bank of England (BofE), PRA and FCA) to make transitional provisions by waiving or modifying firms’ regulatory obligations where those obligations have changed as a result of ‘onshoring’ financial services legislation. For example, the power can be used to:

  • delay the application of onshoring changes; and
  • grant transitional relief to firms with regards to existing regulatory requirements that would otherwise apply for the first time on exit day.

The purpose of the transitional powers is to ensure that any changes to firms’ regulatory obligations do not pose a risk to the UK regulators’ objectives, for example, financial stability and also to provide a smooth transition for firms in a post exit regulatory regime. The powers will be available to regulators for a period of two years from exit day and transitional provisions made using the power will cease to have effect two years after exit day. An SI will be laid before Parliament in due course to give effect to the temporary transitional powers.

Brexit changes to FCA Handbook and binding technical standards: first FCA consultation

The FCA has published a consultation paper (CP18/28) proposing changes to the FCA Handbook and to binding technical standards (BTS) to address deficiencies arising from Brexit. The FCA’s power to make these proposals stem from the Financial Regulators’ Powers (Technical Standards) (Amendment etc.) (EU Exit) Regulations 2018. The FCA expects that the proposals in the consultation paper will affect all of its stakeholders. It states that the proposals aim to correct deficiencies arising from Brexit and not revisit policy decisions.

The consultation paper:

  • sets out the FCA’s approach to reviewing the Handbook and BTS (Chapter 2);
  • discusses a range of cross-cutting issues (Chapter 3);
  • explains the Handbook proposals (Chapter 4)
    • Section 4.1 includes a table of amendments
    • Section 4.2 covers proposals to amend the Prudential Standards sourcebook
    • Section 4.3 covers proposals to amend parts of the Conduct of Business sourcebook
    • Section 4.4 covers changes to the fund management sector, principally amendments to both the Investment Funds sourcebook and the Collective Investment Schemes sourcebook;
  • outlines BTS proposals (Chapter 5); and
  • explains how the FCA intends to treat EU non-legislative material, such as Guidelines and Q&As issued by European Supervisory Authorities and their predecessor bodies (Chapter 6).

In the event the UK and the EU agree on the terms of the withdrawal agreement and there is an implementation period, the amendments proposed in this consultation paper will not come into effect on 29 March 2019. In this case, changes made to the Handbook and BTS post-implementation period will depend on the negotiation outcomes between the UK and EU.

The FCA aims to publish a second consultation paper in the autumn of 2018 covering BTS and parts of the Handbook affected by Brexit SIs which are due to be published in due course. The deadline for responses to CP18/28 is 7 December 2018. The FCA intends to publish feedback on this in early 2019 and also publish final versions of the materials consulted on or before 29 March 2019.

No-deal Brexit sanctions policy: Foreign & Commonwealth Office technical note

The Foreign & Commonwealth Office (FCO) has published a technical note explaining how the UK would implement sanctions if the UK leaves the EU without a deal.

The FCO states:

  • as required by international law, the UK will implement UN sanctions in UK domestic law after the UK leaves the EU;
  • the UK will carry over all EU sanctions at the time of departure. The Sanctions and Anti-Money Laundering Act 2018(the Sanctions Act) will provide the legal basis for the UK to impose, update and lift sanctions after leaving the EU. This will be done in the form of regulations made under it. The FCO aims to lay such legislation before Parliament before March 2019;
  • any sanctions regimes not addressed through regulations under the Sanctions Act by March 2019 will continue as retained EU law under the EU (Withdrawal) Act 2018. This means there will be no gaps in implementing existing sanctions regimes;
  • the UK will also have the powers to adopt its own sanctions under the Sanctions Act, although it will work with the EU and other international partners on sanctions where there is a  mutual interest;
  • in the event of a no-deal Brexit, the FCO will publish further guidance on sanctions; and
  • firms should not assume that all aspects of existing EU sanctions will be replicated exactly. They should check new legislation to ensure compliance with its requirements, and check future guidance when it is published.

European Supervisory Authorities and the European Systemic Risk Board: HM Treasury Brexit guidance

HM Treasury has published guidance on the status of regulations relating to the European Supervisory Authorities (ESAs) and the European Systemic Risk Board (ESRB) following Brexit.

On exit day, the UK will no longer be subject to the jurisdiction of the ESAs and ESRB. Therefore, where the EU (Withdrawal) Act (Act) incorporates directly applicable EU legislation related to the ESAs and the ESRB into UK law, the Treasury will make SIs to amend or revoke those provisions as necessary. This guidance outlines the EU regulations which establish the ESAs and ESRB and provide the legal basis for their objectives and functions. Post-Brexit, HM Treasury intends to revoke them in their entirety. Guidelines and recommendations produced by the ESAs will not form part of UK law after exit day as they are not categorised as retained EU law under the Act. The UK financial regulators are consulting separately on their approach to these guidelines and recommendations.

Where there are other specific functions carried out by the ESAs which will need to be replicated in the UK, HM Treasury will use SIs to transfer those functions to the appropriate UK body.

Sustainable finance

Impact of climate change and green finance on financial services: FCA discussion paper

The FCA has published a discussion paper (DP18/8) on climate change and green finance. The discussion paper outlines how the impacts of climate change are relevant to the FCA’s statutory objectives of protecting consumers, protecting market integrity and promoting competition. Among other things, the FCA consults on addressing the recommendations of the Law Commission’s report on Pension Funds and Social Investment, disclosures by issuers of securities admitted to trading on a regulated market and the introduction of a requirement for financial services firms to report publicly on how they manage climate risks and the content of those reports. The deadline for responding to the questions in the discussion paper is 31 January 2019.

The FCA notes that institutional investors are considering climate change-related issues and asset managers are increasingly being given climate change mandates. Therefore, readily available, reliable and consistent disclosures about climate change issues would ensure that those making investment decisions have accurate information to help them. The FCA and the PRA are setting up a Climate Financial Risk Forum which is designed to manage financial risks from climate change and to support the innovation for green financial services and products.

FCA’s Green FinTech Challenge

The FCA has announced the launch of its Green FinTech Challenge to support innovation and growth in the Green Finance sector and promote green solutions. The FCA encourages firms that require the regulatory support, and meet certain criteria, to apply to join the Green FinTech challenge cohort. The deadline for applications is 11 January 2019. It is open to start-ups, incumbents and technology providers. Examples of green solutions include (but are not limited to):

  • supporting capital flows/investment towards green products and services;
  • driving efficiency in the issuance, distribution or adoption of green products;
  • managing climate-related risk posed to market participants;
  • environmental impact measurement; and
  • delivering new green financial products.

Successful applicants will benefit from a dedicated Innovate Adviser, authorisation support, live market testing in the regulatory sandbox, guidance and informal steers from the FCA.

EU Commission’s technical expert group on sustainable finance

The EU Commission has updated its webpage on sustainable finance announcing that it has set up a technical expert group (TEG) on sustainable finance. The TEG will assist in developing a unified classification system for sustainable economic activities, an EU green bond standard, methodologies for low-carbon indices and metrics for climate-related disclosure. The TEG began work in July 2018 and will operate until June 2019, with a possible extension until end-2019. The group consists of 35 members, including participants from the finance sector.

The Commission intends to clarify how, among others, asset managers and insurance advisors should integrate sustainability risks and, where relevant, other sustainability factors in the areas of organisational requirements, operating conditions, risk management and target market assessment. It will do this by either amending existing delegated acts under directives which include MiFID, AIFMD and the UCITS Directive, or adopting new delegated acts.


SM&CR Statements of Responsibilities and Responsibilities Maps: FCA guidance consultation

The FCA has published a guidance consultation (GC18/4) on its proposed guidance for the content of Statements of Responsibilities (SoRs) and Responsibilities Maps for solo-regulated FCA firms, required under the Senior Managers and Certification Regime (SM&CR). The proposed guidance builds on the information published in the FCA Guide to the SM&CR for solo-regulated firms.

The guidance:

  • sets out the purpose of SoRs and Responsibilities Maps;
  • directs to relevant Handbook references;
  • provides some questions for firms to ask themselves when preparing (i) SoRs, ordered by the relevant section on the "Statement of responsibilities for solo-regulated firms" form, and (ii) Responsibilities Maps;
  • gives example SoRs and Responsibilities Maps based on the case studies in the FCA's SM&CR: Guide for FCA solo-regulated firms; and
  • outlines examples of good practice (in green boxes) and poor practice (in burgundy boxes).

The FCA warns that questions and examples are not to be considered exhaustive, but the guidance provided may be applied in a risk-based and proportionate way. Additional guidance from the FCA in this area is to be welcomed. Firms should consider the content and feedback to the FCA as appropriate. The consultation is open until 10 December 2018.

FCA emphasises interest in non-financial misconduct in firms

The FCA has published a letter from Megan Butler, Executive Director of Supervision, to Maria Miller MP, Chair of the House of Commons’ Women and Equalities Committee in relation to sexual harassment in the workplace. Ms Butler details how the FCA views non-financial misconduct, in particular sexual harassment, as coming under its regulatory ambit predominantly in connection with how it assesses a firm’s culture and individual fitness and propriety. The content of the letter serves as a reminder to firms of their obligations and indicates the FCA’s expectations in some respects.

Ms Butler indicates that the FCA would see a culture where sexual harassment is tolerated as being indicative of an overall culture which does not allow for decisions to be challenged and consequently would fall below the standard the FCA expects. The FCA takes a holistic approach to evaluating a firm’s culture, considering the extent to which it is shaped by factors such as remuneration, inclusion and diversity. Given this approach, it is vital that firms review their culture holistically to ensure that a firm is not only upholding the FCA’s standards in relation to financial conduct but also personal conduct.  The FCA will consider any sexual misconduct, or other non-financial misconduct, when evaluating an individual’s fitness and propriety. The FCA suggests that this is relevant under the approved persons regime, senior managers under the SM&CR and should extend to when firms assess whether certified staff are fit and proper. It is therefore important that firms, when making determinations about senior managers, certified staff or approved persons, examine beyond the individual’s financial conduct and consider their wider behaviour and whether it is compliant with the FCA’s standards.

In addition, Ms Butler highlight firms’ reporting obligations to the FCA under Principle 11 and individual conduct rules. The FCA would expect to be informed promptly of any potentially serious misconduct involving firms’ employees and firms should be able to demonstrate that they have the right processes to handle such cases. If the misconduct involves the most senior staff at the firm, the FCA would expect notification within seven days under the SM&CR. It is also important for firms to have robust processes in place to deal with any cases of serious misconduct and sufficient whistleblowing and complaints procedures in place.

FCA regulatory sandbox cohort 5: applications open

The FCA has announced that it is accepting applications to cohort 5 of its regulatory sandbox. The deadline for applications is 30 November 2018 and the FCA advises firms to read its application guidance prior to applying. The regulatory sandbox allows businesses to test innovative propositions in the market, with real customers. Firms can test their innovative products in a controlled environment and the sandbox reduces time-to-market at a potentially lower cost. The sandbox will support firms in identifying appropriate consumer protection safeguards to build into new products and services.

FCA approach to competition

Following on from its December 2017 consultation, the FCA has published ‘FCA Mission: Approach to Competition’ which sets out what the FCA is doing to advance its competition objective, and gives feedback (in Annex 2) on its consultation.

The FCA states that it welcomes views, continuing discussion and communication on how it can achieve its vision and deliver the competition objective more effectively.

Increasing the award limit for the FOS: FCA consultation paper

The FCA and the Financial Ombudsman Service (FOS) have jointly published a consultation paper (CP18/31) on increasing the award limit for the FOS. The proposed increases apply to the FOS’s compulsory and voluntary jurisdictions. The FCA and FOS propose that, on 1 April 2019, the FOS’s £150,000 award limit should change to:

  • £350,000 for complaints about acts or omissions by firms on or after 1 April 2019;
  • £160,000 for complaints about acts or omissions before 1 April 2019 (to reflects changes in inflation since the £150,000 limit was put in place); and
  • both award limits should be automatically adjusted on 1 April from 2020 onwards, using the consumer prices index (CPI), with the adjusted figure rounded down to the nearest £5,000.

The FCA and FOS do not expect firms’ ongoing complaint handling costs to change because of their proposals; however, it will clearly increase the amount of compensation the FOS can award. The FCA asks specifically for feedback on the interaction of this proposal with its plans to extend the scope of the FOS to small and medium-sized enterprises’ (SMEs) (see next item below).

The consultation closes on 21 December 2018 and the FCA intends to publish a policy statement early in March 2019.

Small and medium-sized enterprises access to the FOS: FCA policy statement

The FCA has published a policy statement and near-final rules (PS18/21) on small and medium-sized enterprises’ (SME) access to the FOS. The change allows a wider range of complainants to access the FOS by changing the definition of an ‘eligible complainant’ in the DISP section of the FCA Handbook. ‘Eligible complainant’ will include more SMEs, charities, trusts and certain personal guarantors of loans to a business they are involved in. The larger focus of the policy statement is on SMEs, as there are more SMEs, and they are likely to be dependent on financial services.

The FCA has made some changes to its approach published in its earlier consultation and this is explained in the policy statement. The FCA aims to finalise the near-final rules before the end of 2018 and the rules are expected to come into force on 1 April 2019. The FCA indicates that it intends to carry out a post‑implementation review of the impact of these new rules by 2021.

Securitisation Regulation: FCA designation and consultation

The UK government is currently in the process of implementing the EU Securitisation Regulation (SR) which, among other things, aims to harmonise due diligence, risk retention and disclosure in relation to securitisations.

HM Treasury has published a letter to the FCA indicating the Treasury’s intention to designate the FCA as a competent authority responsible for the supervision of compliance of UK established: (i) sellers of a securitisation position; (ii) persons with obligations; and (iii) originators, original lenders and securitisation special purpose entities not covered by the EU legislative acts. The FCA is also designated as the competent authority responsible for the authorisation of third party verifiers and the supervision of their compliance with obligations as set out in the SR.

In addition, the FCA published a consultation paper (CP18/30) outlining its proposals to amend the Decision Procedure and Penalties manual (DEPP) and Enforcement Guide (EG) to implement the SR, which will come into force on 1 January 2019.


UK and Hong Kong agree mutual recognition regime for retail fund offerings

Under a Memorandum of Understanding (MoU) signed earlier this month by the FCA and the Hong Kong Securities and Futures Commission (“SFC”), the UK and Hong Kong have established a “streamlined” mutual recognition process, intended to facilitate the cross-border distribution of retail funds to the public in the UK and Hong Kong. 

Click here to read our note summarising the MoU and giving Q&As on the eligibility criteria for the regime.