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:


Transition from LIBOR to risk-free rates: FCA and PRA Dear CEO letters

The FCA and the PRA jointly published Dear CEO letters to banks and insurance firms in relation to their preparations for the transition from the London Interbank Offered Rate (LIBOR) to alternative risk-free rates (RFRs) by 2021. The purpose of this letter is to seek assurance that firms’ senior managers and boards understand the risks associated with the transition and are taking appropriate action now. While firms that have not received this communication from their supervision team are not within scope of this request, the regulators encourage all firms that currently rely on LIBOR to read and reflect on the letter. In a July speech, Andrew Bailey, Chief Executive of the FCA, has already warned of the wider implications to the financial services industry, including that “investment advisors and portfolio managers may need to be able to show that they have considered whether such [LIBOR-referencing] investments remain suitable for a particular client or portfolio if there is no clear and appropriate plan on what will happen in the event of discontinuation”.

The regulators ask banking and insurance firms to:

  • provide the FCA and PRA with a board approved summary of their assessment of key risks relating to LIBOR discontinuation and action plans to mitigate those risks; and
  • identify the senior manager responsible for responding to the Dear CEO letter and for ensuring the effective implementation of the transition plans.

Recommended action to address risks and vulnerabilities in the EU financial system: ESAs report

The Joint Committee of the European Supervisory Authorities (ESAs) has outlined policy actions in a report to address risks and vulnerabilities in the EU financial system. The key risks considered relate to valuations and repricing of risk premia, the uncertainty around the terms of the UK’s withdrawal from the EU, operational and ICT risks and climate change risks.

The report outlines the following policy actions by the ESAs, national competent authorities, financial institutions and market participants moving forward.

  • Conduct and develop further stress test exercises across all sectors – ESMA is currently developing guidelines for stress testing carried out by money market funds and for asset managers on liquidity stress testing.
  • Continued attention to be paid by supervisory authorities on the risk appetite of financial institutions – financial institutions should carefully manage their interest rate risk and retail investors should consider the risk of moving into higher yielding and leveraged products.
  • Macro and micro prudential authorities should further contribute to address contagion risks and enhance their efforts in monitoring of lending standards. Authorities should focus on monitoring and improving asset quality.
  • EU financial institutions, their counterparties and investors and retail customers should plan appropriate mitigating actions in a timely manner to prepare for Brexit. Preparations should address the potential risk of a no-deal Brexit and be reported to national competent authorities (NCAs).

EU framework for prudential and AML supervision: European Commission communication

The European Commission has published a communication on strengthening the EU framework for prudential and anti-money laundering (AML) supervision for financial institutions. In May 2018, the Commission invited the Chairpersons of the ESAs, the Chairperson of the AML Committee of the ESAs and the Chairperson of the Supervisory Board of the European Central Bank to establish a Joint Working Group to initiate a collective reflection on ways of improving the current framework for cooperation between AML and prudential supervisors. The proposed strategy in the communication is based on analysis carried out by this Joint Working Group.

The Commission is concerned that there is no clear articulation between the prudential and AML rules for financial institutions. It expresses that there is also a lack of efficient coordination on AML issues at a cross border and domestic level between authorities at different member states and third countries. Suggested strategies include:

  • increasing the role of the European Banking Authority (EBA) through reforms to the EBA Regulation to provide:
    • centralised AML expertise and resources at the EBA;
    • clarity on the scope and content of AML-related tasks;
    • additional AML-related powers and responsibilities for the EBA; and
    • giving the EBA an international co-ordination role on AML issues.

  • reforms to the proposed CRD V Directive, including:
    • supporting amendments tabled by the European Parliament relating to information exchange and a duty of cooperation between prudential and AML authorities and bodies; and
    • the Commission suggests that AML information should be explicitly covered by confidentiality waivers. If there are disagreements on cooperation and exchange of information, these should be referred to the EBA.

The proposal to strengthen the EBA's role will now be discussed by the European Parliament and Council. These targeted amendments will feed into the ongoing discussions of the Commission proposal to review the ESAs Regulations. The Commission encourages the European Parliament and the Council to reach agreement on these proposals swiftly.

NCA’s disclosure of information covered by professional secrecy: ECJ preliminary ruling

The Court of Justice of the EU (ECJ) has ruled that national financial supervisory authorities may be obliged to disclose information covered by professional secrecy to safeguard the rights of the defence of an applicant or so that information may be used in civil or commercial proceedings. The rulings are on joined cases, Case C-594/16, involving interpretation of Article 53(1) of the CRD IV Directive, and Case C-358/16, interpreting Article 54 of MiFID.

Case C-594/16

Mr Buccioni brought a claim against the Italian national supervisor, Banca d’Italia (Bdl), for refusing to give access to documents, on grounds of professional secrecy. Mr Buccioni claimed the documents could help him assess whether he could bring a claim for damages against Bdl for monetary loss suffered due to Bdl’s flawed supervision of Banca Network Investimenti SpA’s compulsory winding up. The ECJ held that:

  • Article 53(1), governing rules on professional secrecy, includes an exception where a credit institution is bankrupt or is compulsorily wound up. Mr Buccioni’s claim falls within this exception;
  • Article 53(1) does not prevent competent authorities from disclosing information to a person who requests it in order to be able to institute civil or commercial proceedings with a view to protecting proprietary interests which were prejudiced as a result of the compulsory liquidation of a credit institution;
  • however, the request for disclosure must relate to information which is relevant for the purposes of civil or commercial proceedings, the subject matter of which must be specifically identified by the applicant and without which the information in question cannot be used; and
  • it is for the competent authorities and courts to weigh up the interest of the applicant in having the information in question and the interests connected with maintaining the confidentiality of the information covered by the obligation of professional secrecy.

Case C-358/16

Mr DV was required to resign from his post as a director in 2010 as the Luxembourg financial authority (CSSF) declared he was no longer of good repute due to his role played in the setting up of a company which was involved in fraudulent activities. CSSF denied Mr DV’s request to documents (on the grounds of professional secrecy, among others) which Mr DV intended to use to defend his position. The question posed to the ECJ was whether the exception of criminal cases to the professional secrecy under MiFID is applicable in this scenario given that CSSF had imposed an administrative sanction, requiring Mr DV to resign his directorship. The ECJ held:

  • cases covered by criminal law’ (Article 54(1) and (3) of MiFID) does not cover an administrative sanction;
  • the obligation of professional secrecy (Article 54(1)), read in conjunction with Articles 47 and 48 of the Charter of Fundamental Rights of the European Union, must be guaranteed and implemented in such a way as to reconcile it with the rights of the defence. Accordingly, it is for the competent national court, when a competent authority invokes that obligation to refuse to disclose documents in its possession that are not in the file concerning the person who is the subject of a measure adversely affecting him, to ascertain whether that information is objectively connected to the complaints upheld against him. If this is the case, the court must weigh up the interest of the person in question in having access to the information necessary for him to be in a position to exercise fully his rights of defence and the interests in connection with maintaining the confidentiality of the information covered by the obligation of professional secrecy.


A ‘no-deal’ Brexit: data protection technical notice

The Department for Digital, Culture, Media & Support has published a technical note on data protection and the actions UK organisations should take to ensure a smooth flow of personal data between the UK and EU in the event of a ‘no-deal’ Brexit. Currently, the protection framework for personal data is facilitated by the General Data Protection Regulation (GDPR) (at EU level) and the Data Protection Act 2018 (DPA). In a ‘no-deal’ environment post Brexit, the government envisages no immediate change in the UK’s own data protection standards as the EU Withdrawal Act would incorporate GDPR into UK law, supplemented by the DPA. The UK would, at the point of exit, continue to allow the free flow of personal data from the UK to the EU, although this would be kept under review.

However, the GDPR does not permit the transfer of personal data by organisations in the EU to those in the UK when it is a third country without a Commission equivalency decision. As the Commission will not enter negotiations for this decision until the UK is a third country, the government advises UK organisations to consider putting standard contractual clauses in place that allow the free flow of personal data. There are model data protection clauses that are approved by the European Commission which organisations can embed as contractual obligations. Derogations may also be relied upon on certain circumstances.

Report on the progress of the government’s EU withdrawal negotiations

The House of Commons Exiting the EU Committee has published a report on the progress made on the government’s EU withdrawal negotiations (June to September 2018). The report focuses on outstanding issues in the draft UK-EU withdrawal agreement, the white paper on the UK and the EU’s future relationship and any other significant issues yet to be resolved. The Committee notes that around 80% of the withdrawal agreement has been agreed in principle and highlights unresolved issues.

On summarising the state of play for financial services, the Committee says in the report “enhanced equivalence is an ambitious goal, we agree with the Government that it is a pragmatic negotiating objective, given the contribution that the financial services sector makes to the UK economy and its importance to the economies of our trading partners in the European Union.”

Regulatory and supervisory relationships between EU and third countries: European Parliament adopts resolution

Following the European Parliament’s Committee on Economic and Monetary Affairs’ (ECON) report on the relationship between the EU and third countries concerning financial services regulation and supervision, the European Parliament has now voted in plenary to adopt the resolution put forth in the report.

The Parliament has published the minutes of the vote and a provisional edition of the resolution which contains recommendations relating to the equivalence framework in financial services legislation.  See our Investment Management Update of 12 September 2018 for more information on the ECON report and recommendations.

Inaugural meeting of US-UK Financial Regulatory Working Group: joint statement

The inaugural meeting of the US-UK Financial Regulatory Working Group was held on 12 September 2018 in London. The working group was formed to deepen bilateral regulatory cooperation with the view to promote financial stability, investor protection, fair, orderly and efficient markets and capital formation in both jurisdictions. Regulatory cooperation is important given the UK’s withdrawal from the European Union. The working group issued a joint statement following the meeting, focusing on:

  • financial regulatory reforms and future priorities to further develop the financial services activity between the UK and US markets;
  • consequences of Brexit on financial stability and cross-border financial regulation; and
  • US-UK financial regulatory issues resulting from Brexit.

The working group will meet again in January 2019.

Marketing of funds

Cross-border distribution of collective investment funds: ECON draft reports

ECON has published draft rapporteur reports on the European Commission’s proposals for a Directive and a Regulation on facilitating cross-border distribution of collective investment funds. The reports include draft European Parliament legislative resolutions which set out amendments to the Commission’s proposals. If approved, the legislative proposals will require amendments to the UCITS Directive, the AIFM Directive, the EuVECA and EuSEF Regulations and address:

  • procedures for meeting marketing requirements by national authorities;
  • transparency on fees set by national authorities; and
  • possibility of pre-marketing across borders AIFs that have not been established.

The rapporteur generally endorses the Commission proposals but suggests amendments in some areas which are shown in bold italics in the reports.

Financial crime

Fourth Money Laundering Directive: Council does not object to adding Pakistan to the list of high-risk third countries

The European Council has confirmed that it will not object the addition of Pakistan to the list of high-risk countries made under the Fourth Money Laundering Directive.

The proposed Delegated Regulation will be published in the Official Journal of the EU and will enter into force 20 days after publication if no objections to it are raised by the European Parliament.