Investment Management Update

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

This issue includes:



Investment Funds

Financial Crime


Fair pricing: FCA discussion paper

In light of the Financial Conduct Authority’s (FCA) research note ‘Price discrimination in financial services: How should we deal with questions of fairness?’, the FCA has published a discussion paper (DP18/9) on the fairness of certain pricing practices in financial services to launch a public debate on the topic. The paper will be of interest to firms with retail customers. The FCA focuses on two pricing practices: (1) firms charging different prices to different customers based solely on differences in consumers’ price sensitivity; and (2) firms charging existing customers higher prices than new customers. The FCA is concerned that these pricing practices could potentially disadvantage some consumers significantly, in particular the most vulnerable and least resilient consumers, hence breaching the FCA’s Principles of Business which require firms to treat customers fairly and ensure information to customers is presented in a clear, fair and not misleading manner.

In the discussion paper, the FCA gives context to the issues and considers the remedies it may introduce if it were to take appropriate action in the market.

The deadline for submitting comments on the discussion paper is 31 January 2019. Following consideration of the responses received, the FCA will publish a feedback statement.

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Draft Brexit SIs: Regulations on EuVECAs and EuSEFs

HM Treasury has published draft versions of the Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 (for the Regulation on European Venture Capital Funds (EuVECA)) and the Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018 (for the Regulation on European Social Entrepreneurship funds (EuSEF)). The draft SIs are accompanied by an explanatory memorandum which also covers the Regulation on European Long-term Investment Funds (ELTIFs), indicating that the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2018 will be published in due course.

When finalised, the three SIs will:

  • enable UK funds managers to register or be authorised with the FCA in order to market EuVECAs, EuSEFs and ELTIFs under new labels:
    • Registered Venture Capital Funds (RVECA);
    • Social Entrepreneurship Funds (SEF); and
    • Long-term Investment Fund (LTIF).

Existing UK managers of EuVECAs, EuSEFs and ELTIFs that are already registered with, or authorised by, the FCA will be automatically transferred to this new UK regime;

  • retain the existing investment rules for EuVECAs, EuSEFs and ELTIFs domiciled in the UK. This includes retaining the distinction between investment in EEA assets and non-EEA assets;
  • remove the unilateral obligation on UK supervisors to share information or cooperate with EU authorities;
  • transfer functions held by the EU Commission to HM Treasury; and
  • transfer functions held by the European Securities and Markets Authority (ESMA) to the FCA.

The explanatory memorandum also refers to the temporary permissions regime (TPR) in the Alternative Investment Fund Management (Amendment) (EU Exit) Regulations 2018 (AIFMD Brexit SI). The AIFMD Brexit SI sets out the design and structure of the TPR for all EEA Alternative Investment Funds (AIFs), including EuVECAs, EuSEFs and ELTIFs. It enables EEA funds that have notified their intention to market in the UK via a passport before exit day to continue to access the UK market for a limited period after exit day.

The FCA will update its Handbook and relevant Binding Technical Standards (BTS) to reflect the changes introduced through the SIs and intends to consult on these changes in autumn 2018. HM Treasury plans to lay the instruments before Parliament prior to 29 March 2019.

Brexit SI: The Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018

On 26 October 2018, the Financial Regulators' Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018 (SI 2018/1115) were published, accompanied by an explanatory memorandum. The SI fixes deficiencies in BTS which will become retained UK law by giving UK financial services regulators responsibility for these standards (instead of the European Supervisory Authorities) and an ongoing responsibility for making any technical standards required under retained EU law on financial services.

The Regulations were laid before Parliament on 25 October 2018 and came into force on 26 October 2018. Earlier drafts were published in April and July 2018.

Maintaining market confidence – an update on Brexit: FCA speech

The FCA has published a speech, 'Maintaining market confidence: an update on Brexit', delivered by Nausicaa Delfas, the FCA's Executive Director of International. Ms Delfas focuses on three areas of Brexit:

Being ready for a no-deal Brexit

Ms Delfas takes stock of regulatory developments preparing for a ‘hard exit’, including:

  • the proposed TPR (for which the FCA has already received over 1,300 expressions of interest);
  • amendments necessary to the FCA Handbook and BTS as a result of ‘onshoring’;
  • HM Treasury's proposal to give financial services regulators powers to phase in changes that are made as part of the onshoring process; and
  • the consultation on Financial Services Compensation Scheme (FSCS) cover for EEA firms that utilise the TPR.

The FCA expects firms to continue to meet FCA rules as they implement their Brexit plans, for example, meeting the threshold conditions, allowing effective FCA supervision and appropriate senior oversight in the UK. The FCA also expects firms to let their customers know if there will be any change in their ability to provide services to them post-Brexit and if any changes may affect the customer’s products or contracts (for example in relation to changes to their rights and protection under FSCS and the Financial Ombudsman Service schemes or changing contractual terms).

Managing cliff-edge risks around March 2019

Ms Delfas highlights certain risks which remain in areas such as:

  • contractual continuity;
  • clearing; and
  • data adequacy in relation to the transfer of personal data which requires actions from both the UK and EU authorities.

Ms Delfas urges the conclusion of Memoranda of Understanding and other practical arrangements as soon as possible. She also stresses the FCA’s support for outcomes-based equivalence assessments.

Looking to a post-Brexit world

Emphasising that leaving the EU is not seen by the FCA as an opportunity to join a race to the bottom in regulatory standards, Ms Delfas states that the FCA will work with its global counterparts to develop and implement standards which are strong but flexible enough to enable competition and innovation. International engagement will remain a core part of the FCA’s work. For example, the FCA is currently supporting the UK Government in the 'global financial partnerships' strategy, which is focused on enhancing the UK's relationship with key financial partners around the world and preserving the UK's position as a global financial centre. In addition, the FCA is centrally involved in existing financial dialogues the UK has with key global partners including China, Hong Kong, Japan and Singapore.

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Investment Funds

Delegated Regulations on clarifying depositaries’ safe-keeping obligations under AIFMD and UCITS Directive: published in OJ

The Delegated Regulations on clarifying depositaries’ safe keeping obligations under both the AIFMD (Commission Delegated Regulation (EU) 2018/1618) and the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive (Commission Delegated Regulation (EU) 2018/1619) have been published in the Official Journal of the EU (OJ). The Delegated Regulations will enter into force on 19 November 2018 and apply from 1 April 2020.

The Delegated Regulations:

  • specify depositaries’ duties with regard to safe-keeping of AIFs / UCITS;
  • require that where a depositary delegates safe-keeping functions to third parties (custodians) the assets also need to be segregated at the level of the delegate; and
  • outline how the obligations are to be fulfilled.

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Financial Crime

Money laundering and terrorist financing controls in higher risk jurisdictions: updated HM Treasury advisory notice

HM Treasury has published an updated advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions. This advice replaces all previous advisory notices issued by HM Treasury on the subject.

HM Treasury advises firms to consider the Financial Action Task Force’s (FATF) latest statements (reproduced in Annex A and Annex B to the advisory notice) which identify jurisdictions with strategic deficiencies in their anti-money laundering (AML) and countering the financing of terrorism (CFT) regimes. The Treasury advises the following:

  • consider the Democratic People’s Republic of Korea (DPRK) as high risk and apply counter measures and enhanced due diligence (EDD) measures in accordance with the risks;
  • consider Iran as high risk and apply EDD measures in accordance with the risks; and
  • with regards to the following jurisdictions, take appropriate steps to minimise the risks which may include EDD measures in high risk situations: The Bahamas, Botswana, Ethiopia, Ghana, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen.

DPRK, Iran, Syria, Tunisia and Yemen are subject to sanctions measures which would require firms to take additional measures when conducting EDD.

Risk-based approach for securities sector: FATF finalised guidance

The FATF has published finalised guidance on a risk-based approach (RBA) for the securities sector. The purpose of the guidance is to outline key principles and guidelines involved in applying a RBA to AML and CFT in the securities sector.

The FATF hopes that the guidance will assist countries, competent authorities and others with the effective implementation of AML / CFT measures and support the development of a common understanding of what the RBA approach to AML / CFT entails in the context of the securities sector.

The guidance has three sections: the FATF’s risk-based approach to AML / CFT (section 1); guidance for securities providers and intermediaries (section 2); and guidance for supervisors (section 3). In addition, Annex B includes a detailed list of suspicious indicators which may trigger a suspicious transaction report or prompt additional due diligence measures.

The guidance was adopted at the FATF’s October 2018 plenary.

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