Investment Management Update

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

This issue includes:


Brexit developments


Investment Consultancy and Fiduciary Management Market Investigation Order 2019

The Competition and Markets Authority (CMA) has announced that it has made the Investment Consultancy and Fiduciary Management Market Investigation Order 2019. The CMA has also published a notice of making the Order. The Order gives effect to the package of remedies to be implemented by the CMA in order to remedy, mitigate or prevent the adverse effects on competition (AECs) that it found in its investment consultants market investigation. The remedies also address any detrimental effect on customers that may be expected as a result of AECs.

The Order requires fiduciary managers, who make investment decisions on behalf of trustees, and investment consultants to provide clearer information on what their customers are getting for their money. The Order also incentivises pension scheme trustees to run competitive tenders to make sure they are getting the best deal to suit their needs. Parts of the Order relating to fiduciary management information provision and CMA monitoring and compliance will come into effect immediately. For the remaining provisions, trustees, fiduciary managers and investment consultants have six months to ensure their practices are in line with the Order’s requirements.

We reported in greater detail on the CMA’s investigation findings in our update of 19 December 2018. The Financial Conduct Authority (FCA) responded to the CMA’s findings by fully supporting the package of remedies and recommendations. See our update of 13 March 2019 for more detail on this.

Assessing adequate financial resources: FCA consultation paper 

The FCA has published a consultation paper (CP19/20) on assessing adequate financial resources. The consultation paper explains the purpose of, and the FCA’s approach to the assessment of adequate financial resources, for all FCA solo-regulated firms subject to the threshold conditions and/or the Principles for Businesses (PRIN). It also outlines further guidance on the meaning of ‘adequate financial resources’ under the threshold conditions and PRIN. 

The FCA intends to improve the way firms operate so that firms can prevent harm from occurring, by improving systems and controls and/or reducing the risk in their activities. The FCA states that if firms have resources to match their risk, there should be fewer disorderly firm failures, with lower costs being passed onto the industry via the Financial Services Compensation Scheme (FSCS) levy. This promotes fair and effective competition in financial markets.

The consultation paper aims to provide more clarity to the industry on:

  • the role of adequate financial resources in minimising harm;
  • the practices firms can adopt when assessing adequate financial resources; and 
  • how the FCA assess the adequacy of a firm’s financial resources.
    The deadline for submitting responses to the consultation is 13 September 2019.

Transition from LIBOR to risk-free rates: FCA and PRA’s joint statement on firms’ preparations

The FCA and the Prudential Regulation Authority (PRA) have published a joint statement on key themes, good practices and next steps in relation to firms’ preparations for the transition from LIBOR to risk-free rates (RFRs). The FCA and PRA sent "Dear CEO" letters to firms with regards to the transition in September 2018. See our update of 26 September 2018 for more detail on this. Having reviewed the responses to the letter, the PRA and FCA have made observations across eight key areas:

  • comprehensive identification of reliance on and use of LIBOR;
  • quantification of LIBOR exposures;
  • granularity of transition plans and their governance;
  • identification and management of prudential risks associated with the transition;
  • identification and management of conduct risks associated with the transition;
  • scenario planning;
  • the role of market participants in supporting transition; and
  • transacting using new RFRs and building in fallbacks.

The statement should be read within the content of firms’ risk management, contingency planning and governance frameworks. The FCA notes that not all of the findings will be relevant to all firms. Therefore, firms should take into account the nature, scale of its operations and its exposure to LIBOR and/or other interbank offered rates. 

Brexit developments

Share trading obligation, equivalence assessments and post-Brexit arrangements: ESMA speech 

The European Securities and Markets Authority (ESMA) has published a speech by Steven Maijoor, ESMA Chair, relating to international cooperation in financial regulation and supervision. One of the areas that Mr Maijoor addresses in his speech is the challenge of cross-border regulation and supervision and avoiding market fragmentation. In particular, with regards to the share trading obligation set out in article 23 of MiFIR (STO), Maijoor refers to ESMA’s updated view on the scope of the STO in the event of a no-deal Brexit and which reduces potential market disruption by fully excluding shares with GB ISINs. However, Maijoor is concerned that the conflict between the EU 27 MiFIR STO and the UK STO as a result of onshoring MiFIR obligations in a hard Brexit scenario (UK STO) will fragment markets and that this risk of fragmentation is inherently related to the UK’s decision to leave the EU and the risk of a no-deal.

Maijoor sees it as problematic that the FCA only plans to disclose the details and scope of the UK STO once it is clear there is a no-deal Brexit and that clarity may only be provided a few days (or even hours ahead) of a no-deal Brexit. In order to allow market participants to prepare, Maijoor urges the UK to reconsider the timing and provide clarity well ahead of 31 October 2019. 

Mr Maijoor also addresses the following in his speech:

  • strengthening the EU approach towards cross-border regulation and supervision;
  • equivalence process: closer monitoring, more transparency and consistency; and
  • Brexit and the exchange of secondary markets data.

See our in-depth articles of 31 May 2019 and 26 March 2019 for ESMA’s statements on the share trading obligation and the FCA’s response.

Brexit SI: Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 2) Regulations 2019 (SI 2019/1010)

The Financial Services (Miscellaneous) (Amendment) (EU Exit) (No 2) Regulations 2019 (SI 2019/1010), together with its explanatory memorandum, have been published by HM Treasury. The SI, made on 10 June 2019, ensures a coherent and functional financial services regulatory regime post-Brexit and makes amendments to other EU exit instruments. See our update of 13 March 2019 for a further discussion on the SI.