Investment management update

In this month’s update we cover the FCA’s letter to fund managers on liquidity, its statement on the impact of the delay to Brexit and its speech on regulation in a changing world, amongst other things.

This issue includes:


Financial crime


FCA maintains focus on fund liquidity: FCA letter to fund managers requiring review of liquidity management measures

Following the closure of the Woodford Equity Income Fund last month, the Financial Conduct Authority (FCA) has published a letter to the Chairs of authorised fund managers asking fund managers to review their arrangements for managing liquidity risk. The FCA’s recent policy statement on illiquid assets focused on NURS and the new rules come into force in September 2020 (see our update of 24 October 2019 for more detail on this). However, in the letter, the FCA made clear that firms should recognise that effective liquidity management is a core function for all open-ended funds. The FCA has asked firms to consider their obligations on portfolio composition, asset eligibility and liquidity management.

The letter re-emphasises the need for fund managers to take a step back and consider the appropriateness of the investments they make, in the context of the Collective Investment Schemes (COLL) rules. This may include, for example:

  • considering whether a security is, in practice, sufficiently liquid (even where it is admitted to trading on an eligible market);
  • re-evaluating valuation practices to ensure sufficient expertise and independence;
  • ensuring subscriptions and redemption arrangements are appropriate in the context of the relevant fund’s investment strategy;
  • assessing the liquidity of portfolio positions and liquidity demands; and
  • stress testing to assess the impact of extreme but plausible scenarios on the funds.

Combining these features with a formal policy of liquidity thresholds and triggers prompting escalation or action reflects good practice. The FCA has noted in particular that there are clear benefits to setting liquidity triggers for considering fund suspension.

The key output from the FCA letter is that fund managers need to review their practices for liquidity management now (and not wait until September 2020 when the new rules on illiquid assets will come into force).

Brexit: FCA statement on the impact of the delay of UK’s exit from the EU

The FCA has published a statement in relation to the impact of the UK’s delayed exit from the EU. The FCA states that it will be extending the date by which firms and funds should notify it for entry into the temporary permissions regime (TPR) to 30 January 2020. Fund managers will have until 15 January 2020 to inform the FCA if they want to make changes to their existing notification. The TPR will come into force when the UK leaves the EU, in the absence of a transition period (i.e. in a no deal scenario). The statement makes clear that firms must continue to comply with existing regulatory requirements, including those relating to MiFID transaction reporting and EMIR trade reporting requirements. The FCA notes that its expectations from firms and the steps they need to take as described in its press release of 11 October are suspended and that it expects firms to continue to report as normal.

Brexit: temporary equivalence for UK CCPs: European Commission confirms extension

In a speech published on 15 November 2019, Valdis Dombrovskis, European Commission Vice President, confirmed that the Commission intends to extend the temporary equivalence for UK central counterparties (CCPs), which was due to expire in March 2020. Mr Dombrovskis stated that “regrettably, the risk to financial stability has not yet been fully removed, because industry has not so far fully prepared. Therefore, I intend to propose to renew this time-limited equivalence decision beyond that date, to prepare for any eventuality.”

The confirmation follows collaborative lobbying by the Association for Financial Markets in Europe (AFME) together with 13 other trade associations. These trade associations sent a letter requesting the European Commission to extend the temporary equivalence until the European Securities and Markets Authority (ESMA) has completed its scheduled review of recognition decisions in existence as at entry into force of the EMIR 2.2 Regulation (including the temporary recognition decisions in relation to UK CCPs).

In the absence of recognition for UK CCPs, EU clearing members would not be able to continue as direct members of UK CCPs and EU counterparties would not be able to clear (directly as a clearing member or indirectly as a client of a clearing member) OTC derivatives subject to the clearing obligation under Article 4 EMIR in UK CCPs.

MiFID II inducements and research: US SEC announces extension of no-action relief

The U.S. Securities and Exchange Commission has published an announcement of an extension of the “no-action” letter it provided in 2017 to assist market participants regarding their U.S.-regulated activities as they engage in efforts to comply with the provisions relating to research in MiFID II and related implementing rules and regulations. This no-action letter, which was set to expire 3 July 2020, has been extended until 3 July 2023.

In its statement, the FCA welcomes the US SEC’s extension and explains that during the remainder of the current period and the extended period of the no-action relief, broker-dealers subject to the US regime may receive payments for unbundled research from firms subject to MiFID II or equivalent rules of EU member states without being considered an investment adviser under US law. This will also apply to UK firms in the event of EU withdrawal before or during the extended period.

Commission Delegated Regulation amending PRIIPs Delegated Regulation to align transitional arrangements published in the Official Journal of the EU

The Commission Delegated Regulation ((EU) 2019/1866) amending The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation to extend the UCITS KID exemption and to align transitional arrangements has been published in the Official Journal of the European Union. The new Delegated Regulation enters into force on 28 November 2019.

The Delegated Regulation amends Article 18 of the PRIIPs Delegated Regulation, to extend the transitional arrangements by two years, to 31 December 2021. This means that PRIIP manufacturers can continue to use the key investor information document produced in accordance with the UCITS Directive provided that at least one of the underlying investment options is a UCITS or non-UCITS fund referred to in Article 32 of the PRIIPs Regulation. The existing UCITS exemption was previously due to expire on 31 December 2019.

The new Delegated Regulation does not alter the substance of the PRIIPs Delegated Regulation or create new obligations for manufacturers of PRIIPs, or persons advising on or selling PRIIPs, and is consistent with the extended transitional arrangements in the PRIIPs Regulation.

FCA role as AML and CTF supervisor for cryptoasset business: FCA’s new webpage

The FCA has published a new webpage announcing that from 10 January 2020, the FCA will be the anti-money laundering (AML) and counter terrorist financing (CTF) supervisor of UK cryptoasset businesses under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (MLRs). The FCA’s responsibility under this regime will be limited to AML/CTF registration supervision and enforcement only.  

All UK cryptoasset businesses carrying on activities within scope of the MLRs will need to register with the FCA from 10 January 2020. Any firms that are not registered by 10 January 2021 must cease trading.

The webpage outlines the:

  • scope of cryptoasset activities (which is subject to the publication of HM Treasury’s response to the transposition of the Fifth Money Laundering Directive consultation. The FCA makes it clear that cryptoasset businesses carrying out the activities listed on the webpage should assume that they must comply with the MLRs from 10 January 2020.)
  • registration requirements for new and existing cryptoasset businesses;
  • timeline and payment in relation to making a registration application; and
  • FCA’s supervisory approach, including assessment and enforcement.

The FCA encourages firms to consider its guidance where it sets out the FCA’s position on the types of cryptoassets that will fall within its regulatory remit and the implications this has on consumer protection.

Regulation in a changing world: FCA speech

The FCA has published a speech by Christopher Woolard, Executive Director of Strategy and Competition at the FCA in relation to regulation in a changing world and whether the FCA’s regulatory model is still a “right one”.  

Mr Woolard emphasises the importance of outcomes-based regulation and the already clear move from a narrower compliance with the rules, to a focus on delivering the outcomes we want for the users of financial services.

Points of interest include:

  • to do things “differently”, Mr Woolard believes that the following key factors should be considered: (i) the outcomes the FCA intends to see in the market should be clearly stated; (ii) interventions should be built around real consumer behaviour (for example, pension investments can no longer be defaulted into cash savings, unless the customer chooses this option); (iii) working closely with other regulatory bodies; (iv) reviewing the FCA’s rules (simplifying and streamlining it); and (v) technology and the opportunity it presents to bridge the information asymmetry between customers and providers;
  • in the coming months, the FCA will be engaging in public conversation to ensure that financial services markets serve the public interest, now and in the long term. The FCA will be publishing detailed papers, including an analysis of future market dynamics, a discussion paper about its Principles for Business, and a consultation paper on the duty of care; and
  • firms can expect the FCA’s Sector Views and Business Plan for next year to be much more outcomes-focused.

The future of financial services regulation in the UK: FCA speech

The FCA has published a speech by Nausicaa Delfas, Executive Director of International at the FCA regarding the future of financial services regulation in the UK. Although the speech does not raise any new issues, it reiterates some of the themes discussed in the FCA’s recent speeches regarding Brexit.

Points of interest include:

  • Ms Delfas provides an update on the FCA’s ongoing Brexit preparations and notes that due to the onshoring process of EU legislation, at the point of exit, the UK and the EU will have identical rulebooks. However, Ms Delfas emphasises that the solutions on the European side represent a patchwork as the national regimes are partial and differ across member states in terms of scope and duration;
  • with regards to international engagement, Ms Delfas states that the FCA views international standards as a basis on which it can enhance the flow of financial services between jurisdictions, which in turn can support competition, widen the choices available to consumer, and spread the benefits of useful innovation. The FCA will continue its activity in support of the development of sound international standards rooted in strong regulatory cooperation; and
  • Ms Delfas concludes the speech by discussing the FCA’s debate in the recent months about the future of regulation in the UK. The FCA wants to ensure that its regulatory approach is fit and adaptable to the challenges of the future by placing outcomes at the heart of the debate.

Financial crime

FCA reminds firms of their separate obligations under the SAR and STOR regimes: FCA letter to UK Finance

The FCA has published a letter to the Chief Executive of UK Finance setting out its expectations in relation to the application of the Suspicious Activity Reports (SARs) and Suspicious Transaction and Order Reports (STORs) regimes.

Under Article 16(2) of the Market Abuse Regulation (MAR), firms are required to submit a STOR where the firm has a reasonable suspicion that an order or transaction in any financial instrument, whether placed or executed on or outside a trading venue, could constitute insider dealing or market manipulation (even if attempted). In addition, firms that know or suspect that criminal offences may have also occurred will need to consider whether a SAR to the National Crime Agency (NCA) must be submitted pursuant to the Proceeds of Crime Act 2002 (POCA) and the Terrorism Act 2002. 

The FCA reiterates that firms should consider, on a case-by-case basis, all their obligations in relation to both market abuse and financial crime and take appropriate steps in each case. The FCA emphasises that filing a STOR with the FCA will not discharge a firm’s obligations under the POCA or the Terrorism Act. Likewise, a firm cannot discharge its notification obligation under Article 16 MAR by filing a SAR with the NCA. SARs and STORs serve different purposes and firms will have to consider, on a case-by-case basis, whether to submit a STOR, SAR or both.

SAR glossary codes and reporting routes: NCA’s revised guidance

The NCA has published a revised version of its guidance on the use of SAR glossary codes and reporting routes. The updated guidance includes new codes for SARs where the suspected money laundering is of a value of less than £3,000 and where the firm is unaware of any existing law enforcement interest at the time of reporting. The revised guidance replaces all previous publications specifically in relation to glossary codes. However, much of the substantive guidance remains unchanged.

Although representing not new guidance, the following key points are highlighted in the updated guidance:

  • there are illustrative examples of using glossary codes when completing a SAR online for the following areas: requesting a defence from the NCA; risk to children; risk to vulnerable adults; property market; professional enabler; and modern slavery (use of multiple codes);
  • the guidance contains a step-by-step checklist that firms should take into account when completing a SAR. Among other things, firms should consider whether: (i) the circumstances require immediate attention as priority is given to SARs indicating high risk victims of crime and requests for a defence against money laundering and terrorist financing; and (ii) the laundering relates to a specific predicate economic crime offence (i.e. tax evasion, benefit fraud etc.);
  • the SARs regime is not a route to report crime or matters relating to immediate risks to others. It is reporting knowledge or suspicions of money laundering, or belief or suspicions relating to terrorist financing. Where a crime is reported alongside a SAR, it will be good practice to include the crime reference and the organisation details in the SAR;
  • the use of glossary codes is considered good practice as it enables the Financial Intelligence Unit and wider law enforcement to conduct analysis to identify money laundering trends, high risk cases for development and take immediate action where necessary;
  • when submitting a SAR, the relevant glossary code should be included in the "reason for suspicion" text space (the guidance includes examples on how to complete various SARs, accompanied by good practice tips); and
  • it is acceptable to have a SAR with several codes. If in doubt as to whether a particular code applies, firms should work on the basis that it is better to include one than not. In some cases, it is acceptable to populate “no codes apply” in the “reason for suspicion” text space.