Investment Management Update

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

This issue includes:


Brexit developments


Effectiveness of the Distance Marketing Directive: European Commission consultation

The European Commission has published a webpage announcing a consultation on the effectiveness, pertinence and coherence of the Distance Marketing of Financial Services Directive. The retail financial sector has become increasingly digital with new products available on the market and new sales channels being used. The Commission is seeking views on whether the Directive is still fit for purpose given the market and legislative developments that have occurred since 2002 when the Directive came into force. Responses to the consultation can be submitted by completing an online questionnaire. The deadline for responses is 2 July 2019. The European Commission intends to publish the conclusions of the evaluation exercise by the end of 2019.

In December 2018, the Commission launched a review of the Directive and published an evolution and fitness check roadmap. See our update of 19 December 2018 for a discussion on this. For detail on the Financial Services (Distance Marketing) (Amendment and Savings Provisions) (EU Exit) Regulations 2019 (SI 2019/574), see our update of 27 March 2018.

Firms’ obligations when approving financial promotions: FCA’s second "Dear CEO" letter

Following the Financial Conduct Authority (FCA)’s "Dear CEO" letter on financial promotions, published on 9 January 2019, the FCA has published a second letter to all regulated firms reminding them of their regulatory obligations when involved in the approval of financial promotions for unauthorised persons. In the second letter, the FCA states that despite its earlier communication in January 2019, it has identified a number of examples where the due diligence (DD) carried out by firms on a financial promotion may have fallen well short of the FCA’s standards.

The FCA stresses the importance of conducting an appropriate level of DD as consumers can be exposed to a range of differing risks and returns. Where the risks are not adequately explained, it can cause significant harm to investors. Should the FCA identify any concerns with the DD performed, it can lead it to examine the systems and controls of a firm to assess what governance and oversight failures may have contributed to the failure. The FCA concludes the letter by reminding firms of their obligations under conduct of business sourcebook (COBS) and outlines the measures it will take for non-compliance with its requirements.

See our update of 16 January 2019 for a discussion on the FCA’s first "Dear CEO" letter on misleading financial promotions implying unregulated activities as regulated.

Implementation of 5MLD: HM Treasury consultation

HM Treasury has published a consultation paper on the transposition of the Fifth Money Laundering Directive (EU 2018/843) (5MLD) into national law. 5MLD contains amendments to the Fourth Money Laundering Directive (EU 2015/849) which will improve transparency and the existing preventative framework to more effectively counter money laundering and terrorist financing. In implementing the 5MLD, the government is catering for the scenario where an implementation period is in place after the UK leaves the EU. The requirements of the 5MLD must come into effect through national law by 10 January 2020 in line with Article 4 of the 5MLD. In the consultation, the Treasury seeks views on the following:

  • new obliged entities and beneficial ownership requirements; 
  • customer due diligence (CDD) and enhanced due diligence, e.g. changes to exemptions relating to e-money and which e-money products can be made exempt from CDD under the 5MLD;
  • mechanisms to report discrepancies in beneficial ownership information; 
  • trust registration service;
  • politically exposed persons and prominent public functions; 
  • the establishment of a national register of bank account ownership; 
  • requirement to publish an annual report on the supervisory activity undertaken in the preceding year;
  • pooled client accounts; and 
  • other changes required by the 5MLD and additional technical amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

The closing date for submitting comments on the consultation is 10 June 2019.

Market conduct and transaction reporting issues: FCA market watch issue 59

The FCA has published market watch issue 59 in relation to market conduct and transaction reporting issues. The FCA outlines three areas of concern:

  • telephone recording and retention requirements in accordance with SYSC 10A – some firms have not adequately ensured conversations are being recorded, despite having telephone recording systems installed. The FCA suggests that it may be valuable for firms to use the recordings as part of their market abuse surveillance programme;
  • use of client codes – operators of trading venues are not collecting the full client identification code and the use of "short codes" may not be as effective as using "long codes" from a market abuse surveillance perspective. When providing the mapping of the short-to-long code to a trading venue, there are errors being made. The incorrect transaction and order data affects the FCA’s ability to maintain the integrity of the financial markets; and 
  • transaction reporting observations – the FCA has identified a variety of data quality issues in relation to systems and controls, instrument reference data, party identifiers and reporting trade time, price and venue. Among other things, issues include:
    • firms misreporting in the minor currency (e.g. pence) which presents a misleading impression of the value of the transaction;
    • firms misreporting buyer and seller identification codes and inaccurately reporting national identifiers for natural persons;
    • some trading venues and systematic internalisers may not always be submitting the instrument reference data within the timeframe required;
    • firms have identified errors or omissions in their transaction reports but failed to cancel, correct and resubmit corrected reports to the FCA; and
    • firms may not be conducting regular or thorough reconciliation of front office trading records against data samples. The FCA provides a facility for firms to request samples of their transaction reporting data and firms should make the best use of this facility.

FCA’s 2019/20 business plan

The FCA has published its 2019/20 business plan. In the foreword of the business plan, Mr Charles Randell emphasises on the theme of change and the three areas where this is prevalent. Technology is changing the way financial firms do business and the way that consumers engage with their financial decisions. Technology change brings risks to consumers, the operational resilience of the financial system and to regulators who may lag behind in developments or lack skills and resources to match the changing risk landscape. However, technology change can also bring opportunities for innovation, lower costs and greater participation which will benefit consumers.

Mr Randell notes that the global context is also changing in light of Brexit, bringing both risks (i.e. gaps in global regulation) and opportunities (making UK regulation smarter). Finally, Mr Randell states that public expectations are changing reflecting the fears of greater uncertainty in employment and retirement. The business plan reflects these changes and outlines the initiatives to address them. For example, the FCA notes that this year there will be an independent investigation into the issues raised by the failure of London Capital & Finance. Against this backdrop, the FCA’s 2019/20 priorities are:

  • EU withdrawal and international engagement;
  • investment management; retail lending; pensions and retirement income; retail investments; retail banking; general insurance and protection; and wholesale financial markets (sector priorities); and
  • firm’s culture and governance; operational resilience; financial crime & AML; fair treatment of existing customers; innovation, data and data ethics; demographic change; and the future of regulation (cross-sector priorities).

In the business plan, for each sector and cross-sector area, the FCA has identified its key priorities, specific activities and how it will monitor change.

Brexit developments

Recognition of EEA derivatives trading venues under UK EMIR and UK MiFIR in event of no-deal Brexit: financial services trade associations’ letter to HM Treasury

A number of UK and international financial services trade bodies have published a joint letter to HM Treasury regarding the recognition of EEA derivatives trading venues under EMIR and MiFIR in the UK after Brexit in a no-deal scenario. The associations outline their concerns as to the disruptive impact on UK market participants and European derivatives markets if HM Treasury does not act to recognise EEA derivatives trading venues under EMIR UK and MiFIR UK or if the FCA does not grant temporary transitional relief in this regard. 

In the absence of an equivalence decision by HM Treasury:

  • EEA exchange-traded derivatives will be reclassified as OTC derivatives; and 
  • UK financial counterparties will not be able to satisfy the derivatives trading obligation by trading on EEA venues. The UK counterparties will cease to be able to execute transactions in OTC derivatives subject to the trading obligation under MiFIR on those venues.

The associations urge HM Treasury to prepare the necessary measures to recognise the equivalence of EEA derivative trading venues or alternatively work with the FCA with a view to the FCA granting transitional relief for this purpose using its temporary transitional powers. See our update of 27 March 2019 and our in-depth article for a discussion on the European Securities and Markets Authority (ESMA)’s statement on the application of the share trading obligation in the event of a hard Brexit.

FCA notification window for temporary permissions regime extended to 30 May 2019

In light of the amended definition of exit day in the European Union (Withdrawal) Act 2018 to 31 October 2019, the FCA has extended the notification window for firms wishing to enter the temporary permissions regime (TPR). The period has now been extended until the end of 30 May 2019. The previous deadline for notifications to the FCA and the PRA concerning the TPR was 28 March 2019. Any fund managers that, as a result of this extension, wish to update their notification should email by the end of 16 May 2019 at the latest confirming this and include their firm reference number. 

The FCA has subsequently published amended directions relating to the TPR reflecting the extension of the notification window. The FCA has also updated its guide to making notifications to use the TPR and its webpage on the temporary regime for inbound passporting EEA firms and funds. See our update of 10 April 2019 for detail on the FCA’s final transitional directions.