Investment Management Update

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

This issue includes:



FCA filings from 9 September 2019

Directory, AIFMs using NPPR and SM&CR firms

A number of Financial Conduct Authority (FCA) filings have become available to firms or been updated from 9 September 2019. The FCA has:

  • published a webpage and a user guide on the Directory, which is the new public register for checking the details of key individuals working in financial services. From 9 September 2019, the FCA began the staged process for firms to submit their data for the Directory using the Directory Persons Connect form. Banks, building societies, credit unions and insurance companies must submit their data between 9 September 2019 and 9 March 2020. All other firms must submit their data between 9 December 2019 and 9 December 2020;
  • updated its webpage on the national private placement regime (NPPR) announcing changes to the submission of notifications to market and material change by alternative investment fund managers (AIFMs) marketing AIFs under regulations 57, 58 and 59 of the Alternative Investment Fund Managers Regulations 2013. From 9 September 2019, AIFMs marketing funds under regulations 58, 59 and, for UK AIFMs only, regulation 57, will return to submitting notifications via Connect. Full scope EEA AIFMs marketing AIFs under regulation 57 will be required to submit notifications using new forms; and
  • updated its webpage on the Senior Managers and Certification Regime (SM&CR) to notify that Form K (which firms must submit to the FCA to notify which approved persons should be converted to a senior manager function) is available on Connect from 9 September 2019. The Form K must be submitted by 24 November 2019.

Fight against fraud: FCA speech

The FCA has published a speech by Charles Randell, Chair of the FCA, in relation to the fight against fraud. Mr Randell explains that financial crime, specifically fraud against individuals, has reached epidemic proportions where people are scammed out of their savings.

Key points from the speech include:

  • confusion on what is and is not regulated and protected: Mr Randell believes that the financial promotions regime is "ripe for re-examination". The rubric which appears on financial promotions, such as "capital at risk", does not help investors distinguish between a low cost, lower risk diversified listed equity fund and a high cost, much higher risk minibond. A well-functioning financial promotions regime would label a high-risk unquoted and unregulated investment as exactly that and state clearly that it is not the right investment for an individual’s life savings. Unless the issue or approval of financial promotions is made a regulated activity, with only appropriately qualified and governed authorised firms permitted to do this, the FCA is not confident that the financial promotions regime can provide much better protection than it does at present (which Mr Randell believes is not enough);
  • making the corporate enablers play their part: in many instances, fraud is not possible without the data breaches and other actions by firms outside the financial sector, for example large corporate organisations allowing personal data to be stolen or promoting advertisements for scams on the internet. The FCA expects such companies, especially the big-tech ones, to use their large resources to work with law enforcement and regulators to develop algorithms and machine learning tools to identify fraudulent content and take it down immediately when requested by authorities;
  • the role of policymakers: policymakers, including the FCA, need to embed risk of fraud into the savings and investment policies they make; and
  • what the FCA is doing:
    • taking action against the sale of specific types of high risk investment to retail investors such as the proposed changes for peer-to-peer lending, ban on high risk bets on investments and the ban in relation to bets on cryptocurrencies;
    • intensifying its strategic coordination with the Financial Ombudsman Services, the Financial Services Compensation Scheme and the Money Pensions Service;
    • investing further in intelligence and data analytics, increasing the number of people tackling investment fraud and continuing to raise public awareness of scams;
    • proposing to ban contingent charging for pension transfer advice from 2020; and
    • supervising authorised firms’ regulated activities and taking enforcement action in cases of serious misconduct.

Reasonable steps to ensure the authenticity of electronic instructions: IA’s updated guide

The Investment Association (IA) has published an updated version of its guide on assisting fund managers determine the reasonable steps they should take in ensuring the authenticity of electronic instructions. The guidance recommends control mechanisms that firms who are responsible for the unit register should employ in order to be satisfied that an authority has been given by the incumbent holder of the units or someone who has been properly appointed to act on their behalf. The objective ultimately is to permit more automated and efficient processing for investors while providing adequate protection to the firm and to investors against fraud.

Certification regime regulatory references: final BSB statement of good practice

The Banking Standards Board (BSB) has published its finalised statement of good practice (SGP) in relation to implementing the regulatory reference requirement of the SM&CR effectively to candidates for certification functions. The SGP is targeted at banks but will also be of interest to solo-regulated firms that will be coming into the regime as they prepare for implementation on 9 December 2019.

The purpose of a regulatory reference is to provide firms recruiting people into certified roles with information relevant to the assessment of that person’s fitness and propriety that they may not gain through other information supplied to them during the recruitment process. The SGP states that when providing, revising or using regulatory references, firms should take into account the principles of fairness, proportionality and consistency. The SGP covers:

  • good practice in providing regulatory references, including two of the most important questions to ask - "who is the request from?" and "what is being requested?". Firms need to ensure that managers understand what a regulatory reference is and how the firm deals with it;
  • good practice in obtaining a regulatory reference and the steps firms can take to alleviate difficulties in obtaining references in a timely manner; and
  • the type of information to include in a reference, particularly in less straightforward situations where more judgement may be required, for example references containing adverse information about an individual or disciplinary procedures that are incomplete when the reference is requested.

Preparing for Brexit in financial services and the state of play: FCA speech

The FCA has published a speech by Andrew Bailey, Chief Executive of the FCA, in relation to preparing for Brexit in financial services and the current state of play. Mr Bailey referred to progress made so far including:

  • over 50 statutory instruments to ensure EU financial services legislation is effectively on-shored by exit day. In the absence of a transition period, the FCA intends to provide a transitional relief period up to the end of next year using its Temporary Transitional Power;
  • new cooperation agreements with the EU markets, insurance and banking authorities which will take effect in a no-deal scenario; and
  • the FCA taking on several functions in respect of the UK which are currently performed by the European Securities and Markets Authority (ESMA) at EU level, notably the regulation of Credit Rating Agencies and Trade Repositories.

Mr Bailey addressed the following issues requiring further action:

  • share trading obligation (STO): the EU STO will prevent EU investors from accessing liquidity in EU shares listed in London. The UK has on-shored the STO under the European Union (Withdrawal) Act 2018. The UK framework will be the most equivalent in the world to the EU’s. An equivalence agreement would resolve the liquidity issue but the EU has refused an equivalence framework to this date. Mr Bailey has emphasised that the FCA stands ready to enter into dialogue with its European counterparts before finalising its approach;
  • derivatives trading obligation (DTO): unless the UK and the EU find each other’s regulatory regimes as equivalent, EU firms will not be able to meet the EU’s DTO by using UK trading venues to trade in-scope derivatives and vice versa. Currently all over-the-counter (OTC) derivatives subject to the EU DTO have their main pool of liquidity on a UK venue. Without action, EU firms may lose access to UK liquidity pools and liquidity would be fragmented, harming both markets. Mr Bailey again notes that the best solution is to have an equivalence agreement between the UK and the EU;
  • clearing: EU authorities have taken steps to allow for the temporary recognition of UK central counterparty clearing (CCP) however the recognition expires in March 2020. In the absence of clarity on the regulatory status of UK CCPs after this date, the contracts that EU members clear with UK CCPs will be closed out or transferred by then. This would impose significant costs on EU firms as well as potentially straining market capacity. Mr Bailey emphasises that the best solution is for the EU to grant permanent recognition to UK CCPs;
  • uncleared derivatives: through the Temporary Permissions Regime and the Financial Services Contracts Regime, the UK has taken measures to allow firms to service existing uncleared derivatives between UK and EU counterparties. However, the EU has not taken reciprocal action. Member states have implemented measures to address the risk but there is uncertainty about the scope of the legislation in some jurisdictions;
  • data exchange: the UK government has legislated to allow the free flow of personal data from the UK to the EU in a no-deal scenario but without action by EU authorities, EU rules would limit the flow of personal data from the EU to the UK. This could restrict EU households and businesses accessing financial services from, and continuing contracts with, UK financial service providers;
  • contract repapering: progress on repapering has been gradual. Member states have legislated to allow UK firms to continue temporarily to provide certain services in their jurisdiction following a no-deal Brexit but these access provisions are not EU-wide. There are also variations in the activities covered and their durations. This has created uncertainty around how some of these provisions will be applied (the uncertainty will not exist in the UK because of the temporary transitional arrangements); and
  • retail financial services: the majority of UK firms have confirmed that they plan to maintain existing products and services to their customers resident in the EU. However, there is a risk that a lack of legal certainty in some jurisdictions (in the transitional regimes offered by member states) will create adverse outcomes for customers.

Polling and MAR: FCA’s new webpage

The FCA has published a webpage on how it expects firms and individuals to handle any information that has the potential to be inside information, including information obtained as a result of polling. The FCA makes clear that if an established polling firm is due to publish polling results and on publication the results are likely to affect the price of government bonds traded on regulated trading venues (and meets the other criteria to be classified as inside information), then it could be an offence under the Market Abuse Regulation (MAR) to share that information prior to publication other than where necessary “in the normal exercise of employment, a profession or duties”.

The FCA emphasises that whether or not information is inside information would need to be judged on a case-by-case basis. Where the definition of inside information is not met, MAR does not impose a restriction on those collecting or receiving polling information relevant to financial market prices even while polls are open.

Guidelines on liquidity stress testing in UCITS and AIFs: ESMA final report

ESMA has published a final report in relation to guidelines on liquidity stress testing (LST) in UCITS and AIFS. The guidelines apply to managers, depositaries and NCAs. The purpose is to increase the standard, consistency and, in some cases, frequency of LST already undertaken and promote convergent supervision of LST by national competent authorities. The guidelines will apply from 30 September 2020.

Among other things, the guidelines state that:

  • in building LST models, managers should determine: the risk factors that may impact the fund’s liquidity; the types of scenarios to use and their severity; different outputs and indicators to be monitored based on the results of the LST; the reporting of LST results, outputs and indicators to management; and how the results of the LST are used by risk management, portfolio management and by senior management;
  • a manager should have a strong understanding of the liquidity risks arising from the assets and liabilities of the fund’s balance sheet, and its overall liquidity profile, in order to employ LST that is appropriate for the fund it manages;
  • LST should be carried out at least annually and, where appropriate, employed at all stages in a fund’s lifecycle;
  • LST should be properly integrated and embedded into the fund’s risk management framework supporting liquidity management. It should be subject to appropriate governance and oversight, including appropriate reporting and escalation procedures;
  • LST should assist a manager in preparing a fund for a crisis, and in its broader contingency planning; and
  • a depositary should set up appropriate verification procedures to check that the manager of a fund has in place documented procedures for its LST programme.