Investment Management Update

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

This issue includes:


Brexit SIs

Financial crime


FCA asset management market study: IA guidance on fund communications

The Investment Association (IA) has published guidance on fund communications to help members implement clearer and more consistent customer communications which focus on the objectives and investment policy of a fund. The guidance is published in light of the FCA’s asset management market study (AMMS) Final Report which highlights, among other things, customers’ difficulty in knowing what to expect from their fund and how to assess whether it is performing against its stated objectives.

Following the publication of the AMMS Final Report, the FCA established the fund objectives working group (FOWG), which was tasked with proposing measures on (i) improving the usefulness of fund objectives for customers; and (ii) facilitating the comparability of funds on the basis of their stated objectives. This resulted in the FCA's consultation paper CP18/9 which addressed both guidance around fund objectives and rules for the use and reporting of benchmarks. Following this consultation, the FCA issued non-handbook guidance in policy statement PS19/4 on the description of fund objectives and investment policies.

As part of the FOWG, it was agreed that the IA would work with its members and consumer representatives to promote the use of consistent terminology in communications from fund managers to help customers make comparisons across different funds. The published guidance is the outcome of this.

The guidance is split into two parts:

  • Part one examines what is considered to be a fund objective, investment policy and investment strategy; how to describe risk in fund documentation; how to describe time horizons; and how to disclose the use of benchmarks and showing performance against those benchmarks.
  • Part two reflects the findings from customer research and considers the thought process firms should go through when writing for retail investors. The IA provides two lists within the guidance that may be of use when drafting fund documentation. These set out: (i) terms that retail investors may find confusing but could understand shown alongside a simple explanation (such as “bond”, “emerging markets” and “rolling three year period”); and (ii) terms (such as “absolute return”, “efficient portfolio management” and “derivatives”) that retail investors struggle with, therefore an alternative word or description might work better than the term itself. The lists are not intended to be comprehensive or to prescribe a specific approach to the use of a term but to highlight the importance of clear communication and to provoke a review process.

The overall aim of the guidance is to assist industry professionals with the implementation of improved disclosure in fund documentation and to provide a reference point with respect to evolving regulatory expectations. Although not mandatory, the IA states that its guidance addresses industry-wide issues on the basis of a common framework. The IA views this guidance as a starting point in helping firms deliver consistent language in fund documentation. The IA guidance will be kept under review and may evolve further following future consumer testing exercises.

Market abuse requires a dynamic response to a changing risk profile: FCA speech

The FCA has published a speech on market abuse, delivered by the FCA's Director of Market Oversight, Julia Hoggett, which emphasises that new technology will not stand in the way of the FCA's mission to protect the market from manipulation and other suspicious behaviour, nor will it provide a smoke screen for senior managers in regulated firms to hide behind.

Ms Hoggett reiterated the mantra that effective compliance is a state of mind: after-the-event controls cannot work alone and need to be accompanied by tailored systems and controls, together with informed awareness on the part of market participants and senior managers so that they might (i) properly assess the risk that their institution could be used to facilitate a financial crime; and (ii) mitigate against the risk that staff (from print room to front-line) are not sufficiently conscious of the risk that their own behaviours may pose.

[W]hen it comes to mitigating the risk of market abuse, you could say that we are not seeking to be in the business of closing the stable door after the horse has bolted.

Ms Hoggett challenges firms to consider the effectiveness of their “conduct risk identification muscles” and “to think critically about the front-to-back information management that they need to have in place” to guard against the misuse of inside information. Based on Hoggett's observations, some practical questions for firms to consider are as follows:

  • Is your control framework adequately mitigating market abuse risks holistically?
  • Do your staff members understand their responsibilities in relation to inside information?
  • Do they understand the consequences of acting unlawfully with that inside information?
  • Do you have measures in place to monitor for inside information leaving your firm's building (and not just via electronic means)?
  • Are your senior managers sufficiently well-equipped to understand what they can and cannot say when speaking with senior investors and journalists?
  • Do you overly-rely on insider lists? How often do you review/refresh/close such lists (and deal-specific teams)?
  • Does your firm-wide risk assessment consider the access risks to inside information by all members of your staff: from cleaning staff to your head of compliance, IT support and other functions?

Finally a word to the complacent: “We observe firms taking comfort from the perception that ‘others are also failing’ in the same way that they are. As a regulator, I must say that there is something depressing about that logic.”

Investment consultancy and fiduciary management market investigation order 2019: CMA consultation

The Competition and Markets Authority (CMA) has published a draft Investment consultancy and fiduciary management market investigation order 2019 for consultation, together with an explanatory note. 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 and the detrimental effect on customers that may be expected to result from the AECs. We reported in greater detail on the CMA investigation findings in our update of 19 December 2018. 

The explanatory note provides an outline of how the Order is expected to operate. The deadline for submitting comments on the draft Order and the explanatory note is 13 March 2019.

FinTech developments and potential financial stability implications: FSB report 

The Financial Stability Board (FSB) has published a report on FinTech and market structure in financial services focusing on market developments and potential financial stability implications. Some key considerations from the FSB’s analysis of the link between technological innovation and market structure include:

  • the relationship between incumbent financial institutions and FinTech firms appears to be largely complementary and cooperative in nature;
  • FinTech credit is growing rapidly, but is still (in most jurisdictions) small as a proportion of overall credit and the profitability of such institutions may be negatively affected in the future;
  • the competitive impact of BigTech (large, established technology companies) may be greater than that of FinTech firms as BigTech firms typically have large, established customer networks and enjoy name recognition and trust; and
  • reliance by financial institutions on third-party data service providers for core operations is currently estimated to be low; however, analytics predict that reliance will increase going forward which could also pose new risks and challenges.

As FinTech firms, BigTech firms and the markets for third-party services continue to develop, the FSB states that it will be important to continue monitoring developments and their financial stability implications. This may include monitoring the impact of heightened competition on profitability and lending standards, as well as increasing cyber risk.

FinDatEx platform launched to improve EU data exchange between financial institutions

The European Banking Federation, the European Fund and Asset Management Association, Insurance Europe, the European Savings and Retail Banking Group, the European Association of Cooperative Banks and the European Structured Investment Products Association have together published a press release announcing the launch of the Financial Data Exchange Templates (FinDatEx) platform in order to improve data exchange between financial institutions in the EU.

The FinDatEx platform aims to allow EU financial services representatives to:

  • interact with one another in order to develop technical templates which are provided to the industry free of charge and free of any intellectual property rights;
  • coordinate and organise any standardisation work that is carried out by experts from different financial services; and 
  • disseminate technical templates to other relevant EU financial services stakeholders.

Templates already available on the FinDatEx website are:

  • a PRIIPs template;
  • a “Comfort” European PRIIPs template which includes additional data points to facilitate Key Information Document production for insurance companies;
  • a MiFID Template (August 2017) which is currently being reviewed; and
  • a Solvency II tripartite template (adopted by industry associations in April 2018). 

The work already initiated on these will be continued. Other workstreams are being assessed.

Brexit SIs

Brexit SI: Collective Investment Scheme (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/325)

The Collective Investment Scheme (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/325) have been made. The SI is published with its explanatory memorandum. The SI will make amendments to retained EU law related to the UCITS Directive for investment funds and their managers to ensure it continues to operate effectively after Brexit. The Regulations will come into force on exit day, except for Regulations 50(6), 58 and 61 to 71, which come into force on 20 February 2019. See our update of 24 October 2018 for a further discussion on the SI.

Brexit SI: Market Abuse (Amendment) (EU Exit) Regulations 2018 (SI 2019/310)

The Market Abuse (Amendment) (EU Exit) Regulations 2018 (SI 2019/310) has been made and is published along with its explanatory memorandum. The purpose of the SI is to ensure that the retained EU law relating to market abuse, which stems from the Market Abuse Regulation, continues to operate effectively post-Brexit. See our update of 5 December 2018 for more detail on the SI. The SI will take effect on exit day, with the exception of regulations 1 (Citation and commencement), 2 (Amendment of the Criminal Justice Act 1993), 3 (Amendment of the Financial Services and Markets Act 2000) and 6 (Amendment of the Financial Services and Markets Act 2000 (Market Abuse) Regulations 2016) which came into force on 19 February 2019.

Brexit SI: Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2019 (SI 2019/328)

HM Treasury has published the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2019 (SI 2019/328) and an accompanying explanatory memorandum. The SI, made on 19 February 2019, will make amendments to retained EU law related to the Alternative Investment Fund Managers Directive to ensure it continues to operate effectively after Brexit. The Regulations come into force on exit day. See our updates of 24 October 2018 and 5 December 2018 for further discussion on the SI.

Brexit SIs: Regulations on EuVECA, EuSEF and ELTIF

The following SIs have been made in relation to the European Venture Capital Funds Regulation, the European Entrepreneurship Funds Regulation and the European Long-Term Investment funds (the Regulations):

The SIs correct deficiencies in the retained version of the Regulations to ensure that they operate effectively post-Brexit. See our updates of 7 November 2018, 21 November 2018, 5 December 2018 and 16 January 2019 for more detail on these SIs.

Draft Brexit SI laid before Parliament: Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019

The draft version of the Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019, and its explanatory memorandum, as laid before Parliament, has been published. The purpose of the SI is to ensure a coherent and functioning financial services regulatory regime post-Brexit. See our update of 13 February 2019 for more detail on the SI.

Brexit SI: Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/264)

The Financial Conglomerates and Other Financial Groups (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/264) has been made and the SI is published alongside its explanatory memorandum. The SI ensures that the Financial Conglomerates and Other Financial Groups Regulations 2004 will remain operative in a UK-only context post-exit. The Regulations will come into force on exit day. See our updates of 30 January 2019 and 16 January 2019 for more detail on the SI.

Correction slip for draft Brexit SI published: Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019

A correction slip to the draft Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019 has been published by HM Treasury. The correction slip outlines minor amendments to the version of the SI that was laid before Parliament. The changes introduced by the SI will ensure that the UK continues to be able to disclose information to other regulatory and supervisory authorities post-Brexit. See our updates of 30 January 2019 and 16 January 2019 for a further discussion on the SI.

Financial crime

MLD4: European Commission adopts new Delegated Regulation identifying high-risk third countries

The European Commission has adopted a Delegated Regulation, supplementing the Fourth Money Laundering Directive (MLD4), which identifies, in its annex, 23 high-risk third countries with strategic deficiencies in their anti-money laundering and counter-terrorist financing regime that pose significant threats to the financial system of the EU. The Delegated Regulation reflects the stricter criteria under the Fifth Money Laundering Directive and will repeal Delegation Regulation (EU) 2016/1675 which currently lists 16 countries as high-risk. The purpose of the list is to protect the EU financial system by reducing money laundering and terrorist financing risks. Firms are required to carry out enhanced due diligence under Article 18 of MLD4 when dealing with customers and financial institutions from the high-risk third countries listed by the Commission. The 23 jurisdictions are: Afghanistan, American Samoa, The Bahamas, Botswana, Democratic People's Republic of Korea, Ethiopia, Ghana, Guam, Iran, Iraq, Libya, Nigeria, Pakistan, Panama, Puerto Rico, Samoa, Saudi Arabia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, US Virgin Islands and Yemen.

If neither the Council of the EU and the European Parliament object to the Delegated Regulation, it will enter into force 20 days after publication in the Official Journal of the EU and will apply from that date.