Investment management update
- Asset management supervision strategy: FCA Dear CEO letter
- Actions for financial advice firms: FCA Dear CEO letter
- Alternatives supervision strategy: FCA Dear CEO letter
- More focus on UCITS liquidity risk management: ESMA’s press release
- Implementing MLD5: HM Treasury response to consultation
- Multi-firm review of asset management portfolio tools: FCA’s findings
- ESAs ongoing review of RTS under PRIIPs Regulation: trade associations’ letter of concern
- MiFID II third country regime: ESMA consultation on technical standards
- LIBOR transition in 2020: regulators outline next steps and RFRWG’s publications on priorities and milestones
- Clarity on non-representative LIBOR before cessation: FCA letter
- Call for wider adoption of the FX Global Code: Bank of International Settlements Markets Committee letter
- Issues with the AIFMD framework: European Systemic Risk Board letter
- FSCS management expenses levy limit: FCA and PRA joint consultation paper and FSCS plan and budget for 2020/21
- Financial services equivalence post Brexit: HM Treasury letter
- Governance and reporting obligations post Brexit: ESMA’s statement
- Issues for firms to consider during Brexit: FCA’s updated webpage
The Financial Conduct Authority (FCA) has published a Dear CEO letter to asset managers in relation to the FCA’s asset management supervision strategy. The FCA has identified the following areas of focus for fund managers in 2020.
- Liquidity management – The FCA reiterates that ensuring effective liquidity management in funds is a central responsibility for any authorised fund manager and it remains their responsibility even if they delegate investment management to another person. Open-ended funds can have a liquidity mismatch between the terms at which investors can redeem and timescales needed to liquidate assets. Firms should take appropriate action as outlined in recent FCA publications, i.e. policy statement on illiquid assets and open-ended funds.
- Firms’ governance – Firms should ensure that the boards of their regulated entities engage in robust discussion and challenge around important business decisions, without undue reliance on group structures. The FCA expects firms to have refreshed their approach to governance in line with the Senior Managers and Certification Regime (SMCR) requirements.
- Asset Management Market Study (AMMS) remedies – The rule changes introduced to address concerns from the AMMS are now in effect. The new requirements, among other changes, should prompt firms to think differently about their obligations to their end investors by conducting value assessments on firms’ authorised funds. The FCA will focus in the first half of 2020 on understanding how managers have undertaken value assessments in their authorised funds.
- Product governance – The FCA has begun a review to assess how managers have implemented product governance requirements, which it expects to complete in early 2020. As expected, following the collapse of the LF Woodford Equity Income Fund, host authorised corporate directors (ACDs) have been singled out by the FCA as causing concern due to a perceived lack of oversight over investment managers. The FCA is reviewing, in parallel with its product governance review, how effectively host ACDs undertake their responsibilities.
- LIBOR transition – The FCA reminds managers of the importance of transitioning away from LIBOR (which it expects to cease to exist by the end of 2021). The FCA is currently gathering data from asset management firms to enhance its understanding of firms’ business models, including on their exposure to LIBOR risk.
- Operational resilience – Managers are heavily reliant on robust and reliable technology, which underpins the smooth operation of their businesses and the protection of client assets. The FCA expects managers to ensure they manage technology and cyber risk appropriately, including through appropriate oversight of third party firms and intra-group service providers.
- EU withdrawal – The FCA reminds managers that they must take action now to be prepared for when the implementation period ends on 1 January 2021.
The FCA has published a Dear CEO letter to financial advisers setting out the FCA’s approach to tackling key areas of concern and the actions firms are expected to take. Consumers are being asked to take more responsibility for an increasing number of complex financial decisions. The FCA states that financial advisers have a valuable role to play in helping consumers navigate these choices and deliver the right solutions for their needs and objectives.
Points of interest
- Assessing suitability of advice and disclosure – The FCA will be carrying out further work on the suitability of advice and associated disclosure (known as "Assessing Suitability Review 2"). The review will focus on initial and ongoing advice to consumers on taking an income in retirement. Firms need to ensure that the advice provided is suitable and that costs and charges are disclosed clearly.
- Defined benefit (DB) pension transfer advice – Despite the FCA’s repeated clarifications on expectations and publishing new rules on DB pension transfer advice, the FCA is still concerned that the advice given is not of an acceptable standard. The FCA expects firms to start from the assumption that a pension transfer is not likely to be suitable for clients.
- Pensions and investment scams – Scammers are becoming increasingly sophisticated in developing investments designed to defeat firms’ due diligence. For example, a key area of risk is principal firms having inadequate oversight of their appointed representatives.
- Financial resources – The FCA is concerned some financial advisers are holding inadequate financial resources and/or professional indemnity insurance (PII) for the business activities they carry out. The FCA notes that the inability to compensate consumers, and the transfer of these costs to other market participants via the Financial Services Compensation Scheme (FSCS) levy, is unfair and places an unnecessary burden on other firms. Financial adviser firms are reminded of their financial services requirements set out in chapter 13 of the FCA’s Interim Prudential Sourcebook: Investment Business.
- Ban on promotion of speculative mini-bonds to retail customers – The ban came into force on 1 January 2020. The FCA expects firms to consider whether the steps they have taken in approving financial promotions in the past were sufficient to ensure the FCA’s requirements were satisfied.
- SMCR – The Approved Persons Regime (APR) no longer applies to the Financial Services and Markets Act 2000 (FSMA) authorised firms. However, the provisions of the APR and the relevant APR-controlled functions continue to apply to appointed representatives. The FCA emphasises that it is the principal firm’s full responsibility to ensure their appointed representatives and networks comply with the FCA rules, including the APR.
The FCA has published a Dear CEO letter to alternative investment firms outlining key risks of harm that such firms post to their customers or the markets in which they operate. The FCA states that the overall standards of governance, particularly at the level of the regulated entity, generally fall below its expectations. Far too often, the appropriateness of investment products for investors is not adequately considered. In particular, this presents a significant risk of harm where high risk alternative investments are made available to less-sophisticated investors.
Points of interest
- Investor exposure to inappropriate products or levels of investment risk – Among other things, where firms allow investors to "opt up" to elective professional status, the FCA expects them to robustly assess a client’s knowledge and experience of the relevant market, alongside meeting the relevant quantitative tests, and refrain from re-categorising a retail client if they do not meet the threshold. The FCA will be reviewing retail investor exposure to alternative investment products offered by alternatives firms in the coming months.
- Client money and custody asset controls (CASS) – The FCA will test whether firms that have permission to hold client money and safeguard custody assets are exercising those permissions under robust control frameworks to: (a) support the oversight of CASS operations; (b) maintain adequate books and records; and (c) operate in a CASS-compliant manner.
- Market abuse – The FCA observes that market abuse controls across the sector have significant scope for improvement. Alternatives firms are key buy-side participants in financial markets and robust systems and controls are critical in mitigating the risk of market abuse. The FCA excepts firms to ensure their market abuse controls enable them to discharge obligations under the Market Abuse Regulation.
- Market integrity and disruption – Alternatives firms often have scope to take significant investment risk (i.e. market risk, liquidity risk, credit risk etc.) in managing their products. Where firms adopt very high-risk investment strategies, particularly where significant leverage is employed, the FCA expects commensurately high quality risk management controls.
- Anti-money laundering and anti-bribery and corruption – Like many firms in the financial services industry, alternatives firms should be aware of the risk they could be used to facilitate fraud, money laundering, terrorist financing and bribery and corruption.
The European Securities and Markets Authority (ESMA) has published a press release announcing the launch of a common supervisory action (CSA) with national competent authorities (NCAs) focusing on the supervision of UCITS managers' liquidity risk management.
The CSA will be carried out during 2020 and aims to ensure consistent supervision across the EU (the implication being that, in ESMA’s view at least, the supervision of UCITS’ liquidity management by NCAs has to date not been as consistent as it could have been). The CSA will include the FCA and UK UCITS, even though the UK has withdrew from the EU.
The CSA will be a two-stage process. First, NCAs will get an overview of the supervisory risks faced by requesting quantitative data from a large majority of the UCITS managers based in their respective member states. In the second stage, NCAs will then focus on a selected sample of UCITS managers and UCITS, to carry out more in-depth supervisory analysis.
UCITS managers (with UK, Irish or Luxembourg UCITS in their portfolios) should therefore expect to receive regulatory requests for data in the coming months. Managers of UK UCITS should also be aware that the FCA is, separately, doing its own domestic work on liquidity management. This is currently a key priority for the FCA, as set out in its Dear CEO letter to asset managers (see "Asset management supervision strategy: FCA Dear CEO letter").
Following the implementation of The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 on 10 January 2020, HM Treasury has published the response to its April 2019 consultation on the transposition of the Fifth Money Laundering Directive (MLD5). The provisions in MLD5, including the final policy decisions outlined in the consultation response, have been transposed into domestic law through the 2019 Regulations which amend the Money Laundering, Terrorist Financing, Transfer of Funds (Information on the Payer) Regulations 2017.
In its response to the consultation, the government has, among other things:
- transposed the MLD5 requirement to reduce the limit at which low risk e-money products are exempt from client due diligence (CDD) to €150 or less;
- legislated to define “business relationships or transactions involving high-risk third countries” as: (a) a business relationship with a person established in a high-risk third country; or (b) a transaction where either of the parties to the transaction is established in a high-risk third country;
- introduced an explicit CDD requirement on understanding the ownership and control structure of customers, with sufficient flexibility to enable a proportionate approach;
- not legislated to ban payments in the UK carried out by anonymous prepaid cards in light of the evidence on the nature of risk and controls in place for e-money products; and
- not implemented an expansion of scope for the trust registration service (TRS) nor the initially proposed requirement for an extract of the register to be included as part of CDD. Instead, the Treasury has published a technical consultation paper on extending the trust registration service to include the draft legislation and proposals on the types of express trusts that will be required to register, data collection and sharing, and penalties.
See our in-depth article for more information on the key changes introduced by MLD5 and the steps firms should take to prepare for implementation.
The FCA has published its findings from its multi-firm review of how firms in the asset management sector selected and used risk modelling and other portfolio management tools. The FCA notes that while it saw some good practice at most firms, its review identified problems in firms’ processes and controls, particularly in risk model oversight and contingency planning. The FCA considers that portfolio management tools and risk models are central to asset management activities and consequently, any significant technological failure could cause serious consumer harm.
Findings included that
- Many firms found it challenging to decide whether to use a single provider for most of their needs or to bring together components from different sources. The "one-provider" approach has its potential benefits (i.e. improved oversight, in both first and second-line, due to consistent data) and drawbacks (i.e. the resilience implications for their own firms from relying significantly on a single provider).
- In relation to vendor management, the most effective provider review programmes the FCA saw included targeted attention on topics such as regulatory changes or cyber risks to ensure that providers’ arrangements remained compliant and within the risk appetite.
- Many firms stated that the governance of the use of risk and investment models in their business was challenging. This was partly because of the difficulty in building and retaining technical expertise in first and second-line oversight functions.
- Firms described a tension between the need to quickly implement necessary software changes with the desire to test the changes fully. Firms were particularly concerned about supplier errors where the firms themselves may be liable for the cost of any resulting losses.
- The FCA considers that firms involved in this study had not given enough consideration to how they would manage different lengths of outages. A number of firms appeared to have the view that some providers are ‘too big to fail’ but the FCA does not consider this view to be appropriate.
The FCA expects firms to ensure that their implementation, oversight and contingency arrangements in respect of these tools enable them to comply with the FCA’s expectations as set out in the systems and controls handbook and elsewhere. The FCA states that it will continue to look at the operational resilience arrangements in place at firms, including those which were not included in its initial review.
Insurance Europe, together with the European Banking Federation, the Association of Mutual Insurers and Insurance Co-operatives in Europe and the European Fund and Asset Management Association, have published a letter of concern to the European Supervisory Authorities (ESAs) on the ESAs’ ongoing review of the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) regulatory technical standards (RTS).
The associations remain supportive of the overall objectives of the PRIIPs Regulation but is concerned that the ESAs’ current approach to amending the PRIIPs Key Information Document (KID) is flawed and will not meet the PRIIPs Regulation’s aim of providing information that is fair, clear and not misleading.
Among other things, concerns raised include:
- the associations understand that the proposals on changes to the presentation of performance have been subject to some limited testing by the ESAs, but in the associations’ view this is insufficient. Any changes to the PRIIPs KID must lead to concrete improvements in consumer understanding. The only way to ensure this is for all proposals to be subject to thorough consumer testing;
- the timing of the current consumer testing is questionable as the proposals are still under improvement by the ESAs and are likely to be updated in light of feedback from stakeholders. This may result in the final RTS changes being introduced without any testing at all;
- the PRIIPs framework has already been subject to many changes which creates significant detriment of consumer understanding and compliance burdens for companies; and
- there needs to be a more comprehensive assessment of the PRIIPs KID that looks at how the KID is received in practice and assesses whether there is a need to overhaul the entire document. Improving specific calculation methodologies within a flawed KID will still result in a poor-quality document.
ESMA has published a consultation paper on draft technical standards in relation to the provision of investment services and activities by third country firms under MiFID and MiFIR. The purpose of the consultation is to reflect a number of changes introduced by the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR) to the third country regime provisions in MiFID II and MiFIR.
The consultation is of primary interest to third country firms providing investment services and activities in the EU either: (i) on a cross-border basis according to the national law of their host member state following an equivalence decision; or (ii) through a branch in accordance with Chapter IV of Title II (Authorisation and operation conditions for investment firms) of MiFID II. The consultation paper is also of interest to UK firms considering their options for operating in the EU after Brexit (see our in-depth article ‘UK financial services industry: operating in the EU after Brexit’ for more detail on this).
Operating on a cross border basis according to member states’ national law
The IFR introduces significant reporting requirements as third country firms will be required to report granular information on services and activities to ESMA on an annual basis and to provide ESMA with access to relevant data. Therefore, ESMA is consulting on the specific information that third country firms must provide at the point of registration (and annually) and the format in which this should be provided.
Operating via a branch
Article 41(3) of MiFID II, as amended by the IFD, provides that the branch of a third-country firm that is authorised in accordance with Article 41(1) of MiFID II shall report to the competent authorities of its host member state, on an annual basis, certain information. ESMA is consulting on the format in which this information should be provided.
The IFR and IFD also introduce a new requirement for ESMA to annually publish a list of third country firm branches that are active in the European Union (EU) and to ask these firms to provide data relating to all orders and all transactions in the EU (both on own account or on behalf of a client) for a period of five years.
The deadline for responding to the consultation is 31 March 2020. ESMA will consider the responses it receives to this consultation paper in Q2 2020 and expects to publish the draft technical standards and send the final report to the European Commission for endorsement in Q3 2020.
The FCA and the Bank of England (BoE) have published press releases (FCA press release and BoE press release) outlining the next steps for LIBOR transition in 2020. Both acknowledge that good progress has been made, but stress that firms need to accelerate their efforts to ensure they are prepared for LIBOR cessation by end of 2021. To help achieve this, the regulators have published:
- a joint letter from the FCA and BoE to senior managers of UK banks and insurers regarding the transition – the regulators consider the following areas as "key" for firms to focus in delivering the transition: product development; reviewing infrastructure; updating loan system capabilities; client communications and awareness; and updating documentation; and
- a statement from the FCA and BoE encouraging market makers to switch the convention for sterling interest rate swaps from LIBOR to SONIA on 2 March 2020. This is designed to help progress transition in the derivatives market.
Alongside this, The Working Group on Sterling Risk-Free Reference Rates (RFRWG) has published the following materials, which highlights important events over 2020 and clarifies actions that market participants should take to reduce their LIBOR exposure ahead of end-2021 and transition to alternative rates:
- the RFRWG’s priorities and roadmap for 2020 – the regulators expect all firms to incorporate RFRWG’s targets outlined in the roadmap in their own project milestones and ensure that management information is available to track progress;
- a paper setting out the Working Group’s views on the appropriate use of SONIA compounded in arrears for businesses and clients, and guidance for where the use of alternative approaches, such as a Term SONIA Reference Rate, may be necessary;
- a statement considering helpful "lessons learned" from recent conversions of legacy LIBOR contracts; and
- a factsheet for end-users summarising LIBOR transition and setting out why market participants need to act now.
The FCA has published a letter of response to the International Swaps and Derivatives Association's (ISDA) request to the FCA and the ICE Benchmark Administration asking for clarity on the length of any “reasonable period” in which a non-representative LIBOR might be published before LIBOR’s final cessation. In the letter, the FCA sets out why market participants should not assume that any period of non-representative LIBOR based on reduced panel bank submissions would last for more than a short period (i.e. a period of months, not years).
The FCA reiterates that its preference is to avoid publication of a non-representative LIBOR and to have an orderly cessation. Among other issues, if there were to be a non-representative LIBOR, the behaviour of the rate would be difficult to present, the level could be impacted by any significant change in panel composition and is likely to be more volatile given the smaller number of panel banks. Nevertheless, the FCA states that one cannot rule out the possibility of having a non-representative LIBOR due to the mechanisms of the Benchmarks Regulation.
The FCA makes it clear that the many years of advance warning of LIBOR’s demise means that firms have had the opportunity to implement transition plans. The FCA would not seek to prolong a non-representative panel bank LIBOR simply to benefit firms, which had failed, or continued to fail, to act on opportunities to transition. Where contracts can practicably be amended to reference alternative rates by bilateral agreement or other arrangements, they should be, before end of 2021.
Following the FCA’s letter of response, ISDA has published a press release announcing that it will re-consult on how to implement pre-cessation fallbacks. The new consultation will ask whether the 2006 ISDA definitions should be amended to include fallbacks that would apply to all covered derivatives following the permanent cessation of IBOR or a non-representative pre-cessation event, whichever occurs first. Under this scenario, a single protocol would also be launched to allow participants to include both pre-cessation and permanent cessation fallbacks within their legacy derivatives trades.
The Bank of International Settlements (BIS) Markets Committee has published a letter to the Chair of the Global Foreign Exchange Committee (GFXC) in relation to the assessment of the effectiveness of the FX Global Code, feeding into the GFXC’s review of the code in 2020. The key message is for more asset managers to adopt the Code.
Some positive developments
- Since the launch of the Code, there has been a significant and growing number of market participants adopting the Code and publishing their Statement of Commitment demonstrating adherence to the Code.
- The Code is becoming the ‘focal point’ for FX-related issues, featuring predominantly in industry conferences and journals.
- The effect of the Code on market behaviour has been broadly positive based on market feedback and takeaways from the GFXC annual surveys.
Some areas for improvement
- To date, only a fraction of the largest buy-side participants, such as asset management firms, have adopted the Code. As their share in global FX trading increases further, it is important that they adopt the Code to ensure a fair and effective FX market for all.
- GFXC could explore enhancements of existing adherence mechanisms, such as by providing increased clarity on the principle of proportionality.
- Guidance relating to disclosures on algorithmic trading or aggregation services can also be enhanced in terms of their breadth, quality and consistency.
The European Systemic Risk Board (ESRB) has published a letter to the European Commission regarding issues with the Alternative Investment Fund Managers Directive (AIFMD). The letter indicates that the European Commission will report on its review of the AIFMD in early 2020.
The ESRB states that while the investment fund sector can provide a valuable alternative to bank finance and facilitate efficient capital allocation in the EU, increased financial intermediation by investment funds can also create vulnerabilities that can lead to risks to financial stability. These vulnerabilities particularly relate to liquidity risks, high levels of leverage in some types of funds and procyclical risk-taking.
The ESRB shares the following considerations:
- the suitability of the reporting framework and access to data for monitoring systemic risk – among other things, the ESRB notes that:
- around half of funds reporting under AIFMD do not report or possess a Legal Entity Identifier (LEI). The availability of unique identifiers is crucial for the analysis of interconnectedness, the understanding of complex group structures or when linking AIFMD data with other data sources;
- systemic risk analysis would benefit from a revised approach to fund classification that better reflects the type of funds registered as AIFs and where the “other” category is reduced in size;
- more granular data on the portfolio breakdown of assets and liabilities using international identifiers (e.g. LEI, ISIN) would significantly enhance systemic risk analysis. In addition, the absence of a more granular geographical breakdown of exposures (e.g. at country level) by asset classes, investors, counterparties and sponsorship arrangements means that NCAs are not able to fully assess potential contagion risks;
- ESRB has identified, as a priority, the operationalisation of existing macgroprudential policy instruments (e.g. the use of leverage limits for AIFs or suspending redemptions in the public interest) in a harmonised and coordinated way. For example, the AIMFD currently does not provide a definition of what is meant by “public interest”, and whether this includes financial stability. As a result, NCAs may not consider this instrument as a macroprudential tool, separate from suspension of redemption in the interest of shareholders; and
- the development of the European macroprudential framework for investment funds – and non-banks more generally – is still at an early stage. At the global level, the Financial Stability Board has called on IOSCO to develop recommendations to improve the liquidity risk management practices of open-ended funds. The recommendations note that there should be an appropriate alignment between portfolio assets and redemption terms, and that funds should not be managed in such a way that the investment strategy relies on additional liquidity management measures such as suspensions.
The FCA and the Prudential Regulation Authority (PRA) have published a joint consultation paper setting out proposals for the FSCS management expenses levy limit (MELL) for 2020/21. The FSCS has a statutory responsibility to process compensation claims resulting from the failure of financial services firms. Under FSMA, the PRA and the FCA must set a limit for the total management expenses that the FSCS can levy on financial services firms. The MELL is the maximum amount that the FSCS may levy in a year for its operating costs without further consultation.
The proposed MELL is £83.2m for 2020/21, consisting of a management expenses budget of £78.2m and an unlevied contingency reserve of £5m. This is an increase of 4.8% (£3.6m) over the 2019/20 management expenses budget of £74.6m. 75% of the increase can be attributed to a forecast rise in the volume and complexity of claims expected by the FSCS. The proposed MELL would apply from Wednesday 1 April 2020, the start of the FSCS’s financial year, to Wednesday 31 March 2021. The deadline for responding to the consultation is 17 February 2020.
Alongside this, the FSCS has published its plan and budget for 2020/21, which outlines the FSCS’ expected management costs and initial levy forecast that firms will pay in 2020/21. The proposed 2020/21 indicative levy is £635m, an increase of £87m from the levies raised in 2019/20. The FSCS states that the overall increase is due to increasing self-invested personal pensions (SIPP) operator claims, which continues the rising trend of pension-related cases. The investment provider class is forecast to reach its annual limit, which will trigger the retail pool for these costs. The FSCS levy will be confirmed in April 2020.
HM Treasury has published a letter of response to the Chair of the European Union Committee in relation to equivalence in the area of financial services. Points of interest include:
- whilst the Commission has adopted temporary equivalence decisions for the UK under EMIR on central counterparties (CCPs) and the CSDR on central securities depositaries (which will only take effect in a no-deal scenario), it is important that both the UK and the EU can continue to benefit from UK CCPs being able to offer their services to EU counterparties in all circumstances;
- the UK’s ambition is for a future relationship with the EU that respects the autonomy of both the parties, while providing confidence and protecting financial stability. The UK and the EU have committed to start assessing equivalence with respect to each other under existing frameworks as soon as possible after the UK’s withdrawal from the UK, endeavouring to conclude these assessments before the end of June 2020;
- the government’s priority is to seek equivalence across approximately 40 equivalence regimes which exist in EU legislation;
- after the UK’s withdrawal from the EU, the government will not be required to follow the EU’s exercise of equivalence determinations. For example, the UK could make an equivalence decision for a third-country when the EU has not; and
- the procedure for equivalence decisions to come into law is set out in The Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc.) (EU Exit) Regulations 2019. Following the UK’s withdrawal from the EU, the Commission’s function for making equivalence decisions in financial services legislation will be transferred to HM Treasury.
ESMA has published a statement clarifying issues relating to its governance and reporting obligations for UK entities following the UK’s withdrawal from the EU. By virtue of the Withdrawal agreement, the FCA will no longer be a member of ESMA’s Board of Supervisors or participate in any of ESMA’s other governance bodies (unless there are exceptional circumstances).
EU law will continue to apply to the UK, as if it were a member state, during the implementation period from 1 February to 31 December 2020. ESMA reiterates that:
- rights and obligations for UK entities under EU law will also continue to apply – such as reporting and notification obligations under MiFID II/MiFIR, EMIR, CSDR, AIFMD, MMFR; and
- ESMA will continue to directly supervise registered credit rating agencies, trade repositories and securitisation repositories established in the UK during this period.
In the coming eleven months, ESMA will continue monitoring the application of EU law to and in the UK, and will closely monitor developments in preparation for the end of the implementation period.
The FCA has updated its webpage on Brexit outlining considerations that UK firms must take into account during and after the implementation period. The FCA makes it clear that how firms are affected at the end of the implementation period in 2020 will depend on a number of factors, including any such agreement between the UK and the EU on the future relationship. Although not raising anything new, and which firms must already be thinking about, the FCA provides a non-exhaustive list of questions for firms.
- Does the firm currently provide any regulated products or services to customers resident in the EEA?
- Is the firm marketing financial products in the EEA? This includes products marketed on a website aimed at consumers in the EEA.
- Does the firm have membership of any market infrastructure (trading venues, clearing house, settlement facility) based in the EEA?
- Does the firm outsource or delegate to an EEA firm or does an EEA firm outsource or delegate to the firm?
- Does the firm have agents in the EEA or interact with any intermediary service providers in the EEA?
- Does the firm transfer personal data between the UK and the EEA or vice versa?
- Is the firm part of a wider corporate group based in the EEA, or does the firm receive any funding from an entity in the EEA?
The FCA notes there are also other ways firms may be able to access the EEA which may not be affected by the end of the implementation period, although these will depend on the specific firm, type of activity and the local jurisdiction in question. These include: permission under local law or based on rules of a local financial market infrastructure; local exemptions in an individual EU country; whether "reverse solicitation" is permitted without local authorisation; whether the activity is covered by an EU decision on the UK’s equivalence; and member states may put in place regimes to provide continuity of business for a temporary period.
The FCA also warns banks and payment service providers to take steps now to ensure that they are ready to provide the relevant customer information when making payments after the implementation period. For more information, see our in-depth article ‘UK financial services industry: operating in the EU after Brexit’.