Investment management update

In this month’s update we cover the FCA’s sector views and outline the key updates regarding the transition from LIBOR, amongst other items.


LIBOR transition

Financial Crime



Regulator statements on Covid-19 (coronavirus)

On 4 March 2020, the FCA issued a statement setting out its expectations for firms in response to the outbreak of Covid-19 (coronavirus). The FCA expects firms to have contingency plans in place to deal with major events and, alongside the Bank of England, it is actively reviewing the contingency plans of a wide range of firms. This includes assessments of operational risks, the ability of firms to continue to operate effectively and the steps firms are taking to serve and support their customers. The FCA has made clear that it expects firms to take all reasonable steps to meet their regulatory obligations. For example, the FCA would expect firms to be able to enter orders and transactions promptly into the relevant systems, use recorded lines when trading and give staff access to the compliance support they need. If firms are able to meet these standards and undertake these activities from backup sites or with staff working from home, the FCA has no objection to this.

ESMA also issued a statement on 11 March 2020 in response to Covid-19. ESMA notes the impact on financial markets and states that it continues to monitor developments and is prepared to use its powers to ensure the orderly functioning of markets, financial stability and investor protection. In particular, ESMA states that all financial market participants should be ready to apply their contingency plans, including business continuity measures, to ensure operational continuity in line with their regulatory obligations and asset managers should continue to apply the requirements on risk management, and react accordingly.

See our in depth article for further information on what measures firms should be taking.  

FCA Sector Views: February 2020

On 18 February 2020, the Financial Conduct Authority (FCA) set out its sector views detailing an overall view of how each financial sector is performing. Such views inform the FCA’s priorities and business planning.

In keeping with the FCA’s work on improving outcomes for consumers, the FCA has commented on harm in the sector which it has identified as coming from the following areas:

  • the pricing and quality of investment management products;
  • operational resilience;
  • disorderly markers;
  • market abuse and pricing;
  • the quality of institutional intermediary services; and
  • the quality of custody and investment administration services.

Of these, the FCA has made the following comments on the areas it is most concerned about: 

  • pricing and quality of investment management products – drivers of this harm range from consumers struggling to assess and compare fees and products, to poor governance practices at asset managers. A study conducted by the FCA found weak price competition in several areas of the industry and poor standards of governance; and
  • operational resilience – a lack of operational resilience or cybercrime is a threat, both at firms within the sector or at third-party firms they have outsourced activities to. Harm in this context includes financial and data loss for investors and, potentially, damage to market integrity. Poor operational resilience could lead to widespread market disruption, which prevents or hinders firms from investing, or limits investors’ access to their capital.

In addition, the FCA has identified and commented on a number of drivers for change, namely:

  • macro and socio-economic factors – drivers include the low interest rate/low yield environment, uncertainty over Brexit, and the growing attention on environmental, social and governance (ESG) and stewardship;
  • technology and innovation – drivers include the growth of artificial intelligence, increased oversight challenges as a result of increased outsourcing to third parties and advances and changes in data use and the potential for online threats and technology failures; and
  • regulation – drivers include new rules and regulation (such as MiFID II and PRIIPs) coming into force in the past few years, and further rules and regulation to come into effect in the near future (such as the EU Sustainable Finance Action Plan, Senior Managers and Certification Regime and Cross-Border Distribution of Funds Regulations) and the transition from LIBOR to alternative risk-free rates (RFRs).

The FCA also commented on the value assessments that authorised fund managers have to publish for UK authorised funds as part of the Asset Management Market Study remedies. In particular, the FCA noted that challenges include how firms present their findings and the potential need to move investors in share classes with higher charges to ones with lower charges. The FCA expects to do some follow up work with firms once they have published their value assessments.

FCA feedback statement on patient capital and authorised funds (FS20/2)

On 28 February 2020, the FCA published a feedback statement on patient capital and authorised funds (FS20/2).

FS20/2 summarises the responses the FCA received to its December 2018 discussion paper on patient capital and authorised funds (DP18/10). The key points to take away from FS20/2 are as follows:

  • the FCA found no inappropriate barriers to investing in long-term assets within its authorised funds regime. Broadly, respondents found the current authorised funds regime fit for purpose for long-term investments by professional and sophisticated retail investors;
  • the FCA considers that for broad retail distribution funds, barriers do exist which limit the range of available investment options. However, the FCA considers that such barriers may not be inappropriate and it is unclear how they may be relaxed without introducing a level of risk which would be inappropriate for retail investors;
  • respondents agreed that UCITS and non-UCITS retail schemes (NURSs) only provide limited options relating to long-term assets because of restrictions intended to offer a degree of protection. However, qualified investor schemes (QIS) are suitable for investment in long-term assets;
  • a range of closed-ended investment products such as investment companies and venture capital trusts already provide retail investors with access to investment in long-term assets; and
  • the FCA is giving some consideration to the proposals made by the IA in relation to a "long term asset fund" and will continue to work alongside the Investment Association to test the viability and desirability of such a proposal.

FCA speech on penalties, remediation and Principles for Businesses

On 13 February 2020, the FCA published a speech delivered by Mark Steward, FCA Executive Director of Enforcement and Market Oversight, on penalties, remediation and the FCA's Principles for Businesses. The speech focused on the following areas:

  • observations on the General Principles – the FCA consider that the Principles are the foundation of good conduct and ought to be an integral part of a firm’s operational processes at all levels. Mr Steward explained that many of the cases that have been considered in the previous year could have been dealt with by the firm considering its conduct in light of the Principles;
  • financial penalties – the FCA’s intention in taking enforcement action is not only to deter misconduct, but is also to ensure that the consequences of the misconduct in question are remedied. As such, the FCA shall review the actions which firms take following any misconduct, and the sanctions which are imposed will depend on how proactive and effective firms are in dealing with such misconduct; and
  • penalty policy in practice – a financial penalty is ultimately not intended to punish, but the decision maker in respect of such punishments shall ensure that the price for the contravention is sufficiently higher than any gain or benefit in respect of the conduct would have been.

European Commission consultation on MiFID II post-implementation review

On 17 February 2020, the European Commission published a consultation paper on its review of the regulatory framework for investment firms and market operators under the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR) (together referred to as MiFID II).

The Commission is required to carry out a post-implementation review of MiFID II under Articles 90 and 52 of the MiFID II Directive and MiFIR respectively.

Among other things, the Commission is considering potential changes to:

  • investor protection rules,
  • potential actions to foster research coverage for small and medium-sized enterprises (SMEs); and
  • the possible introduction of a new transparency tool that allows investment managers, investment advisers and their clients to have access to "live" asset prices across the EU in a consolidated format (referred to as the consolidated tape).

The Commission explains that this consultation, and ESMA's consultation on the functioning of certain aspects of MiFID II, are complementary and should not be considered mutually exclusive. Both the ESMA report and the findings from this consultation will inform the Commission's review reports for the European Parliament and the Council of the EU, including legislative proposals where considered necessary.

Comments can be made on the consultation until 20 April 2020.

ESMA updates MiFID II Q&As on investor protection and intermediaries: February 2020

On 18 February 2020, ESMA published an updated version of its Q&As on investor protection and intermediaries (ESMA35-43-349) under the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (600/2014) (MiFIR)

The updated version includes new Q&As on practices for firms selling financial instruments subject to the resolution regime under the Bank Recovery and Resolution Directive (2014/59/EU) (BRRD) (as amended by the BRRD II Directive ((EU) 2019/879) (BRRD)). There is now clarification on a number of areas, including:

  • sales of subordinated eligible liabilities and the assessment of suitability;
  • information to be collected from clients;
  • calculation and monitoring of the 10% threshold; and
  • what happens if a transaction relating to subordinated eligible liabilities is deemed unsuitable by the firm, but the retail client wishes to proceed anyway.

ESMA last updated the Q&As in December 2019.

Member states are expected to adopt and publish the measures necessary to comply with the BRRD II Directive by 28 December 2020 and to apply those measures from the same date, with certain exceptions.

Court of Appeal finds disclosure of privileged documents to regulator not required as relevant statute does not override privilege

On 18 February 2020 judgement was given in the case of Sports Direct International plc v Financial Reporting Council [2020] EWCA Civ 177. 

Summary of the facts

  • The respondent (FRC) was empowered to conduct investigations into statutory auditors and audit work and to impose sanctions for failure to comply.
  • It was investigating the conduct of an accountancy firm in relation to an audit of the appellant’s (SDI) financial statements for 2015-16.
  • SDI ultimately provided most of the documents which FRC requested for these purposes, but withheld some, claiming legal advice privilege.
  • In the first instance, it was held that documents could not be withheld due to legal advice privilege: (a) simply by virtue of being correspondence between lawyer and client; and (b) because the production of documents to a regulator for the purposes of a confidential investigation by the regulator is not an infringement of legal professional privilege.

Ultimately, it was held in the Court of Appeal that, unless the statute under which the regulator derives its powers overrides legal professional privilege, the privilege still attaches to the correspondence in question. As a result, simply because documents are asked for in the conduct of a regulatory investigation is insufficient to override legal professional privilege.

BoE announces launch of COP26 private finance agenda

On 27 February 2020, the Bank of England (BoE) published a press release announcing the launch of the 2020 UN climate change conference (COP26) private finance agenda.

COP26 will take place in Glasgow in November 2020. The agenda is designed to help private finance support the whole economy transition to net zero. The objective is to ensure that every financial decision takes climate change into account. In a speech at the launch event, Mark Carney, outgoing BoE governor, explains that, to achieve net zero, every company, bank, insurer and investor will need to adjust their business models for a low carbon world.

The focus will be on developing the right framework for reporting, risk management and return, which will embed climate change considerations and help finance a whole economy transition.


  • Help the private sector to refine and implement TCFD disclosure and to work with authorities to commit to pathways to make climate reporting mandatory.
  • Ensure firms and investors can measure and manage the risks in the transition to a net zero world.
  • Help firms and investors identify the opportunities in the transition to net zero.

These goals are briefly summarised in an infographic and, in his speech, Dr Carney outlines at a high-level some specific actions under each of these goals.

The full strategy will be published once Dr Carney's term as BoE Governor ends in March 2020 and he takes up his roles as UN Special Envoy for Climate Action and Finance, and the UK Prime Minister's finance adviser for COP26.

LIBOR transition 

BoE speech: Turbo-charging sterling LIBOR transition

On 26 February 2020, Andrew Hauser, Executive Director, Markets, BoE gave a speech about the need for a decisive acceleration in effort in 2020 to ensure that risk-free rates are adopted to replace LIBOR. In the speech, he announced two new BoE initiatives to further support risk-free rate transition.

Publication of compounded SONIA index

BoE is intending to publish a compounded Sterling Overnight Index Average (SONIA) index from July 2020. The index will complement the existing overnight SONIA rate and is intended to provide a flexible tool to help market participants construct compounded SONIA rates in an easy and consistent way.

In connection with this, BoE published a discussion paper which includes example calculations (based on published SONIA data) to show how the proposed compounding products could work. Under the discussion paper, BoE is seeking views from sterling market participants on:

  • BoE's intention to publish a daily SONIA Compounded Index. This is intended to support the use of SONIA in a wide range of financial products by simplifying the calculation of compounded interest rates; and
  • whether it would be useful to publish a simple set of compounded SONIA Period Averages, which would give users easy access to SONIA interest rates compounded over a range of set time periods and whether there is a market consensus on how to define the relevant time periods.

Responses to these questions are sought by 9 April 2020.

Increases to haircuts

From October 2020, BoE will increase haircuts progressively on LIBOR linked collateral that it lends against with haircuts scheduled to reach 100% at the end of 2021. Any LIBOR linked collateral issued after October 2020 will be ineligible for use at the BoE. This approach reflects the preferences of respondents to the discussion paper.

FCA Dear CEO letter urges asset management firms to prepare now for end of LIBOR

On 27 February 2020, the FCA published a Dear CEO letter it has sent to UK regulated asset management firms, setting out its expectations for these firms as they prepare for the cessation of LIBOR at the end of 2021.

In the letter, the FCA explains that firms in the asset management sector should be in no doubt that they have a responsibility to facilitate and contribute to an orderly end to LIBOR. The FCA expects them to take all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or cause harm to consumers, and to support industry initiatives to ensure a smooth transition.

Key milestones for asset management firms raised in the letter are:

  • switch from LIBOR swaps to SONIA swaps for new positions where possible from 2 March 2020;
  • consider not making any new investments in GBP LIBOR based cash products maturing beyond 2021 by end Q3 2020;
  • consider stopping launching new products with benchmarks or performance fees linked to LIBOR by end Q3 2020; and
  • have a clear plan in place by end Q1 2021 on how to manage the transition of legacy LIBOR products.

Asset management firms with LIBOR exposures or dependencies should have their transition activities underway. If they have not done so, the FCA expects such firms to take immediate action to develop and begin to execute an appropriate plan. If a firm's board decides no LIBOR transition plan is needed, the FCA may seek to understand, and challenge (where appropriate), the reasons for this decision. If, following careful review, a firm's board considers a barrier to transition is insurmountable, or the firm's transition preparations will not be completed in time, the FCA should be immediately informed and kept up-to-date on developments.

The FCA makes clear it is essential that firms receiving the letter reflect on the points raised and act as appropriate. The cessation of LIBOR is a market event and the transition to alternative RFRs is market-led, so the FCA expects firms to take proactive steps now, where appropriate, and not wait for instructions from clients. Firms should not expect or base their transition plans on future regulatory relief, guidance or legislative solutions.

In January 2020, the FCA, BoE and Working Group on Sterling RFRs (RFRWG) published a number of documents containing targets for 2020 on LIBOR transition, to support the smooth transition of the industry to alternative RFRs ahead of the end of 2021.

Financial crime

Updated HM Treasury advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions

On 24 February 2020, HM Treasury (HMT) updated its advisory notice on Money Laundering and Terrorist Financing controls in higher risk jurisdictions (AML/CTF). This notice replaces all previous notices issued by HMT on the subject. The revised notice follows from two statements published by the Financial Action Task Force (FATF) on 21 February 2020, identifying jurisdictions with strategic deficiencies in their AML/CTF regimes.

Annex A of the advisory notice identifies the Democratic People's Republic of Korea (DPRK) and Iran as being higher-risk jurisdictions for which enhanced due diligence and appropriate counter-measures ought to be deployed in order to meet the risks presented by each to the international financial system.

Annex B of the advisory notice identifies Albania, The Bahamas, Barbados, Botswana, Cambodia, Ghana, Iceland, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Panama, Syria, Uganda, Yemen and Zimbabwe as countries for which appropriate actions should be taken to minimise the associated risks and these actions may include enhanced due diligence in high-risk situations.

Having been found to significantly improve its AML/CTF regime, Trinidad and Tobago is no longer subject to the FATF's increased monitoring process and is removed from the list of countries for which enhanced due diligence ought to be considered or applied.

JMLSG consults on revisions to guidance reflecting Money Laundering and Terrorist Financing (Amendment) Regulations 2019

Following implementation of the Fifth Money Laundering Directive, the Joint Money Laundering Steering Group (JMLSG) on 4 AML and CTF guidance for the financial services sector. The JMLSG states that the proposed revisions take account of the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511), which came into force on 10 January 2020

The JMLSG has published marked-up versions of parts of the guidance on its consultation webpage, indicating the changes that it proposes to make.

  • Part I. Revisions to chapter 4 (Risk-based approach), chapter 5 (Customer due diligence), chapter 7 (Staff awareness, training and alertness), chapter 8 (Record keeping) and the glossary.
  • Part II. Revisions to sector 3 (Electronic money).
  • Part III. Revisions to chapter 3 (Equivalent markets).

The deadline for comments on the revisions is 3 April 2020.

The JMLSG is developing a new sector for Part II of the guidance relating to cryptoasset exchanges and custodian wallet providers. JMLSG intends to publish this sector for consultation by the end of February 2020.


UK Government policy paper on approach to UK-EU future relationship negotiations

On 27 February 2020, the UK Government published a policy paper on its approach to negotiations on the future UK-EU relationship (CP211).

In the paper, the Government sets out its proposals for the contents and structure of a comprehensive free trade agreement (CFTA) between the UK and the EU. In the area of financial services, it envisages that the agreement should include provisions that:

  • promote financial stability, market integrity and investor and consumer protection, providing a predictable, transparent and business-friendly environment for cross-border financial services business;
  • contain legally binding obligations on market access and fair competition, in line with the precedent of the EU-Canada Comprehensive Economic and Trade Agreement (CETA); and
  • establish regulatory co-operation arrangements intended to maintain trust and understanding between the parties' "autonomous systems of regulation" as they evolve. These arrangements should be based on the precedent of the EU-Japan Economic Partnership Agreement (EPA) and international best practice and could include appropriate consultation and structured processes for the withdrawal of equivalence findings.

The Government emphasises that the equivalence assessments for financial services being conducted by the UK and the EU should be distinct from negotiations on the CFTA. It states that the fact that the UK currently has the same rules as the EU provides a strong basis for concluding comprehensive equivalence assessments before the end of June 2020.

More generally, the Government states that it will not agree to any obligations for the UK's laws to be aligned with the EU's or for the EU's institutions to have any jurisdiction in the UK.

Letter from Chancellor of the Exchequer to European Commissioner for Financial Stability, Financial Services and Capital Markets Union, outlining the UK’s preparations for assessments of financial services equivalence

On 2 March 2020, HMT published a letter (dated 27 February 2020) from Rishi Sunak, Chancellor of the Exchequer, to Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union (CMU), outlining the UK's preparations for assessments of financial services equivalence.

It is noted in the letter that the EU and the UK have agreed to start assessing equivalence as soon as possible, and will aim to conclude these assessments by the end of June 2020. The Chancellor believes that comprehensive positive findings should be able to be delivered within this timeframe.

HMT is ready to begin working with the EU in a structured way to ensure that the UK and the EU can both progress their equivalence assessments. Mr Sunak proposes to establish a dialogue for the exchange of information to support UK and EU autonomous decision-making on equivalence. Treasury officials will therefore be contacting their EU counterparts to initiate discussions on equivalence, establish a programme of meetings to work efficiently through the issues, and provide initial technical information on the UK's equivalence framework and regulatory regime.

The Chancellor reiterated that the UK is committed to working with the EU to build a friendly future relationship on financial services that is based on co-operation between sovereign equals.

Michel Barnier speech considers EU approach to equivalence decisions relating to UK

On 26 February 2020, the European Commission published a speech given by Michel Barnier, the EU's chief negotiator on its future relationship with the UK, on co-operation in the age of Brexit.

In the speech, Mr Barnier considers the EU's approach to making equivalence determinations relating to the UK, now that the UK is a third country.

Mr Barnier states that:

The EU will make equivalence determinations when it is in the interest of the EU, its financial stability, its investors and its consumers. He warns that equivalence decisions will never be global or permanent and that they are, and will remain, unilateral decisions. He rejects the idea that these determinations will be subject to joint management with the UK.

The EU will not accept a model for the future relationship as it applies to financial services where the EU becomes a risk-taker and foots the bill for any future financial crisis, while the UK financial services industry retains the profits.

See our latest article, Brexit: are some senior managers suffering a false sense of security?