Investment management update

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






PRA business plan 2020/21

Following the release of the Financial Conduct Authority’s (FCA) business plan referred to in last month’s update, on 9 April, the Prudential Regulatory Authority (PRA) published its business plan for 2020/21, which sets out its strategy and work plan for the coming year and its budget for 2020/21.

The PRA's strategic goals for 2020/21 include the following:

  • having in place robust prudential standards and holding regulated firms, and those who run them, accountable for meeting these standards through its supervision;
  • adapting to market changes and horizon scanning by looking at climate change, fintechs and other new risks;
  • financial resilience by ensuring that firms are adequately capitalised and have sufficient liquidity for the risks they are running or planning to take;
  • operational resilience in order to mitigate the risk of disruption to the provision of important business services;
  • ensuring that banks and insurers have credible plans in place to enable them to recover from stress events; and
  • ensuring a smooth transition to a sustainable and resilient UK financial regulatory framework following the UK’s exit from the EU.

The PRA states that, in the light of the Covid-19 pandemic, it will actively revise elements of the business plan as may become necessary to keep working as effectively as possible towards the delivery of its objectives.


FCA webpage: firm handling of complaints during Covid-19

On 1 May, the FCA issued a helpful statement for firms on complaints handling, recognising the many difficulties faced by firms in meeting DISP requirements during the Covid-19 "lockdown". This latest FCA statement follows a series of FCA guidance notes for firms on a range of topics in response to the Covid-19 pandemic and its discussions with the financial services industry, as well as Principle 11 notifications made by firms.

The statement sets out the FCA’s key expectations of firms on their complaints handling processes during the lockdown, and the areas it expects firms to prioritise, being:

  • prompt payments of redress;
  • prompt and fair resolution for potentially vulnerable customers (PVCs) and small businesses facing financial difficulties; and
  • the sending of holding responses to the groups above where prompt resolution may not be possible.

It is clear that the FCA expects firms to consider requiring the presence of staff in the office (subject to meeting social distancing requirements) if the priorities above cannot be assured by home-working, and the FCA stresses that firms unable to meet the eight week rule in DISP 1.6 or other key DISP requirements should make Principle 11 notifications to explain the steps they are taking to manage any areas of non-compliance.

It is also clear the FCA does not expect firms to lower standards or response times in their processes for the submission and acknowledgment of customer complaints and the provision of information to customers about the firm’s complaints processes.

Helpfully, though, the FCA’s statement also contains guidance for claims management companies (CMCs), including an expectation that CMCs allow firms a reasonable amount of extra time, beyond eight weeks, to give a final response before referring complaints to the Ombudsman Service.

Overall, the guidance underlines the importance of firms’ maintaining PVC policies to consider the needs of vulnerable groups and mark them for priority treatment. Most firms with consumer clients should already have PVC policies in place to identify and consider the needs of such clients.

Firms should be checking that these policies are fit for purpose during the pandemic and are scoped to meet the definition of vulnerable customer set out in the FCA’s Approach to Consumers, as well as assessing whether the coronavirus has exacerbated or caused vulnerability in other customer groups. Firms must also consider the needs of small businesses which (although not likely to be included in existing PVC policies) must nevertheless receive priority treatment according to the statement.

FCA webpage on expectations for funds in light of Covid-19

The FCA has published a webpage on its expectations for funds in light of the Covid-19 pandemic.

Key points

  • The FCA has agreed to delay annual and half-yearly fund reports.
  • Virtual general meetings – the FCA notes it does not have a supervisory concern about general meetings of fund unitholders being held in a virtual format. However, the FCA notes that fund documentation may contain details about arrangements that are additional to what is prescribed by its rules. The FCA cannot forbear on private law obligations owed by authorised fund managers (AFMs) to unitholders or claims which they might bring, and therefore AFMs will need to consider the terms of their fund documentation, including prospectuses and instruments of incorporation, when making arrangements for meetings during this time.
  • Ensuring compliance with limits on value at risk (VaR) – the FCA expects firms to have plans in place already to deal with issues ensuring compliance with VaR and to take appropriate action, considering market conditions and what is in the best interests of their customers.
  • Electronic signatures – during the Covid-19 crisis, the FCA are willing to accept electronic signatures on applications to authorise funds or approve changes to funds.
  • 10% portfolio value reporting – on 31 March, the FCA published a Dear CEO letter on Covid-19 issues to firms providing services to retail clients. This included statements on supervisory flexibility concerning firms’ obligations to inform investors concerning depreciation of values of portfolio or leveraged position by 10% or more. The FCA confirms that the statements in the letter, including on 10% portfolio value reporting, apply to non-retail client business performed by MiFID investment firms and collective portfolio management investment firms to the extent that the requirements are applicable to those firms.
  • Repo use for liquidity management – the FCA states that, if repo transactions are entered into for the sole purpose of liquidity management, it is unlikely that they will meet the requirements under applicable rules, given the requirement in the Collective Investment Scheme sourcebook (COLL) that transactions should only be used for efficient portfolio management.
  • Client assets – the FCA refers firms to its guidance on client assets published on 6 April 2020.
  • Paper-based and manual processes – the FCA notes that AFMs may allow unitholders or potential investors to deal in units in an authorised fund by post, fax or other physical means. The FCA states that if dealing by one or all of those physical means ceases to be possible because of the pandemic, AFMs should consider whether they can provide alternative means for unitholders to deal in units in the fund and how they can manage such alternative processes without disadvantaging unitholders. If AFMs cannot provide alternative means for unitholders to deal, and if that means that some unitholders may be prejudiced, AFMs should consider whether there are any other options for ensuring that all unitholders in the fund are treated fairly.
  • AIFMD transparency reporting – the FCA notes that it does not intend to change the usual deadlines for reporting transparency information to it under the AIFMD Level 2 Regulation (Regulation 231/2013/EU). Firms that suspect they may not be able to meet the usual deadlines should inform their usual supervisory contact or contact the FCA to explain the reasons.

FCA statement: expectations on financial resilience for solo-regulated firms

On 17 April 2020, the FCA published an updated version of its statement on its expectations on financial resilience for FCA solo-regulated firms in light of Covid-19. The updates to the statement relate to the following issues.

  • Capital and liquidity buffers – if a firm is planning to draw down a buffer, it should contact the FCA or its named FCA supervisor.
  • Wind-down plans – firms should maintain an up-to-date wind-down plan that considers the current market impact of the Covid-19 crisis. If the wind-down plan identifies material execution risks, the firm should contact the FCA or its named FCA supervisor, with its plan for the immediate period ahead.
  • Distributions – if a firm is considering whether to make a discretionary distribution of capital to fund a share buy-back, fund a dividend, upstream cash or meet a variable remuneration decision, it should satisfy itself that each distribution is prudent given market circumstances and consistent with its risk appetite. The FCA does not expect firms to distribute capital that could credibly be required to absorb losses over the coming period and it may contact specific firms about this, as relevant.
  • Expected credit loss estimates – the FCA reminds non-bank lenders subject to IFRS9 that the forward-looking information used in expected credit loss estimates should be reasonable and supportable. The FCA states that it is essential that the standard is implemented in a well-balanced and consistent way that reflects the potential impact of the Covid-19 crisis and the support provided by governments and central banks to protect the economy.

FCA statement: expectations for wet-ink signatures in light of Covid-19 restrictions

The FCA has published a statement that sets out its expectations of firms when dealing with the need for wet-ink signatures (i.e. documents signed by hand, using a pen) in light of the Covid-19 pandemic. The webpage focuses on two types of document.

1. Agreements

The FCA states that its rules do not explicitly require wet-ink signatures in agreements and they do not prevent firms from using electronic signatures in agreements. It considers that the validity of electronic signatures is a matter of law and recommends that firms consider the legal position themselves as it cannot give legal advice.

The FCA advises firms to consider any related requirements set out in its Principles for Business and general rules. By way of example, it states that firms should consider Principles 2, 3 and 6 and review the risks and harm of using electronic signatures, and take appropriate steps to minimise those. It also advises firms to consider the client’s best interests rule (COBS 2.1.1R) and the fair, clear and not misleading rule (COBS 4.2.1R) to ensure that, when a client signs a document electronically, this does not make it more difficult for the client to understand what they are agreeing to.

2. Forms

The FCA refers to its recent decisions to accept electronic signatures for fund-related applications and on all applications from mutual societies. The FCA confirms that firms may use electronic signatures for all interactions with it.

FCA webpage on professional indemnity insurance for financial advisers

The FCA has published a new webpage that sets out its position on the impact the Covid-19 crisis is having on professional indemnity insurance (PII) for financial advisers.

The FCA recognises that some financial adviser firms may be concerned that the current Covid-19 situation may affect their ability to renew their PII in a timely manner, impacting their operational resilience. It states that it is continuing to assess how insurers have been reviewing their approach to underwriting and is aware that insurers may seek more detailed information to understand a particular firm's risk.

The FCA has engaged with the International Underwriting Association and has spoken directly with individual insurers and brokers. Its discussions indicate that PII cover remains available in the market and the crisis is not preventing insurers from undertaking the renewals process.

The FCA’s position remains that firms need to have PII policies in place in accordance with its rules to support their ability to meet liabilities as they fall due and protect their consumers. It considers that it is ultimately a commercial decision for insurers about what cover they will offer, including cost and on what terms. However, insurers also need to meet their regulatory obligations, including when manufacturing, distributing and writing contracts of insurance.

The FCA notes that it will continue to monitor the impact of Covid-19 on all firms' operational resilience, including insurers. Where it sees evidence that insurers' ability to process renewals is being affected, it will consider taking action in line with its approach to supervision. It asks individual firms to notify it in their usual way if they have concerns that they will be unable to secure appropriate PII cover, including at the point of renewal.

FCA webpage on changes to regulatory reporting up to 30 June 2020

The FCA has published a new webpage that sets out temporary measures it has introduced for firms that are due to submit regulatory returns by 30 June 2020, in light of Covid-19. The FCA states that it has extended the submission deadlines for certain regulatory returns due on or before 30 June 2020. It lists the relevant returns on the webpage.

In summary, the FCA has granted a:

  • one month extension for 17 returns due under Chapter 16 of its Supervision manual (SUP 16);
  • two month extension for the submission of the FIN-A return (annual report and accounts); and
  • two month extension for annual financial reports (as required under Disclosure Guidance and Transparency Rules), the credit union complains return (CREDS 9 Annex 1R), the complaints return (DISP Annex 1R), the claims management companies complaints return (DISP 1 Annex 1AB) and key data from claims management companies (CMC001).

The FCA also states that firms will not be required to submit the Employers’ Liability Register compliance return for 2020. However, it does expect firms to continue to ensure their Employers’ Liability Register is accurate and up to date.

In addition, the FCA confirms that returns not included in the list do not have an extension and firms must submit their data in the usual timeframe. The FCA states that it still expects firms to submit their returns as soon as possible. If a firm misses a deadline (in the period up to 30 June), it will send the firm a reminder letter.

FCA extends time limit for obtaining appropriate qualifications: updates to the FCA’s information for firms webpage

In our April edition, we reported that the FCA published a new webpage containing information for firms on Covid-19, providing specific guidance on a number of topics. On 21 April 2020, the FCA updated this webpage to explain how firms can comply with requirements to ensure that their employees complete appropriate qualifications during the Covid-19 crisis.

This guidance follows decisions by accredited bodies and other professional qualification providers to cancel examinations indefinitely due to the Covid-19 pandemic. The FCA states that it still requires firms to ensure that all employees have the skills, knowledge and expertise needed to discharge their responsibilities. However, the FCA will not take action against a firm or accountable individual that is not able to ensure that an employee has attained an appropriate qualification within the required 48 months (as required under TC 2.2A.1R of the FCA Handbook) because the relevant examinations were cancelled or postponed. In these circumstances the FCA:

  • will treat the time limit for attaining the appropriate qualification as “within 48 months or, where necessary, as soon as reasonably practicable afterwards, up to a further 12 months” instead of “within 48 months”. This means that affected employees of the firm will, if needed, have an additional 12 months to complete the appropriate qualifications. The FCA notes that firms will need to assess and decide if an extension should be granted to an employee and record the reasons for this; and
  • confirm that a firm’s affected employees include those employees that have a set (registered or booked) examination date(s) which was cancelled or postponed by the examination provider or by the firm. The FCA gives the example of an employee that is needed to carry out extra duties to manage risks, and/or to provide support, to consumers and businesses and where it is not realistic to expect the employee to also fulfil the qualification requirement.

The FCA will adopt this approach until 31 October 2020, which means that firms may apply a time limit of up to 60 months where examinations were cancelled or postponed up to and including 31 October 2020.

ESMA public statement: actions to mitigate the impact of Covid-19 on the deadlines for the publication of periodic reports by fund managers

On 9 April 2020, the European Securities and Markets Authority (ESMA) published a public statement (ESMA34-45-896) on actions to mitigate the impact of Covid-19 on the deadlines for the publication of periodic reports by fund managers.

The statement relates to the obligations of:

  • UCITS management companies;
  • self-managed UCITS investment companies;
  • authorised alternative investment fund managers (AIFMs);
  • non-EU AIFMs marketing alternative investment funds (AIFs);
  • European venture capital fund (EuVECA) managers; and
  • European social entrepreneurship fund (EuSEF) managers

(together referred to as fund managers) to publish annual and half-yearly reports in respect of funds they manage, in relation to reporting periods ending from 31 December 2019 to 30 April 2020 inclusive.

ESMA is aware that the actions taken by member states to prevent Covid-19 contagion present significant difficulties and challenges for fund managers and auditors in preparing their funds' annual and half-yearly reports, carrying out a timely audit of the accounts, and publishing them within the reporting deadlines set out in the AIFMD and the UCITS Directive, and in the EuVECA and EuSEF Regulations.

ESMA notes that periodic information relating to investment funds is an important point of reference for investors’ economic decisions and highlights that fund managers are expected to exercise their best efforts to prepare the annual reports and half-yearly reports and publish them within the relevant legislative deadlines.

While recognising the importance of periodic reports for timely and transparent disclosure, ESMA considers that the burdens on fund managers associated with the Covid-19 outbreak should be taken into account by national competent authorities (NCAs) in a co-ordinated way. In the current circumstances, ESMA expects NCAs not to prioritise supervisory actions against these market participants in respect of the upcoming reporting deadlines and to adopt a risk-based approach.

However, ESMA reminds fund managers that certain funds continue to be subject to the disclosure obligations laid down in Article 17 of the Market Abuse Regulation. In particular, these funds must continue to disclose any inside information as soon as possible.

ESMA states that it will continue to closely monitor the situation and will take or recommend any measures necessary to mitigate the impact of Covid-19 on timely and appropriate periodic disclosure by fund managers in respect of the funds they manage or market. ESMA will also, as necessary, reassess any potential need to amend the timelines that NCAs are expected to apply under the statement.


FCA further statement from the RFRWG on the impact of Coronavirus on the timeline for firms’ LIBOR transition plans

On 29 April, the FCA published a further statement on the impact of Covid-19 on firms’ LIBOR transition plans.

The FCA refers to the statement it issued in March 2020 and confirms that the central assumption remains that firms cannot rely on LIBOR being published after the end of 2021. The FCA and the Bank of England (BoE) have worked with members of the Working Group on Sterling Risk-Free Reference Rates (RFRWG) and its sub-groups to consider how all firms’ LIBOR transition plans may be impacted by Covid-19.

The FCA states that it is pleased to have seen continued progress on LIBOR transition, including the first syndicated loan that will link to SONIA and SOFR and the first bilateral loan referencing SONIA in the social housing sector.

Within sterling cash markets, and, specifically, the bond market, the FCA states that transition to SONIA has been largely completed. In loan markets, lenders will continue to work to make SONIA-based products available before the end of Q3 2020, but the FCA notes that it, the RFRWG and the BoE recognise that it will not be feasible to complete transition away from LIBOR across all new sterling LIBOR linked loans by the original end of Q3 2020 target and that there will likely be continued use of LIBOR-referencing loan products into Q4 2020 to maintain the smooth flow of credit to the economy. As a result, the RFRWG recommends that:

  • by the end of Q3 2020, lenders should be in a position to offer non-LIBOR linked products to their customers;
  • after the end of Q3 2020, lenders, working with their borrowers, should include clear contractual arrangements in all new and re-financed LIBOR-referencing loan products to facilitate conversion ahead of end-2021, though pre-agreed conversion terms or an agreed process for renegotiation to SONIA or other alternatives; and
  • all new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.

The FCA, BoE and the chair of the RFRWG will support the delivery of the RFRWG workplan in key areas to continue the momentum on LIBOR transition, including publishing the RFRWG’s considerations and analysis on how to deal with “tough legacy” contracts and building on the consensus on how to calculate a fair credit spread adjustment in legacy cash products to assist transition from LIBOR in cash markets.

The RFRWG, the FCA and the BoE will continue to assess the evolving impact of Covid-19 on firms' LIBOR transition efforts, and provide further updates in due course.

See also our Passle blog post “FCA statement on LIBOR and Covid-19: any change for asset managers?”.


BoE, FCA and PRA statements on the proposed use of regulators' temporary transitional power at the end of the Brexit transition period

On 30 April, the BoE and PRA published a joint statement, and the FCA published a statement (on an updated webpage) on the proposed use of the UK financial services regulators’ temporary transitional power (TTP) at the end of the Brexit transition period.

The statements refer to the written ministerial statement published by HM Treasury in March 2020 which outlined its intention to retain the regulators’ TTP and shift its application so that it is available for use by the UK financial services regulators for a period of two years from the end of the transition period.

The BoE and the PRA intend to use the TTP after the transition period as previously communicated in relation to exit day. This means that, in all but a few areas, PRA-regulated firms and BoE-regulated FMIs do not need to have completed preparations to implement changes in UK law arising from the end of the transition period by December 2020. The BoE and the PRA in their statement explain that they intend to grant general transitional relief on a broad basis, with key exceptions as previously identified, for a period of 15 months after the end of the transition period (i.e. ending on 31 March 2022).

Specific uses of the TTP, in particular relating to some of the new requirements on firms entering the temporary permission regime, are expected to remain as previously published. In addition, the application of the TTP to changes to new EU legislation due to become applicable during the transition period will be considered as part of the ongoing legislative process. The draft BoE and PRA transitional directions and guidance will be updated in the light of the transition period with more details to be published in due course.

Similarly, in its statement, the FCA confirms that, after the transition period, it intends to apply the TTP on a broad basis and to the same areas as previously communicated. The FCA also intends to grant transitional relief from the end of the transition period until 31 March 2022.

The FCA’s statement explains that this means that regulatory obligations on firms will generally remain the same as they were before the end of the transition period for that temporary period. Generally, UK regulated firms will not need to complete preparations to implement changes in UK law arising from the end of the transition period by December 2020.

The FCA will not grant transitional relief in specific areas and it notes that in those areas, it continues to expect firms and other regulated entities to take reasonable steps to comply with the changes to their regulatory obligations by the end of the transition period. It will also publish updated draft TTP directions and annexes in due course, which will include details on the TTP's application to new EU legislative requirements that become applicable during the transition period.