Investment management update

In this month’s update we cover regulatory responses to the impact of the Covid-19 outbreak on financial markets, the FCA’s consultation on a new listing regime for OEICs and the latest updates from the FCA regarding the transition from LIBOR, among other items.



LIBOR transition



FCA consults on a new listing regime for OEICs

On 9 March 2020, the Financial Conduct Authority (FCA) published a consultation paper on open-ended investment companies (OEICs) and proposals for a more proportionate listing regime (CP20/5).

Publication of the consultation paper follows the FCA's February 2017 discussion paper on UK primary markets, which considered whether the premium listing obligations that apply to OEICs should be dis-applied. Following feedback, in October 2017 the FCA committed to prepare rules for a move to a standard listing for OEICs because of concerns about there being a limited rationale for the premium listing of OEICs.

The FCA is now proposing a number of changes, including the below.

  • Premium-listing governance and transparency requirements: a number of governance and transparency requirements which currently apply to OEICs in premium listing will be dis-applied (including, among others, the requirement for an OEIC to exercise operational control over the business it carries on as its main activity).
  • Listing principles: OEICs will continue to be subject to the two Listing Principles in LR 7.2.1R. to ensure that the listed company will continue to: (i) take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations; and (ii) deal with the FCA in an open and co-operative manner.
  • The listing-application process: the requirement for the new-applicant OEIC to publish FCA-approved listing particulars will be removed as prospective investors in an OEIC tend to rely on information disclosed in a UCITS prospectus or KIID, rather than the listing particulars.
  • Sponsors: the obligation to appoint an FCA-approved sponsor will be removed, in line with the requirements applicable to issuers with standard listed securities.
  • A bespoke, standard listing segment in new LR chapter 16A: the Listing Rules for OEICs currently set out in chapter 16 of the sourcebook will be replaced by a new chapter 16A to align more closely with the standard listing segment, and some consequential changes.
  • Proposals for existing premium listed OEICs: when the new rules come into force, all OEICs that already have a premium listing will automatically become standard listed under the amended provisions.

The FCA is of the view that existing requirements are disproportionate because they prescribe transparency and safeguards that are already present in underlying fund regimes, under which OEICs will be authorised or recognised.

The consultation was originally supposed to close to comments on 9 June 2020. However this deadline has now been extended to 1 October 2020 as a result of the Covid-19 pandemic.

ESMA consultation on guidelines under Article 25 AIFMD (use of information by competent authorities, supervisory cooperation and limits to leverage)

On 27 March 2020, ESMA published a consultation paper on guidelines under Article 25 of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) (ESMA34-39-967).

Article 25 provides for national competent authorities (NCAs) to identify the extent to which the use of leverage in the AIF sector contributes to the build-up of systemic risk in the financial system, risks of disorderly markets, or risks to the long-term growth of the economy.

The European Systemic Risk Board (ESRB) published a set of recommendations in April 2018 on liquidity and leverage in investment funds. One of the recommendations requested ESMA to provide guidance on Article 25, specifically on the framework to assess the extent to which the use of leverage within the AIF sector contributes to the build-up of systemic risk in the financial system, and on the design, calibration and implementation of macroprudential leverage limits.

In response to the ESRB request, ESMA is consulting on proposed guidelines relating to Article 25. The guidelines will apply to NCAs and focus on the assessment of leverage-related systemic risk, detailing when leverage limits might be imposed.

In a bid to ensure that NCAs take a consistent approach in the assessment of leverage-related systemic risk, the draft guidelines include:

  • a common minimum set of indicators to be taken into account by NCAs during their assessment;
  • the instructions to calculate such indicators based on the reporting data under Article 24 of the AIFMD; and
  • qualitative and, where appropriate, quantitative descriptions of the interpretation of the indicators.

Comments can be made on the consultation until 1 September 2020.

FCA speech: open-ended funds investing in less liquid assets

On 19 March 2020, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, delivered a speech in which he seeks feedback from investors and the industry on an optimal policy response to liquidity mismatch.

In his speech, Mr Schooling Latter cites recent examples of open-ended funds needing to suspend dealing in response to the number of redemption requests received (such as the LF Woodford Equity Income Fund). He notes that while suspension can serve investors' best interests in difficult market conditions, these recent examples raise questions about the wisdom and appropriateness of promising daily liquidity to investors when funds invest in illiquid or less liquid assets.

Points of interest from the speech

  • The asset side of the balance sheet: the FCA believes that imposing additional restrictions on investment in illiquid assets is unlikely to be the best solution for fund investors or the wider economy. Although, for fund structures that should fit a risk profile designed with retail markets in mind, such as UCITS, it is important that the rules are crafted in a way that achieves the risk objective. The FCA will therefore look for an opportunity to review the UCITS rule that creates a presumption that listing on an exchange means an asset is sufficiently liquid to meet short-notice redemption requests.
  • Managing liabilities – swing pricing: swing pricing is one of the main tools that the FCA and the Bank of England (BoE) are considering in their joint work on liquidity issues. The redemption price swings lower at times of stress to reflect the issues arising from the sale of investments thus causing less detriment to remaining investors. The FCA is of the opinion that it may avoid remaining investors bearing an unfair proportion of costs, risks, or loss of value, as the fund’s most liquid assets are sold to meet redemptions by exiting investors.
  • Managing liabilities – notice periods: the FCA also considers longer notice periods prior to redemption as a tool for liquidity issues. Firstly, a straightforward notice period is arguably easier to understand for consumers and may in itself, demonstrate the illiquid nature of the assets. Secondly, the fact that the Net Asset Value would change between the notice of redemption and the valuation of the assets at some future redemption date, would cause investors to pause before redeeming at times of market stress. Thirdly, it should allow a fund a longer period to sell out of less liquid assets. This might mitigate against the fire sale of assets and poorer prices.

Mr Schooling Latter highlights the fact that any measures the FCA takes to change the rules around pricing tools or notice periods for UK-authorised funds would not apply to non-UK funds sold in the UK (which would decrease the effectiveness of those rules in addressing risks faced by UK investors, or systemic risks). The FCA will continue to work with international counterparts to discuss the optimal approach to the common risks.

FCA and BoE letters: climate risk and green finance initiatives

On 10 March 2020, the House of Commons Treasury Committee published a press release concerning correspondence on initiatives being undertaken or contemplated by the FCA and the BoE on climate risk and green finance. The committee has published letters to and from Andrew Bailey, Chief Executive at the FCA, and Mark Carney, Governor at the BoE.

Points of interest

  • Disclosure: the FCA plans to publish a consultation paper shortly on new climate-related financial disclosure rules for certain issuers aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). It is also currently considering how best to enhance climate-related disclosures by regulated firms, such as asset managers and life insurers, in a manner consistent with the TCFD’s recommendations.
  • Consumer choice: the FCA is currently undertaking policy analysis on the way that firms design specialist sustainable retail investment products and disclose information about these to consumers. Its objective is to ensure that consumers have access to genuinely sustainable finance products and services and receive appropriate information and advice to help inform their investment decisions.
  • Carbon footprinting: the FCA is monitoring industry and regulatory initiatives on developing classifications and labels to signal products' sustainability characteristics to consumers at both EU and UK level. These include: (i) the EU development of an "eco label" that will reference the taxonomy for sustainable activities that it has developed and (ii) plans by the Investment Association to consider product labels. The FCA is of the view that it has the power to introduce rules on regulated financial services firms to disclose an environmental carbon footprint visual rating system, if appropriate.
  • Brown penalising factors: the BoE is examining the case for a brown-penalising factor, which would introduce additional capital charges for polluting and potentially risky activities. It is in the process of gathering data which will allow it to measure the riskiness of an asset.

ESMA guidelines on performance fees in UCITS and certain types of AIFs

On 3 April 2020, ESMA published final guidelines on performance fees in undertakings for UCITS and certain types of alternative investment funds (AIFs).

The guidelines aim to promote convergence in the way that NCAs supervise performance fee structures and the circumstances in which performance fees can be paid. In particular, they aim to ensure that performance fee models used by the management companies comply with the best practice principles so as to prevent undue costs being charged to the fund and its investors.

The guidelines cover:

  • the performance fee calculation method;
  • consistency between the performance fee model and the fund's investment objectives, strategy and policy;
  • frequency for the crystallisation of the performance fee;
  • negative performance (loss) recovery; and
  • disclosure of the performance fee model.

The guidelines will be translated into the official EU languages and published on the ESMA website. The publication of the translations will trigger a two-month period during which NCAs must notify ESMA whether they comply or intend to comply with the guidelines. The guidelines will then apply from the end of this two month period.

FCA business plan 2020/21

On 7 April 2020, the FCA released its business plan for 2020/21, specifically focusing on the challenges presented by the Covid-19 pandemic. The FCA states that it will focus on ensuring that financial services businesses give people the support they need, that people avoid scams, and that financial services businesses and markets know what the FCA expects of them. Specifically, throughout the pandemic, the FCA will focus its efforts on ensuring that:

  • markets function well;
  • the most vulnerable are protected;
  • the impact of firm failure is minimised;
  • scams are tackled; and
  • consumers and small firms are protected.

Looking ahead to the next one to three years, the business plan sets out the following priority areas where the FCA will address continuing harm. The FCA will focus on:

  • enabling effective consumer investment decisions so investors can make effective decisions about their savings and are not exposed to risky or poor value investment products;
  • ensuring consumer credit markets work well so consumers do not get into unaffordable debt, and are treated well if they do;
  • making payments safe and accessible so consumers can receive their pay or benefits, settle their bills and access cash when they need it; and
  • delivering fair value in a digital age so consumers are treated fairly. The use of consumer data and behaviour through digital channels is increasing and so is the risk that consumers are not treated fairly in the pricing and other terms they receive.

The FCA is also focusing on transforming how the FCA works and regulates. This requires the FCA to look at its entire system, from the data it collects, to how it analyses, manages and shares intelligence across the organisation, and how it decides which firms and individuals can operate. The FCA will also look at how firms are supervised and will work with the Government and other stakeholders to shape the future regulatory framework.


FCA Dear CEO letter: firms providing services to retail investors

On 1 April 2020, the FCA published a Dear CEO letter it has sent in the light of the Covid-19 pandemic to the CEOs of firms providing services to retail investors.

The FCA recognises it is a challenging time for all firms, particularly small and medium-sized firms. It also notes that these challenges also bring with it the need to protect consumers. The letter sets out the FCA’s expectations for these firms.

  • Client identity verification: the FCA expects firms to continue to comply with their obligations on client identity verification but can be flexible in their approach.
  • Supervisory flexibility over best execution until the end of June 2020: the FCA expect firms to continue to meet their obligations including their obligations on client order handling. However, it has no intention of taking enforcement action where a firm does not publish RTS 27, RTS 28 and Article 65(6) reports, provided they are published by 30 June 2020.
  • Supervisory flexibility over 10% depreciation notifications until the end of September 2020: firms providing portfolio management services or holding retail client accounts that include leveraged investments are currently required to inform investors where the value of their portfolio or leveraged position falls by 10% or more compared with its value in their last periodic statement, and for each subsequent 10% fall in value. The FCA has no intention of taking enforcement action where a firm:
    • has issued at least one notification to retail clients within a current reporting period, indicating their portfolio has decreased in value by at least 10%; and
    • subsequently provides general updates through its website, other public channels (such as social media) and/or generic, non-personalised client communications. These communications should update clients on market conditions, explain how clients can check their portfolio value and invite clients to contact the firm if they wish; or
    • chooses to cease providing 10% depreciation reports for any professional clients.

The FCA will adopt this approach for a period of six months (to 1 October 2020).

See our article for our views regarding fund managers ensuring investor interests are put first.

PRA and FCA issue a joint statement setting out their expectations of dual-regulated firms

On 3 April 2020, the Prudential Regulatory Authority (PRA) and FCA published a joint statement on the impact of Covid-19 on the Senior Managers and Certification Regime (SM&CR), setting out their expectations of dual-regulated firms. It covers the below.

  • Notifications about changes to senior manager responsibilities: there is no fixed deadline for firms to resubmit updated statements of responsibilities (SoRs) in the event of a "significant change". The regulators are aware that significant changes to a senior management function's (SMF) responsibilities may be required due to sickness or any other temporary situations resulting from Covid-19. Therefore, they expect firms to resubmit relevant SoRs as soon as reasonably practicable, accepting that firms may take longer than usual to submit revised SoRs given the current environment.
  • Notifications about temporary arrangements: in normal circumstances, if an SMF becomes temporarily vacant, firms should reallocate that SMF's prescribed responsibilities (PRs) among their remaining SMFs until a permanent replacement for the vacant SMF is identified and approved. Where possible, this remains the regulators' preference for firms dealing with temporary SMF absences linked to Covid-19. However, if firms cannot reallocate an absent SMF's PRs due to Covid-19, they can temporarily allocate them to the individual who is acting as interim SMF under the 12-week rule, even if they are, at the time, unapproved as an SMF.
  • Allocating responsibility for coordinating firms’ responses to coronavirus among SMFs: the regulators do not require or expect firms to designate a single senior manager to be responsible for all aspects of their response to Covid-19.
  • Certification requirements for dual regulated firms: firms are expected to continue taking reasonable steps to complete any annual certifications of employees that are due to expire while the Covid-19 restrictions are in place. The regulators recognise that what constitute reasonable steps may be altered by the current circumstances.

The statement also sets out the regulators expectations on furloughing SMFs.

FCA statement: senior manager responsibilities for work-related travel

On 27 March 2020, the FCA published a statement setting out how firms should prioritise who should make work-related travel, and the responsibilities of senior managers in doing so, in light of the Covid-19 pandemic.

The FCA strongly supports the government's efforts to protect the public by ensuring only those workers who cannot work from home, continue to travel to and from work.

Each firm's designated senior manager, or equivalent person, is responsible for identifying which of their employees are unable to perform their jobs from home and must travel to the office or business continuity site. The FCA expects the total number of roles requiring an ongoing physical presence in the office, or business continuity site, to be far smaller than the number of workers needed to ensure all of a firm's business activities continue to function on a business as usual basis. The FCA would not expect the following to go into work or meet face-to-face:

  • financial advisers, as they can offer their services online or by phone;
  • staff who can safely and securely trade shares and financial instruments from home;
  • business support staff, such as those in IT where they can triage issues from home; and
  • claims management companies and those selling non-essential goods and credit.

The FCA expects the number of exceptions to this to be low and advises firms to continue to follow the government's guidance closely.

FCA statement setting out its expectations of solo-regulated firms on the SM&CR

On 3 April 2020, the FCA published a further statement setting out its expectations of solo-regulated firms on the SM&CR. It covers the below.

  • Senior management responsibilities: senior managers should be considering where the current situation might lead to emerging risks, and how it affects existing risks, along with the controls used to manage them.
  • Statements of responsibilities and significant changes to senior manager responsibilities: the FCA does not intend to enforce the requirement on firms to submit updated statements of responsibilities, provided that the change is made to cover multiple sicknesses, or other temporary changes in responsibilities in direct response to Covid-19, and is temporary and expected to revert to the firm's previous arrangements. However, the FCA expects allocations to be clearly documented internally, so that it is clear who is responsible for what.
  • Temporary arrangements for senior management functions: the FCA intends to issue a modification by consent to the 12-week rule to support firms using temporary arrangements. Firms are still expected to clearly document these responsibilities, including on relevant statements of responsibilities and management responsibilities maps (if relevant). Under the modification, firms will also be able to allocate the prescribed responsibilities of the absent senior manager to the individual who is standing in for the absent senior manager.
  • Furloughed staff: unless a furloughed senior manager is permanently leaving their post, they will retain their approval during their absence and will not need FCA re-approval when they return. If a firm is subject to the overall responsibility rule, the responsibilities of the furloughed senior manager must be allocated to another senior manager. If the firm is relying on the 12-week rule, the replacement does not need not be a senior manager.
  • Reallocating prescribed responsibilities: firms should reallocate the prescribed responsibilities of a furloughed senior manager to another senior manager. Individuals performing required functions (for example, compliance oversight, the money laundering reporting officer and the limited scope function) should only be furloughed as a last resort.

Short-selling bans, calculating short selling positions and changes to reporting obligations

We summarise below the FCA’s approach to implementing short-selling bans and the implications this has on firm’s calculations and, consequently, reporting obligations.

Where an EU regulator decides to impose a ban that regulator notifies other EU regulators, who then consider whether to do the same in their jurisdictions. The intention is to avoid short selling activity linked to particular shares moving to other jurisdictions where these shares are also traded. In response to the recent Covid-19 outbreak, various EU countries have imposed temporary short-selling bans applying to both physical and derivative positions.

When considering whether to use short selling powers following action by an EU regulator, the FCA’s standard policy has been to assist that regulator. The FCA expects to continue that policy for future requests unless, for exceptional reasons, they consider that their assistance is not necessary. This means that the listed instruments that have been temporarily banned in EU member states are also banned in the UK.

The FCA has stated that its focus is on maintaining open markets that operate with integrity and note that an ability to short sell can contribute to this, including by supporting effective price formation, enhancing liquidity and enabling risk management. As such, the FCA itself has not imposed a ban on short selling activities in the UK.

On 16 March 2020, ESMA published a decision (ESMA70-155-9546) to temporarily require holders of net short positions in shares traded on an EU regulated market to notify the relevant NCA if the position reaches or exceeds 0.1% of the issued share capital. ESMA explains that the lowering of the reporting threshold is precautionary to allow NCAs to monitor developments in markets under the exceptional circumstances linked to the impact of the ongoing Covid-19 pandemic, which ESMA describes as constituting a serious threat to market confidence in the EU.

The decision entered into force immediately on its publication on ESMA's website, and applies for a period of three months until 16 June 2020. The temporary obligations apply to any natural or legal person, irrespective of their country of residence. However, they do not apply to shares admitted to trading on a regulated market where the principal venue for the trading of the shares is located in a third country, market making or stabilisation activities.

Following ESMA’s decision, the FCA published a statement on short selling bans and reporting. It stated that the lower threshold for the notification of short selling positions will apply in the UK. On 31 March 2020, the FCA confirmed that it will be ready to receive notifications at the lower threshold from 6 April 2020. The FCA advises firms to make best efforts to report at the lower threshold from this date. As such, firms should be mindful of the below.

  • Derivative and physical positions should be aggregated: both physical and derivative positions are considered “short positions” under the Short Selling Regulation, and no distinction should be made in reporting those positions.
  • Care should be taken with synthetic shorts: if a firm has a net short position attributable to long cash and short swap (including long or short positions in American or Global Depositary Receipts) on the same issuer in respect of which there is a ban, it may not be allowed to sell the long position (as this would increase its net short position).
  • Check how reporting should be undertaken: in February 2020, the FCA updated its statement on how to notify it of net short positions. Information in respect of other national competent authorities may be found in ESMA’s statement.

For more information, see our in-depth article "Short-selling bans and calculating short selling positions".

Information for firms on Covid-19: FCA’s new webpage

On 17 March 2020, the FCA published a new webpage containing information for firms on Covid-19, providing specific guidance on a number of topics. The FCA states that it is working closely with the government, BoE, the Payment Systems Regulator and firms, and stands ready to take any steps necessary to ensure customers are protected and markets continue to function well. The FCA expects firms to:

  • take reasonable steps to ensure they are prepared to meet the challenges Covid-19 could pose to customers and staff, particularly through their business continuity plans;
  • provide strong support and service to customers during this period;
  • manage their financial resilience and actively manage their liquidity; and
  • report to the FCA immediately if they believe they will be in difficulty.

Topics of particular interest

  • SM&CR responsibilities: firms are not required to have a single senior manager responsible for their Covid-19 response. Instead, they should allocate these responsibilities in the way which best enables them to manage the risks they face.
  • Regulatory change: the FCA has scaled back its routine business interactions so that it only contacts firms on business-critical requests and responses to the current situation. It will continue with a small number of regulatory changes that support consumers, particularly the most vulnerable, or where major long-term programmes would be disrupted. The FCA is reviewing its current work plans to postpone activity that is not critical to protecting consumers and market integrity. In particular, it is extending the closing date for responses to its open consultation papers and calls for input until 1 October 2020, and rescheduling most other planned work.
  • Operational resilience: all firms are expected to have a tried and tested contingency plan in place to deal with major events. The FCA and the BoE are actively reviewing the contingency plans of a wide range of firms, including an assessment of their operational risks. Firms are advised to continually assess their contingency planning and ensure their systems and controls remain fit for purpose. Firms are still expected to "take all reasonable steps to meet the regulatory obligations which are in place to protect their consumers and maintain market integrity". It is therefore imperative that firms establish appropriate systems and controls to ensure they maintain appropriate records.
  • Market trading and reporting: the FCA will continue to monitor for market abuse and take action where necessary. As firms move to alternative sites and home working arrangements, "they must consider the broader control environment in these new circumstances". Firms should continue to record calls, but the FCA accepts that this will not be possible in some scenarios. However, firms are expected to inform the FCA if they are unable to meet these requirements. The FCA encourages firms to mitigate outstanding risks where they are unable to comply with their obligations to record voice communications through enhanced monitoring, or retrospective review once the situation has been resolved. Where a firm has difficulty in submitting regulatory data, the FCA expects it to continue to maintain appropriate records during the period and submit the data as soon as possible thereafter. Firms should not unnecessarily delay these submissions.

The FCA will continue to update the webpage with information for firms over the coming weeks and expects to adapt its guidance to firms as the Covid-19 situation develops to facilitate and ensure consumers are protected and markets function well.

Covid-19: ESMA clarifies position on telephone call recordings under MiFID II

Under MiFID II, credit institutions and investment firms are required to record telephone conversations or electronic communications and minutes from face-to-face meetings related to the reception, transmission and execution of orders on behalf of clients or on their own account.

In light of the Covid-19 pandemic, ESMA has issued a public statement to clarify its position on the application of MiFID II requirements on the recording of telephone conversations (ESMA35-43-2348). ESMA states that it recognises that, considering the exceptional circumstances created by the Covid-19 outbreak, some scenarios may emerge where, notwithstanding steps taken by the firm, the recording of relevant conversations required by MiFID II may not be practicable. If firms, under these exceptional scenarios, are unable to record voice communications, ESMA expects them to consider what alternative steps they could take to mitigate the risks related to the lack of recording. As an example, ESMA suggests the use of written minutes or notes of telephone conversations when providing services to clients. However, this is subject to the firm:

  • giving the client prior notice that it is impossible to record the call and that written minutes of notes of the call will be taken instead; and
  • ensuring enhanced monitoring and ex-post review of relevant orders and transactions.

In any event, ESMA expects firms to deploy all possible efforts to ensure that these measures remain temporary and that recording of telephone conversations is restored as soon as possible.

As mentioned above, the FCA is also adopting a similar approach to the recording of voice communications and firms are expected to notify the FCA where they are unable to record telephone calls. For more information, see our Passle blog "Telephone recording and Covid-19: some relief for FCA authorised firms?".

Covid-19: ESMA clarification of issues relating to MiFID II rules on best execution reports

On 31 March 2020, ESMA published a public statement clarifying issues relating to the rules under the MiFID II Directive (2014/65/EU) on publication of general best execution reports by execution venues and firms. The statement specifically relates to the requirements under Delegated Regulation (EU) 2017/576 (RTS 28).

ESMA issued the public statement to promote co-ordinated action by NCAs and to provide clarity to firms as it is aware of difficulties encountered in preparing these reports due to the Covid-19 pandemic.

ESMA notes that firms are due to publish their RTS 28 reports on 30 April 2020. It encourages NCAs to consider the possibility that firms may only be able to publish the RTS 28 reports due by 30 April 2020 on or before 30 June 2020 as they may need to deprioritise efforts for their publication.

ESMA further encourages NCAs not to prioritise supervisory action against firms in respect of these deadlines, and to generally apply a risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of RTS 28. It advises firms to keep records of the internal decisions taken in relation to any expected delay, and reminds firms of their core obligations to achieve best execution for clients and to ensure fair order handling and allocations during current market volatility. The FCA has taken the approach encouraged by ESMA as set out in its latest Dear CEO letter reported on above.

Covid-19: ESMA’s Covid-19 recommendations for financial market participants

On 11 March 2020, in response to the continuing impact of the Covid-19 outbreak on financial markets in the EU, ESMA issued a public statement detailing recommendations for financial market participants.

The recommendations cover four main topics.

  • Business continuity planning: all market participants should be ready to apply their contingency plans, including business continuity measures, to ensure operational continuity in line with regulatory obligations.
  • Market disclosure: issuers should disclose, as soon as possible, any relevant significant information concerning the potential impacts of Covid-19 on their fundamentals and financial situation in accordance with their transparency obligations under the Market Abuse Regulation.
  • Financial reporting: issuers should provide transparency on the potential impacts of Covid-19, the possible qualitative and quantitative impact on their business activities, as well as the financial situation and economic performance of 2019 year-end financial report if these have yet to be finalised, or otherwise in their interim financial reporting disclosures.
  • Fund management: asset managers should continue to apply the requirements on risk management and react accordingly. 

ESMA states that it will continue to monitor developments in coordination with NCAs and is prepared to use its powers to ensure the orderly functioning of markets, financial stability and investor protection.

LIBOR transition

FCA and BoE letter: LIBOR transition for trade associations

The FCA and the BoE have published a joint letter to trade associations on how the discontinuation of LIBOR may affect their members and stakeholders.

The letter explains the rationale for the transition from LIBOR to alternative "risk-free" rates (RFR), how this will affect trade associations and their members, and urges trade associations to help raise awareness among their networks, providing practical advice and educational materials on how to do so.

The letter refers to several alternatives to LIBOR already in wide use. Of particular note was the references to the Sterling Overnight Index Average (SONIA) which was selected as the preferred RFR for wholesale financial markets in the UK the Working Group on Sterling Risk-Free Reference Rates (RFRWG) in April 2017. It notes that the RFRWG task force recently concluded that SONIA is suitable for use in around 90% of future sterling lending by value.

The letter emphasises that during the transition from LIBOR, it is important that firms treat customers fairly. It also sets out key dates relating to the transition and explains that it is important all LIBOR users understand where it is used within their business, and what they need to do to transition.

FCA statement: impact of COVID-19 on firms’ LIBOR transition plans

On 25 March 2020, the FCA published a statement confirming that discussions with the BoE and members of the RFRWG on the impact of Covid-19 on firms’ LIBOR transition plans had taken place.

The FCA stated that the central assumption that firms cannot rely on LIBOR being published after end-2021 has not changed and should remain the target date for all firms to meet. The FCA emphasised that the transition from LIBOR is an essential task and thus many preparations for transition will continue. However, the FCA concedes that there has been an impact on the timing of some aspects of the transition programmes of many firms. This is particularly relevant in segments of the UK market that have made less progress in transition and are therefore still more reliant on LIBOR, such as the loan market.

The FCA does not provide any further guidance for firms, but will continue to monitor and assess the impact on transition timelines alongside other international authorities, the BoE and working group, and will update the market as soon as possible.

LIBOR contractual triggers: FCA’s new webpage

A growing number of contracts referencing LIBOR include a "pre-cessation trigger" that converts the contract to reference a relevant RFR plus an appropriate spread in the event that the FCA finds that any LIBOR settings are no longer going to be representative of the underlying market the rates seek to measure.

As the activation of these pre-cessation triggers depends on potential announcements made by the FCA, it is key that market participants are aware of how these announcements would be made. Similarly, many LIBOR "cessation triggers" are activated by an FCA announcement that LIBOR will cease. The new webpage therefore explains the manner in which FCA will make the relevant announcements if required, to ensure that its statements are clear, unambiguous, and that notice is given at the same time to all market participants.

The FCA does not expect LIBOR to cease or become non-representative before end-2021 given the agreement between the FCA and LIBOR panel banks for them to remain on the LIBOR panels until end-2021. However, the FCA does state that markets need to be prepared for potential announcements that some or all LIBOR settings will cease after end-2021, or that the FCA finds that they are no longer going to be representative, after end-2021. These announcements may be necessary as the FCA is given notice of the departure of panel banks.

On the other hand, the FCA could make announcements before end-2021, even if the cessation or loss of representative status will not occur until the panel banks had left at end-2021 or on an applicable date of panel bank departure thereafter.

For both abovementioned scenarios, the FCA's announcement will:

  • be made via the Regulatory News Service (RNS), at the same time as, or very shortly followed by, a posting of a fuller statement on the FCA website;
  • be clear that it is being made in the awareness it will engage certain contractual triggers that are activated by pre-cessation or cessation announcements made by the FCA;
  • be clear about the LIBOR currencies and tenors to which it relates; and
  • include the date of cessation, or, if applicable, the date from which the relevant LIBOR settings will no longer be representative.


European Commission letter: approach to equivalence assessments and decisions

In our March edition, we reported that HM Treasury had published a letter from Rishi Sunak, Chancellor of the Exchequer, to Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union concerning the UK’s preparations for assessments of financial services equivalence. In that letter, Mr Sunak stated that the EU and the UK will start assessing equivalence as soon as possible, and aim to conclude these assessments by the end of June 2020.

On 16 March 2020, the European Commission published a letter from Valdis Dombrovskis, European Commissioner for Financial Stability, Financial Services and Capital Markets Union (CMU), to Rishi Sunak, Chancellor of the Exchequer, on the Commission's approach on equivalence assessments and decisions.

In the letter, Mr Dombrovskis states that the Commission's approach is in line with the political declaration agreed in October 2019. Therefore, the EU and the UK should start assessing equivalence as soon as possible, endeavouring to conclude their assessments before the end of June 2020. However, he makes clear that the commitment in the political declaration referred only to proceeding with the assessments, not to taking equivalence decisions by June 2020.

HM Treasury consultation on marketing and overseas funds regime

On 11 March 2020, HM Treasury published a consultation paper on an overseas funds regime (OFR) to replace the existing UCITS passporting regime. The consultation paper sets out the government's proposal for a new process to allow overseas investment funds to be marketed and sold to UK investors.

  • How the OFR will operate: the government proposes two separate regimes based on the principle of equivalence: one for retail investment funds and the other for money market funds (MMFs). The process for gaining market access for MMFs will depend on whether the MMF will be marketed to retail or professional clients.
  • How an equivalence determination will be made: before an equivalence determination is made, the FCA will be asked to provide advice on a country's regulatory regime. The advice will be developed and presented in accordance with the existing memorandum of understanding between HM Treasury, the FCA and the BoE on equivalence determinations. In its advice, the FCA will consider the factors that HM Treasury must be satisfied of when granting equivalence.
  • The process by which investment funds will be registered and recognised: the FCA will be given powers to ensure compliance with the OFR, including the ability to suspend or revoke the recognition of a fund.
  • How the UK regulatory framework relating to marketing and financial promotions will apply to overseas funds in the OFR: funds recognised under the OFR will be subject to obligations including disclosure requirements, the provision of investor facilities in the UK, regular reporting to the FCA and payment of regulatory fees.

The consultation also contains proposed amendments to section 272 of the Financial Services and Markets Act 2000. In particular, it is proposed that fund operators will be required to notify replacement of operators, trustees or depositaries as soon as reasonably practicable rather than a month prior to any such replacement.

The deadline for comments on the consultation paper is 11 May 2020.