Investment management update

This month’s edition includes the following updates:

• an official working group’s policy recommendations for the Long Term Asset Fund;
• the FCA’s new Consumer Investments Strategy; and
• ESMA’s latest work plan which has a strong focus on the EU’s retail investment strategy and proposed reforms to MiFID II.

Asset management and financial services

UK

• The Productive Finance Working Group has published its recommendations on the Long Term Asset Fund (LTAF). The group was chaired by the UK authorities and was comprised of industry representatives. The report recommends encouraging DC pension schemes to invest in the LTAF, to resolve issues relating to the DC charge cap, and to consider allowing wealthier and more sophisticated retail investors to access the new fund vehicle.
• The Joint Money Laundering Steering Group (JMLSG) has published proposed revisions to the Monitoring customer activity section of its Guidance. Comments are requested by 15 October 2021.
• The FCA has published a Consumer Investments Strategy, which collates existing FCA workstreams, and is aimed at giving retail investors the confidence to invest and be supported by a high-quality, affordable advice market. The publication also provides details on feedback received in response to its September 2020 call for input on the strategy.
• The Treasury Committee has published the responses that it has received in response to its report on the Future Regulatory Framework of Financial Services The responses include the Government’s feedback, detailing its intention to empower financial regulators to set regulation, including in relation to on-shored legislation after Brexit, but within a framework of strategic direction from and accountability to the Government and Parliament. The Government will publish a second consultation in the autumn.
• HM Treasury has published its response to its consultation on a new Economic Crime levy, alongside draft legislation. AML regulated entities will be levied for the first year covering the period 1 April 2022 to 31 March 2023.
• The Competition & Markets Authority has published its much-anticipated guidance on "greenwashing" (misleading environmental claims made about products), as part of a wider awareness campaign launched ahead of COP26. The CMA intends to carry out a full review of misleading green claims early next year and stands ready to take action against offending firms.
• The Dormant Assets Bill is working its way through Parliament, and will expand the range of assets subject to the scheme to other financial products and instruments, including insurance and certain retirement income policies, shares in collective investments and investment assets, and shares in certain publicly traded companies. As currently, scheme membership will be voluntary, and it only applies to assets held directly by an individual.
• From 1 October 2021, changes have been introduced to the DC default fund charge cap to encourage illiquid investments. The changes exclude costs solely attributable to the holding of physical assets from the charge cap calculations and allows for the smoothing of certain investment performance fees when assessing default arrangement charges against the charge cap. Note that the Productive Finance Working Group has recommended further changes to the charge cap to facilitate DC schemes’ investment in the Long Term Asset Fund.
• Regulations that came into effect on 1 October 2021 now require trustees of DC schemes with assets of less than £100m to provide a detailed annual value for members (VfM) assessment from the first scheme year ending after 31 December 2021. Trustees of most defined contribution occupational pension schemes are also required to report on net investment returns for the default and self-selected funds in their chair's statement from the first scheme year ending after 1 October 2021.

EU

• ESMA has issued a call for evidence on retail investor protection. The consultation follows a request from the European Commission for ESMA (and separately, EIOPA) to provide advice on potential reforms as part of the EU’s retail investment strategy. Among the topics considered are disclosures, and digital tools and channels such as robo-advice and online brokerage. Comments are due by 2 January 2022.
• ESMA has published its 2022 annual work programme, setting out its priorities for enhancing investor protection and promoting stable and orderly financial markets. Key areas of focus include the exercise of new and existing supervisory powers for benchmarks and data service providers as well as CCPs; its contribution to EU priorities on the development of the capital markets union, sustainable finance and innovation; and the convergence of supervisory and regulatory practices across the EU.
• ESMA has published a consultation on its review of best execution reports (RTS 27 and RTS 28) under MiFID II. RTS 27 was suspended for two years as part of the first stage of the MiFID II review and in response to the pandemic (while the FCA consulted earlier this year on suspending both RTS 27 and RTS 28 reports). The consultation proposes a simplification of the regime. Comments are due by 23 December 2021.

Global

• IOSCO has published guidance on the use of artificial intelligence and machine learning by market intermediaries and asset managers. The guidance recommends six measures, including in relation to governance, technological development, and transparency to markets and regulators.

Derivatives and trading

UK

• The Government has introduced a Critical Benchmarks Bill to Parliament. The Bill is important in the context of LIBOR transition, and makes references to the meaning of certain benchmarks within contracts and to the liability of benchmark administrators.
• The Bank of England has published a policy statement on the UKMIR derivatives clearing obligation (i.e. the onshored EMIR legislation).

EU

• EIOPA has published its approach to the implementation of IBOR transitions, including with regards to timing and implementation. EIOPA will implement the updated methodology for the calculation of the risk-free interest rates as of January 2022 for the British pound, Swiss franc and Japanese yen.
• ESMA executive director Natasha Cazenave has delivered a speech setting out ESMA’s priorities for derivatives, focusing on ESMA’s recommendations for the review of the EU MiFID II/MiFIR framework, and the regulator’s work on the transition to risk free rates in the context of the EMIR clearing obligation and the MiFIR derivatives trading obligation.
• The European Commission has published its final report under Article 75 of the Central Securities Depositories Regulation (CSDR). This report summarises the main areas under review to ensure fulfilment of the objectives of the CSDR in a more proportionate, efficient and effective manner. The Commission is considering a so-called "REFIT" review of the legislation. The industry, including ISDA, have been focused on delaying or removing the CSDR’s mandatory buy-in provisions. Meanwhile, ESMA has called on the European Commission to take urgent action to signal that it is considering postponement of the implementation of the mandatory buy-in, currently scheduled for 1 February 2022.
• ESMA has published guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation, to provide guidance to financial market participants and competent authorities on the application of the requirements relating to the use of a methodology for calculating a benchmark and the related record keeping requirements, as well as the requirements on the oversight function.
• ESMA is consulting on the review of the Short Selling Regulation. Responses are sought by 19 November 2021, with ESMA expecting to publish a final report by the end of Q1 2022.