UK regulatory

FCA indicates that it will act proportionately in taking enforcement action against firms not fully MiFID II compliant by 3 January 2018

In a speech at the AFME European Compliance and Legal Conference [20.09.17], FCA Director of Enforcement and Market Oversight, Mark Steward, has indicated that the FCA "will not take a strict liability approach" and intends to act proportionately in taking enforcement action against firms who do not meet all of their regulatory requirements by 3 January 2018. He said "This means we have no intention of taking enforcement action against firms for not meeting all requirements straight away where there is evidence they have taken sufficient steps to meet the new obligations by the start-date, 3 January 2018." However, he warned that the FCA cannot create a lower standard for compliance than the MiFID II standards, so firms who cannot demonstrate that they have made "a real or genuine attempt to be ready or where key regulations are deliberately flouted" are not likely to benefit from this approach. Steward further identified a significant uptick in the number of FCA investigations and predicted that this would continue as increased disclosure under MiFID II, as with MAR, will provide a better picture of the market. He also emphasised that the threshold for investigations is low and provides the FCA with wide discretion. See speech below for further reference to the FCA's enforcement approach for MiFID II.

FCA executive director launches asset management Hub and refers to FCA's MiFID II enforcement approach

Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA, gave a speech at the FT Investment Management Summit Europe 2017 [28.09.2017], in which, among other things, she launched the FCA's asset management Hub. The asset management Hub will support new entrants to the market "as they move between pre-authorisation and authorisation, and on to regular supervision". The concept also encompasses better guidance on regulations and processes, easier access to information via a dedicated portal and more personalised engagement between the FCA and new market entrants. Phase one of the Hub will be live in October 2017, offering pre-application meetings, dedicated case officers and access to the online portal. Phase two is expected in 2018 adding quarterly surgeries, online booking for pre-application meetings, and the FCA plans to make more information available to firms on entry criteria and application details. Butler stressed the Hub is about supporting firms not lowering standards of entry to the market.

On MiFID II, Butler referred to Mark Steward, FCA Director of Enforcement's speech (above) and highlighted the FCA's expectation that firms will submit Suspicious Transaction and Order Reports and have systems and controls for deterring market abuse. She also asked asset managers to remind clients who are legal entities of the requirement to obtain a legal entity identifier (LEI) and of the deadline for doing so, if they want to trade when MiFID II is in force ( read more here). She stressed that the FCA's approach to enforcement of the MiFID II requirements will be proportionate and said, citing Steward, "we have no intention of taking enforcement action against firms for not meeting all MiFID II requirements straight away - if there is evidence they have taken sufficient steps to meet the new obligations by the start date, and that there are plans in place to complete the process." Butler also said the FCA would support asset managers "- where we can - to resolve significant business planning issues", telling firms they are aware of issues facing firms in relation to research, passing on costs to clients, and for firms registered in the US and certain other jurisdictions as broker dealers who cannot accept payment for research without applying to be an investment advisor. 

On Brexit, Butler stated "we want an open market" and called for constructive engagement between regulators. On delegation and outsourcing, the FCA is opposed to unnecessarily complicating existing rules, which currently work well. Further, the FCA will work closely with asset managers to support Brexit-related business planning.

FCA's Occasional Paper on the Aging Population and Financial Services

The FCA has published an Occasional Paper [21.9.17] concerning the impact of the aging population on the financial services industry. The paper is the first in a series of consumer-focused publications planned by the FCA. The FCA expects to perform a further review in 3 - 5 years of how the industry is adapting to meet the needs of older consumers. The paper highlights the risk that older consumers' financial services needs "are not being fully met", which could lead to "exclusion, poor customer outcomes and potential harm". It identifies areas where financial services firms could do more for older consumers' financial services needs, in particular in product and service design, customer support and reviewing and adapting strategies.

FCA speech on Senior Managers Regime: culture and conduct

FCA's view is "It can't just be business - it has to be personal too", says Jonathan Davidson, Director of Supervision – Retail and Authorisations at the FCA, addressing an audience at the City and Financial Summit, London [20.09.2017]. Davidson spoke on culture and conduct, under the Senior Managers and Certification Regime (SMCR). Davidson said the FCA will be assessing managers on their use of "four types of lever" to manage culture. These are:

  • a clearly communicated sense of purpose and approach;
  • 'tone from the top';
  • governance – in particular having "a well thought through conduct risk framework"; and
  • incentives and capabilities that do not reward misconduct.

Davidson outlined the SMCR's approach to regulating the conduct of employees generally as well as senior managers. All employees that "do financial services" in firms are to abide by minimum standards of behaviour and he listed them: acting with integrity; acting with due care skill and diligence; being open and cooperative with regulators; paying due regard to customer interests and treating customers fairly; and observing proper standards of market conduct. Senior managers need to be fit and proper and have "clear accountabilities set out in an Individual Statement of Responsibility", establishing the areas an individual is accountable for - not the daily tasks. For "people in positions that significantly affect conduct outcomes," it is about capability and motivation and the FCA envisages the annual certification requirements will mean firms focus on ensuring such people "can do their job well".

Davidson called for a "move from a compliance culture to an ethical culture" and made a business case for the latter saying: "ethical culture could be a sound business proposition. A sense of inspiration not only enables some firms to deliver the right customer and conduct outcomes, it also leads to greater employee engagement, better teamwork and more innovation. By the way, it also delivers lower sickness, absentee and turnover rates." The extension of individual accountability under the SMCR to all FSMA authorised firms is currently the subject of an FCA consultation and responses are expected by 3 November 2017. Read more here.

PRA publishes changes to certain Senior Managers Regime forms

The PRA has published a policy statement which includes changes to SMR forms [03.10.17] which will be effective from 12 November 2017. The amended forms are (i) Long Form A for UK Relevant Authorised Persons and Third Country Relevant Authorised Persons; (ii) Short Form A for UK Relevant Authorised Persons and Third Country Relevant Authorised Persons; (iii) Form E Internal transfer of an approved person (for firms and individuals subject to the senior management regime); (iv) Statement of Responsibilities; and (v) Statement of Responsibilities (Third Country Relevant Authorised Persons only). Until 12 November 2017, firms should continue to use the current forms available on the PRA website.

FCA and PRA to comply with ESA guidelines on acquisitions and increases of qualifying holdings (changes in control)

The FCA and PRA notified [20.09.2017] the European Supervisory Authorities (ESMA, EIOPA and the EBA) that they will comply with the Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector, except for identifying acquirers of indirect qualifying holdings, which came into force on 1 October 2017. The FCA said "firms should continue to use the existing methodology as laid out in Part XII FSMA to identify proposed and/or existing controllers".


EU regulatory

ESMA updates MiFID II/MiFIR Investor Protection and intermediaries Q&A

ESMA has introduced new Q&As to its MiFID II/MiFIR Investor Protection Q&A document [03.10.2017]. New Q&As have been added to section 1 Best Execution (2 Q&As); section 8 Post-sale Reporting (2 Q&As); section 9 Information on Costs and Charges (7 Q&As); and section 11 Client Categorisation (1 Q&A).

ESMA consults on draft guidelines on non-significant benchmarks

ESMA has published a consultation paper on draft guidelines on non-significant benchmarks [29.09.2017]. Non-significant benchmarks are benchmarks where the value of contracts underlying the benchmark is less than EUR50bn and the benchmark is not a commodity or interest rate benchmark (see FCA page). The guidelines aim to ensure common, uniform and consistent application of four provisions in the Benchmarks Regulation. Guidelines on the first three provisions apply to administrators of benchmarks; the last applies to contributors. The deadline for comments is 30 November 2017. Read more here.

ESAs' guidance to prevent terrorist financing and money laundering in electronic fund transfers

The Joint Committee of the ESAs has published final guidelines aiming to help prevent funds transfers being used for for terrorist financing and money laundering [22.09.17]. The guidelines are published as the ESAs are required by the Wire Transfer Regulation (WTR) to issue guidelines to competent authorities and payment service providers to assist payment service providers comply with their obligations under the WTR. The guidelines describe measures and procedures payment service providers should put in place to detect funds being transferred without the required information on the payee or payer, and so whether the payment service providers then execute, reject or suspend such transfers. The guidelines apply six months after the date they were issued. Read more here.

EBA and ESMA joint guidelines on suitability of management bodies' members and key function holders under MiFID and CRD IV

The EBA and ESMA published joint guidelines on the suitability assessment of management bodies' members and key function holders [26.09.17] aiming to (i) achieve "sound governance arrangements in financial institutions" in compliance with the CRD IV and MiFID II, and (ii)  "harmonise and improve" the assessment of suitability across EU financial sectors. The guidelines emphasise that management body members (and, for CRD institutions, key function holders who are not members of the management body) and the management body collectively, must be assessed for suitability. They should have the necessary knowledge, experience and skills "to safeguard proper and prudent management of the institution" and to understand the institution and its main risks. The guidelines provide criteria to consider in the selection process, including for assessing the collective and individual knowledge, skills and experience plus good reputation, honesty, integrity and independence of mind of management body members. The guidelines also promote diversity which is to be considered in the selection process. Institutions should ensure members of management bodies commit sufficient time to performing their duties, for which the guidelines provide a framework to assess the expected time commitments of members, including in respect of other directorships held and how that number of directorships is to be calculated.

The guidelines apply from 30 June 2018 to competent authorities and institutions, on both an individual and consolidated basis. The previous EBA guidelines for assessing members of the management body and key function holders are to be repealed on this date.

No objection from EU Council on delegated regulation on MiFID II systematic internalisers definition

The European Council [25.09.17], decided not to object to the Commission's delegated regulation amending Delegated Regulation (EU) 2017/565 on the definition of systematic internalisers for MiFID II. The regulation seeks to clarify the scope of the "systematic internaliser" definition due to the ambiguity of "trading on own account when executing client orders" so as to ensure uniform application of that definition and to seek to prevent market "circumvention" of MiFID II. The regulation follows technological developments for matching arrangements in securities markets that the Commission identified necessitate specifying "a systematic internaliser is not allowed to engage, on a regular basis, in the internal or external matching of trades via matched principal trading or other types of de facto riskless back-to-back transactions in a given financial instrument outside a trading venue". The delegated regulation is to amend the MiFID II Delegated Regulation (EU) 2017/565 by inserting Article 16a to address this point.


Brexit

ESMA speech on MiFID II and Brexit

Verena Ross, Executive Director of ESMA, gave a speech at the AFME European Compliance and Legal Conference [20.09.17] focusing on ESMA's work on Brexit, MiFID II and MiFIR.  On Brexit, Ross gave a reminder that new authorisations for UK firms are to be granted "in full compliance with Union law" with "no automatic recognition of existing authorisations from other jurisdictions". Outsourcing or delegation from entities authorised in the EU27 to third countries will be "strictly set and consistently supervised" she said and is not to result in letterbox entities or obstacles to effective supervision.  While acknowledging firms' freedom to locate in any EU27 Member State they chose, Ross said relocation is not to be done to avoid stricter regulation elsewhere. In this vein Ross referred to: ESMA's June 2017 opinion setting out principles for a consistent regulatory approach on entities and activities relocating in to the EU from the UK (read more here) and to ESMA's further sector specific guidance, including for investment funds (read more here). Ross also highlighted ESMA's work on the technical standards for implementing MiFID II, its MiFID II opinions including on Trading on a Trading Venue (read more here) and Q&A.


Recent articles and publications

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances,