UK: FCA Consults On European Money Market Funds Regulation (Investment Management Brief: 8 February 2018)

Last Updated: 8 February 2018
Article by David Heffron, Elizabeth Budd and Ian Warner

Originally published by Pinsent Masons' Financial Regulation team


FCA consults on European Money Market Funds Regulation

The FCA has published a consultation paper (CP18/4) on the European Money Market Funds (MMF) Regulation [24.01.2018] which came into force on 21 July 2017 and takes effect on 21 July 2018. The Regulation will be directly applicable but certain aspects of the UK's regulatory framework need to be changed for the Regulation to function properly. As at the date the MMF Regulation takes effect in 2018, new MMFs will need to be authorised by their National Competent Authority - so must commence the approval process in advance of that date. For "Existing funds that are already branded as MMFs and operating under the regime set out in European Securities and Markets Authority (ESMA) Guidance, and any existing funds that are substantially similar to MMFs as defined in the MMF Regulation, will have to comply with the new Regulation by 21 January 2019", the FCA says. The MMF Regulation aims to enhance MMFs' stability and liquidity as part of the European drive to address concerns over these areas. Read more on the background here.

Among the changes this Regulation introduces are: to set out three types of MMF: Variable NAV (VNAV) MMF; Public Debt Constant NAV (CNAV) MMF; Low Volatility NAV (LVNAV) MMF; eligible assets they can hold; minimum liquidity requirements; stress testing; and transparency requirements. Comments are sought on the consultation paper by 23 March 2018. See also the related item in the EU Regulatory section below: Commission confirms share cancellation not consistent with new MMF Regulation.

FCA speech on cyber resilience

Robin Jones, Head of Technology, Resilience & Cyber at the FCA, delivered a speech [25.01.2018] at the PIMFA financial crime conference in London, highlighting a range of areas including the FCA's expectation that firms identify key assets and vulnerabilities and the importance of effective governance in countering cyber attacks.

Jones reported that in 2017 the FCA had 69 "material attacks" reported to it, compared to 38 in the previous year. Individuals and criminal groups are now developing tools and exploiting vulnerabilities on a larger scale - the interconnectedness of systems and data processing speed means "attacks travel fast". The ability to detect an attack, respond and recover are key to what the FCA calls "cyber resilience": although how to achieve it will be different for each firm - depending on its business, customers and suppliers. The regulator's goal is to "raise awareness and the capability of the firms we regulate to have good cyber hygiene, a good security culture and good governance."

Jones flags that firms should: "address the basics" as attackers often focus on weaknesses that are well known; be able to detect successful attacks and ensure any contingency plan covers communications (such as how to contact staff, customers and suppliers as well as regulators). "Response and recovery require thought out plans in advance which have been practiced and tested - they should not be created as the incident unfolds" Jones said.

Some areas Jones noted where firms could improve include: being better at identifying attacks and "critical assets" (which includes data); and focusing on security culture among staff (as "people can often be the weakest link") so training and increased board understanding could be improved.

In partnership with other regulatory bodies the FCA has published "Good cyber security – the foundations" an infographic for firms. It contains basic information on cyber hygiene, what to do in an attack and who to contact. The FCA plans further communications during the year.

December 2018 announced as date from which new SM&CR requirement apply to insurance sector

HM Treasury announced [29.01.18] that from 10 December 2018 the SM&CR regime will apply to insurance firms. It currently applies only to banking firms. There is no date yet set for extending the SM&CR to other firms solo-regulated by the FCA and EEA and third country branches. For more on the FCA's current consultations regarding the extension of the SM&CR regime, read our earlier update here.

FCA statement on performance scenario concerns in PRIIPs KIDs

The FCA released a statement [24.01.2018] on communications in KIDs under the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. The PRIIPs Regulation has applied since 1 January 2018 and from then, PRIIPs manufacturers have had to publish a Key Information Document (KID) for each of their PRIIPs. The KIDs contain a range of specified information including on: risks, performance scenarios, costs and other pre-contractual information in a standardised format. They must not be misleading and are required to be fair, accurate and clear.

The FCA's rules require firms' client communications to be fair, clear and not misleading (Principle 7) and firms are to comply with the client's best interests rule in COBS. The FCA acknowledges "some firms are concerned that, for a minority of PRIIPs, "performance scenario" information may appear too optimistic and so has the potential to mislead consumers" due to: strong past performance of certain markets, the way the calculations are carried out, or calculation errors.

The FCA is comfortable with PRIIPs manufacturers providing explanatory materials to put the calculation which they are concerned may be "too optimistic" into context and for them to set out their concerns for investors to consider. Firms that sell or advise on PRIIPs that have concerns about performance scenarios in KIDs misleading clients, should decide how to approach this: for example, by including further explanations in their client communications. Read our earlier update on Q&As prepared by the ESAs including on performance scenario calculations, here and refer to the FCA's page on PRIIPs disclosure.

FCA's Handbook Notice No. 51

The FCA has published Handbook Notice No. 51 [January 2018] which includes changes to the Handbook made between December 2017 and January 2018, alongside feedback on consultations. The changes include amendments to the projection rules which the FCA previously consulted on in their Quarterly Consultation No. 18 (CP17/32). (See our earlier update here). The changes include:

  • keeping the cap on the nominal intermediate rate of return for tax-exempt business at 5% and at 4.5% for all other products;
  • keeping the current 'lower' and 'higher' flanking rates used to illustrate potential variability around the intermediate rate of return at + or - 3%;
  • basing the price inflation assumption on the consumer price index (CPI), not the Retail Price index (RPI) with the effect of reducing the rate of price inflation (from 2.5% to 2%);
  • continuing to use an RPI assumption for the use of firms where contributions benefit or charges are linked to that index; and
  • reducing the assumption for earnings inflation from 4% to 3.5%.

The FCA proposes extending the implementation date so that the new rules come into force on 6 April 2019.

Amendment to Alternative Investment Fund Managers Regulations 2013

HM Treasury has made the Alternative Investment Fund Managers (Amendment) Regulations 2018 (the Regulations) [01.02.2018] amending the Alternative Investment Fund Managers Regulations 2013 and the Financial Service and Markets Act 2000 (Qualifying EU Provisions) Order. The amendments concern applications for registration as a manager of an EU social entrepreneurship fund (EuSEF) or of an EU venture capital fund (EuVECA) and for refusal and revocation of these registrations; and provide for registration of an EuSEF or EuVECA by an authorised alternative investment fund manager and for refusal and revocation of such registrations. The changes reflect changes at the European level to Regulation (EU) No. 345/2013 on EuVECA and Regulation (EU) No. 346/2013 (EuSEF). These changes come into force on 1 March 2018. Read more about the extension of the designation of EuSEF and EuVECA to alternative investment fund managers here. This section of the IMB contains public sector information licensed under the Open Government Licence v3.0.

New UK Benchmarks Regulations

HM Treasury has made the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018 [01.02.2018] which come into force partially on 27 February 2018, 1 July 2018 and in full on 1 May 2020. The Regulations reflect the Benchmarks Regulation 2016 ((EU) No. 2016/1011) and give the FCA additional powers over those involved with the provision of a benchmark and who are not benchmark administrators. They also allow the FCA to impose requirements on persons requiring them to administer or contribute to a benchmark and make provision in relation to benchmark administration.

The Regulations amend the Financial Services and Markets Act (FSMA) 2000 and the FSMA 2000 (Regulated Activities) Order 2001 to provide that administration of a benchmark is a regulated activity. This section of the IMB contains public sector information licensed under the Open Government Licence v3.0. ESMA has also updated its Q&A on benchmarks, see EU Regulatory section below.

FCA consults on Handbook changes following the Benchmarks Regulations

The Financial Conduct Authority (FCA) is consulting (CP18/5) on changes to the Handbook following the EU Benchmarks Regulations and the UK Benchmarks Regulations 2018. The UK Regulations extend the FCA's powers over authorised persons for breaches of the Regulations and give the FCA powers over "miscellaneous BM persons" (certain other unauthorised persons). The Regulations provide for procedure for authorisation and registration of EU-based benchmark administrators, for recognising benchmark administrators located in third countries, and for endorsing benchmarks of such third country administrators for use in the EU.

The CP's focus is on amending the Decision Procedure and Penalties manual (DEPP) and Enforcement Guide (EG) as a result of the changes introduced by both sets of regulations. The CP is relevant to firms who provide or contribute data to benchmarks. The consultation period is for 4 weeks with comments to be provided to the FCA by 5 March 2018, so the FCA has time to consider them before publishing their Policy Statement in March 2018. ESMA has also updated its Q&A on benchmarks, see EU Regulatory section below.


Commission confirms share cancellation not consistent with the new Money Market Funds Regulation

Further to ESMA's final report on the MMF rules [17.11.17] (see our earlier update), the European Commission has confirmed in a letter to ESMA the view [19.01.2018] ESMA had given in public consultation, that the practice of share cancellation (know also as reverse distribution mechanism (RDM),or share destruction) is not compatible with the MMF Regulation. ESMA will now assess the consequences of this response and the steps needed for a convergent application of the Regulation in the EU. See UK Regulatory section above for item on FCA's consultation on the new European Money Market Funds Regulation.

ESAs Opinion on using innovative customer due diligence solutions

The Joint Committee of the ESAs published an Opinion [23.01.18] on the use of innovative solutions by credit and financial institutions in their customer due diligence (CDD).The Opinion states: "While the move towards a more technologically driven financial services market presents many benefits, which include reduced costs, improved customer experience, increased speed of transactions, reduced account opening times and continuous access to services online, firms have to be mindful of the impact these changes might have on their money laundering and terrorist financing (ML/TF) risk exposure." It also predicts that firms face "additional challenges" in meeting their CDD obligations as they "move away from traditional face-to-face interactions to non-face-to-face online channels". However, this also presents opportunities for innovation with potential benefits for firms' AML/CFT control processes. The paper highlights factors for national competent authorities to take into account when assessing the adequacy of, and controls around, innovative CDD solutions.

Final report published on sustainable finance by the European Commission's High-Level Expert Group

The recommendations contained in the final report [31.01.2018] of the independent High-level Expert Group on Sustainable Finance (HLEG) which the Commission established in December 2016, will serve as the basis for the European Commission's Action Plan on sustainable finance. The Commission says work has begun on some of the key recommendations as they were in the group's interim report (July 2017). The Commission has already also consulted on institutional investors' and asset managers' duties regarding sustainability (read more in our earlier update). Recommendations specific to asset managers include promoting high standards of competence on environmental, social and governance (ESG) issues in a number of ways including by:

  • developing "competence on sustainability and governance issues within their organisations and establish organisational principles and reward structures that encourage long-term oriented behaviour";
  • adopting "minimum standards for investment mandates vis-à-vis their institutional clients";
  • reviewing their valuation and risk models;
  • assessing "the average holding period of securities, particularly equities" and "routinely publish meaningful information on the portfolio turnover in their funds";
  • considering an "adequate mix of longer-term, thematic and ESG research" when using external analysis, "to broaden and inform their investment perspective";

and ensuring "client sustainability and ethical preferences are reflected in investments" by:

  • asking institutional clients if they have "sustainability, governance or broader ethical concerns" for them to consider;
  • informing retail clients about "ESG risks" and by integrating sustainability "within their management processes".

ESMA publishes translations of guidelines on MiFID II product governance requirements

ESMA has published [05.02.2018] the official translation of its Guidelines on MiFID II product governance requirements [ESMA35-43-620]. National Competent Authorities (NCAs) to whom these Guidelines apply now have 2 months from their publication date to notify ESMA if they comply or intend to comply with them.

ESMA updates Q&As on benchmarks

ESMA has updated its Q&As on the Benchmarks Regulation ((EU) 2016/1011) to include answers on:

  • Commodity benchmarks section: how the threshold in the exemption under Article 2(2)(g) of the Benchmarks Regulation should be calculated; and
  • Definition of a benchmark in relation to investment funds section: clarifying the cases in which a benchmark is used to measure the performance of an investment fund.


House of Lords committee reports on financial regulation and supervision after Brexit

The House of Lords European Union Committee released a report, Brexit: the future of financial regulation and supervision [27.01.2018]. Read more about this report on Outlaw. The Committee produced an earlier report, Brexit: financial services [15.12.2016] which looked at market access issues, focussing on Brexit's impact on passporting financial services. This section of the Investment Management Brief contains Parliamentary information licensed under the Open Parliament Licence v3.0.

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.

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