The Roaring Twenties
The 1920s were known as the "Roaring Twenties" and it was a decade of two halves, starting with relative prosperity, following the First World War but progressing to rising unemployment, precipitating the Great Depression of the 1930s.
Will the 2020s mirror the 1920s – a Brexit boom followed by rising inflation and rising unemployment? I haven't a clue – but what I do know is that the wave of new regulations and enhanced regulatory supervision will continue. My copy of the Securities and Financial Services Law Handbook (Butterworths) includes around 250(!) European Financial Services Regulations or Directives that have been published in the last decade.
After the Brexit transition period ends in December 2020 and the UK is no longer obliged to directly implement European Regulations, will we see the FCA, with more time on its hands, starting to "roar" and take it upon itself to make new investment management focused regulation? Watch this space.
2020 – the year of responsibility
In my view, 2020 is the year of "responsibility" which includes:
- Asset ownership: The majority of the first annual reports will be made by asset managers under the Shareholder Rights Directive, which requires transparency of their policies on how they engage with each other and the companies they invest in, plus how their strategies create long-term value.
- Green investing: We expect to see several consultations and guidance issuances subsequent to the FCA's climate change and green finance feedback statement (FS19/6) – investment managers will need to consider how to react to increased issuer disclosures.
- Senior management: It will be the first full year of the Senior Managers and Certification Regime ("SMCR") and one in which Senior Managers will need to act in consideration of their "duty of responsibility". The hope is that the industry will see a tangible uptick in employee governance, by which firms take more responsibility for employees being fit and proper, and implement better standards of conduct at all levels in banking firms. Industry players await the true impact.
- Data protection: After the massive fines of 2019 we expect asset managers in 2020 to devote a significant proportion of their time to the responsibilities they have under the GDPR.
The first regulation to land in 2020
The 5th Money Laundering Directive, as implemented in the UK by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, is effective from [today] and brings important changes for all FCA Authorised Firms. In addition, it will impact (in the investments space) real estate firms, certain firms involved in cryptoassets, and investment firms using trust providers.
The FCA has said "We expect firms to comply with the new, amended regulations from 10 January 2020. In assessing our approach to firms that may not be compliant on that date, we will take into account evidence that they have taken sufficient steps before that date to comply with these new obligations".
Money Laundering Regulations 2019
For investment managers, the following are the key changes made by the Money Laundering Regulations 2019 (effective 10 January 2020):
- Consideration of new "high-risk" factors (Regulation 33): Firms must include new additional high-risk factors when assessing the need for enhanced due diligence and seek additional information and monitoring in certain cases. Have these been built into your risk assessment?
- Periodic updates to beneficial ownership information for corporate clients (Regulation 27(8)): Firms must periodically update their records relating to the beneficial ownership of corporate clients when it has a legal duty to contact an existing customer for the purpose of reviewing information relevant to its risk assessment or when fulfilling a duty under the International Tax Compliance Regulations 2015(a). Have you clearly updated your policy to explain when beneficial ownership information is required to be updated?
- Recording difficulties in obtaining control structure information (Regulation 28): Firms must understand the ownership and control structure of their corporate customers, and record any difficulties encountered in identifying beneficial ownership. Have you identified how this will be recorded?
- Reporting discrepancies to Companies House (Regulation 30A (2)): Any person subject to the MLR 2019 needs to report to Companies House discrepancies it finds between the information received from the customer and the records at Companies House. The obligation doesn't extend to records in relation to overseas businesses registered outside the UK. Do you have a process in place for identifying and reporting discrepancies?
- Registration of cryptoasset businesses (Regulation 14A (1)): "crypotasset exchange provider and custodian wallet services" are required to be registered with the FCA. Don't be fooled by the title, the definition is very wide and includes making arrangements with a view to the exchange of cryptoassets / fiat currency. Have you checked the definition to see if you need to register?
- Registration of letting agency business (Regulation 8): Persons undertaking letting agency work, as defined by Regulation 12(3) to (5). Have you identified whether any group entities undertake this activity?
- Enhanced Due Diligence ("EDD") Required in certain situations: For all business transactions / relationships involving high risk 3rd countries, EDD is always required. Have you updated your policy in this regard?
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.