Welcome to the 2021 edition of In Principle. As with recent years, Brexit has been a significant feature to this year's legal developments, with the United Kingdom (U.K.) securing a post-Brexit trade deal with the European Union (EU) on December 24, 2020, just in time for the end of the Brexit Transition Period on December 31, 2020. The eleventh hour deal means that is also one which will undoubtedly feature heavily over the coming months, as most people – authorised firms included – navigate the post-Brexit landscape, which is still destined to change, with a further deal on financial services hoped for in the near future.
Whilst many anticipated the challenge posed by Brexit, few could have predicted the widespread effects of a global pandemic at the time of our last edition. COVID-19 has challenged even the largest businesses, turning the corporate environment on its head following the shift to remote working in March of last year. In the U.K., the Financial Conduct Authority (FCA) was also not immune to these challenges, shown in an early corresponding dip in new enforcement cases, as the regulator was forced to adapt quickly to these "unprecedented times" and the dreaded "new normal". At the same time, the FCA has been going through administrative changes, with fresh leadership and internal restructuring, indicating the potential ushering in of a reinvigorated regulatory approach.
As was the case last year, Environmental, Social and Governance issues remain high on the regulatory agenda, with the U.K. set to deviate from the main EU regimes – one example of a post-Brexit divergence. This notwithstanding, it is expected that the U.K. regime will share many features with the EU one, and the interconnectedness of the markets means that each regime will likely be relevant to firms in the other jurisdiction. A similar story can be told of the new prudential regimes for investment firms, where the EU and the U.K. are set to commence similar but distinct regimes – the EU's rules are set to come in during the middle of this year, and the U.K. regime six months later at the start of 2022.
In spite of the challenges presented by the pandemic, the FCA concluded a number of significant enforcement cases over the past year with repeated reminders to firms of the need to continue to comply with their compliance obligations in the remote working world. As firms remain faced with pandemic-related challenges, they must still hold space to turn their attention to other pressing issues that require preparation.
1. Lifting the Lid on Brexit.
Along with many substantive changes to rules and regulations, Brexit has brought a new vocabulary and new sources of law. In order to understand what has happened, and what the new regime means, a basic fluency in this new language is required, from what it means for the U.K. to have "saved and incorporated" some EU laws into U.K. law, what are "Exit Regulations", and why are "equivalency decisions" more important than ever before? This article is a toolkit for understanding what Brexit has done and how to discuss what has happened.
2. The EU/U.K. Post-Brexit Agreement and Financial Services.
Whilst the Trade and Co-operation Agreement (TCA) which is now in force between the EU and the U.K. does not focus on financial services, it is not silent on the subject either. This article explains (i) what the TCA does and doesn't do in the financial services sector, and looks ahead to the anticipated further discussions on financial services co-operation to which both the EU and the U.K. have committed themselves.
3. Environmental, Social and Governance Issues.
As predicted in our 2020 edition, environmental, social and governance (ESG) matters have remained a key policy focus in the financial services sector. The EU has played a significant role in developing climate change policies, particularly with respect to the financial services industry, but there have also been a number of developments with respect to U.K. ESG policies. For those within scope of EU rules, the end of the first quarter of 2021 will see a number of new requirements come into force, with additional U.K. climate related disclosures expected to apply from 2022. As such, firms within scope of these updated regulations will need to pay close attention to this new landscape that brings with it new obligations, including highly prescriptive disclosure requirements, as well as the increased attention that is anticipated from regulators and investors.
4. New U.K. Prudential Regime for Investment Firms.
Towards the end of 2020, the FCA began a consultation on new rules that would introduce the U.K. Investment Firm Prudential Regime (U.K. IFPR). The new regime is due to take effect shortly after the parallel EU Investment Firm Prudential Regime (EU IFPR) comes into force, but there are some differences between the two. With the U.K. changes expected to come into force from January 1, 2022, firms will need to dedicate time over the next 12 months to ensure that they are adequately prepared for the new rules and requirements.
5. Market Abuse.
2020 was a difficult year for firms in making sure they met their obligations around market abuse. With the shift to working from home, in particular, firms had to make sure that their remote monitoring policies and procedures were fully functioning in a way that had never been needed on such a scale before. Market abuse has been an FCA priority for some time, with such cases representing over 20 percent of open enforcement investigations at the end of March 2020. This article looks forward to some of the specific guidance which has emerged from the FCA over the past year.
6. Changing of the Guard at the FCA.
January 2021 represents a pivotal moment for the FCA. The continuing effects of the pandemic and post-Brexit landscape pose various challenges, but the regulator has also committed to an internal rejuvenation process, particularly in response to heavy criticism levied by two independent reviews that were published in December 2020. With fresh leadership in the form of the new Chief Executive Officer, Nikhil Rathi, the regulator seems poised to ring the changes, with a focus on diversity and inclusion and indications of a potentially more activist regulatory approach following its Business Interruption Insurance Test case which has just been decided by the U.K. Supreme Court. This article considers what the FCA's new apparent priorities and approaches will mean for regulated firms and individuals.
7. Enforcement Trends.
The 'elephant in the room' for analysing the FCA's recent enforcement trends is, of course, the pandemic. Given that it is relatively rare for a significant FCA enforcement action to commence and close within a year, we do not yet have a clear idea of how (or indeed whether) the FCA's approach to bringing enforcement cases has changed due to the pandemic. Prior to the pandemic, familiar signals were identifiable – the number of open cases, fines and quantum of penalties appeared to remain stable, with significant increases in case duration and costs. This article analyses the data available, and sets out what firms should take from this.
8. Key Cases and Enforcement Round- Up.
Whilst enforcement trends are hard to know at the moment, the FCA continued to close a number of significant actions during the course of 2020. These cases were diverse in subject matter, reflecting the regulator's wide ambit of jurisdiction. Discussed in this section are some of the most significant cases for regulated firms to be aware of.
The contribution of Jasmine Alexander is gratefully acknowledged.
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.