FCA's 2018/19 Business Plan and related publications

The FCA published its Business Plan for 2018/19 [09.04.2018] containing "key priorities" for the coming year. These "reflect the high level of resource the FCA needs to dedicate to European Union withdrawal, given its impact both on our regulation and the firms we regulate" the FCA said. Accordingly, "this inevitably affects the amount of work we can undertake in other areas. As a result, agreeing our 2018/19 priorities has involved particularly rigorous scrutiny and challenge" according to Andrew Bailey, FCA Chief Executive. In addition to EU withdrawal work (such as working with the UK's Government and regulated firms, as well as on the transition of EEA firms, and ensuring the FCA's "operational readiness" for Brexit) the FCA set seven "cross-sector priorities and seven sector priorities. The cross-sector priorities are:

  • Firms' culture and governance;
  • Financial crime (fraud and scams) and AML;
  • Data security, resilience and outsourcing;
  • Innovation, big data, technology and competition;
  • Treatment of existing customers;
  • Long-term savings, pensions and intergenerational differences; and
  • High-cost credit.

Investment management is one of the seven sector priorities for which the FCA specified a number of aspects, including: working with the ESAs on implementing PRIIPS; consulting on new rules on liquidity management and working with the Treasury on a new prudential regime for investment firms. In relation to the retail investments sector the FCA is considering a range of topics including the impact of the Financial Advice Market Review and Retail Distribution Review and publishing its report on the Investment Platforms Market Study. Its other five sectors are: wholesale financial markets, retail lending, pension and retirement income, retail banking and general insurance and protection.

In addition, the FCA published [09.04.2018] a number of related documents:

  • regulated fees and levies: rates proposals 2018/19 (CP18/10). Its annual funding requirement for 2018/19 has increased by 3.2% to £543.9m and the FCA is seeking comments on its proposed rates by 1 June 2018 and expects to publish a PS in July 2018 containing feedback and final rates rules. The CP contains a table of fee payers affected by the 2018/19 fees and levies rates the FCA proposes;
  • Ex post Impact Evaluation Framework (DP18/3) to assist the FCA in finding out whether its interventions have been effective, using ex post (i.e 'after the event') "impact evaluations". Although the FCA has previously reviewed the effect of their interventions it has not previously consulted on a framework for doing so. The FCA seeks comments by 9 July 2018;
  • Sector Views 2018 – the FCA describes these as a "snapshot of a sector at a given time". In the Sector View for Investment Management the FCA addresses a number of areas including asset management; and intermediaries and advice. The Retail Investments Sector View covers distribution. The FCA welcomes feedback on its Sector Views. Read more comment on Out-law on the FCA's Business Plan and related publications here.

FCA's PS18/8 Asset Management Market Study remedies and Handbook changes - and related publications

The FCA published PS18/8 Asset Management Market Study remedies and changes to the handbook – Feedback and final rules to CP17/18 [05.04.18] to address a number of issues identified in the Asset Management Market Study on which the FCA consulted in June 2017. Read more on issues the FCA identified and which it consulted on in CP17/18 here. The rules in PS18/8 "are intended to require authorised fund managers to focus more on their duties as agents of investors in their funds" the FCA said. The PS contains final rules and guidance.

1. Proposals for investors

The FCA consulted on three aspects (CP17/18) which are now to be addressed as follows:

  • A: Fund manager's duty to act in the best interests of investors
    • "Value for Money" (VfM) and AFM's duty to act in the best interests of their fund's investors. AFMs should charge "in the context of the overall service and value provided" the FCA said. The FCA's final rules clarify the assessment of fund charges is to be in the context of "overall value delivered, rather than using the term 'value for money'" which was seen as being overly costs based. Final rules come into effect on 30 September 2019 extending the implementation period from one year to 18 months;
    • Independent directors: AIFM boards are to appoint at least two independent directors who constitute at least 25% of the board's total membership. Final rules come into effect on 30 September 2019 extending the implementation period from one year to 18 months;
    • SM&CR: the FCA flagged in CP17/18 a Prescribed Responsibility (PR) for AFMs that it set out in more detail in the FCA's SM&CR consultation (CP17/25) for extending the SM&CR to almost all financial services firms. The proposal was for a Senior Manager, usually the chair of the AFM's board, to have the PR for ensuring the AFM's obligations for value assessment, independent director representation and acting in investors' best interests are complied with. It will be introduced as part of the SM&CR when the final rules are published later in 2018 and which the FCA expects to come into effect in mid to late 2019.
  • B: Fund managers returning box profits derived without taking market risk to the fund and disclosing box-management practices
    • Introduced remedy as final rules and guidance. The FCA says it is "allowing some flexibility in how risk-free profits should be allocated fairly and in the interests of investors." Rules to come into effect on 1 April 2019.
  • C: Easier switching for retail investors to cheaper share classes
    • Introduced in the form of final recast guidance. The AFM does not require consent from each investor before they are moved (converted) to identical - but cheaper - share classes in the same fund. Under the recast Final Guidance 14/4 (FG18/3) AFM do so using a one-off notification to investors, to which investors are not required to respond, at least 60 days before a mandatory conversion. FG18/3 became effective from its publication in PS18/8 on 5 April 2018.

CP17/8 requested feedback on whether the FCA's proposed governance requirements should be extended to other investments – notably unit-linked and with-profits insurance products and investment trusts/companies. The FCA will work on with-profits and unit-linked products to understand the position and if further action is required. The FCA anticipates it will reach a view in the first half of 2019 and is keeping under review whether further change is needed to investment trust governance - but it is not planning to take action immediately. The FCA is also not currently proposing to make changes to pension governance or to bring forward policy change on Trail Commissions.

2. Proposals for asset managers

  • In June 2017 FCA proposed disclosing a single all-in fee to investors.
    • PS18/8 notes an all-in charge now applies under PRIIPS and MIFID II so firms within scope must "produce information broadly equivalent to a single charge when communicating to investors about costs and charges".
    • The FCA also published Occasional Paper No 32: [05.04.18] to understand how presentation of charges impacts on investors' decisions. The Asset Management Market Study identified some charges "might not always be visible to retail investors" and, even if they were, investors "might not pay sufficient attention to charges or understand their impact on investment returns." The FCA has conducted an experiment with a simulated, online platform, using over one thousand non-advised investors, to test the impact of four ways of presenting charges.
  • In June 2017 the FCA recommended industry and investor representatives should agree a standardised costs and charges template with an independent person convening a relevant stakeholder group to do so.
    • PS18/8 confirms the Institutional Disclosure Working Group (IDWG) comprised of industry and investor representatives was set up [September 2017] to agree such a template. The FCA expects the IDWG's recommendations on this template before summer 2018.
  • In June 2017 the FCA proposed chairing a working group on making fund objectives clearer and more useful to investors and consulting on the use of benchmarks and past performance reporting
    • PS18/8 confirms that CP18/9** Consultation on further remedies – Asset Management Market Study – [05.04.2018] addresses these matters. A working group input into the proposals it contains on fund objectives. The FCA requests feedback on the CP by 5 July 2018.
  • In June 2017 the FCA recommended the Department for Work and Pensions (DWP) removed barriers to pension scheme consolidation and pooling.

3. Proposals for intermediaries

  • In June 2017 the FCA decided to seek views from interested parties on not accepting undertakings in lieu (UIL) of the competition reference to the Competition and Markets Authority (CMA); proposed recommending that Treasury considered bringing investment consultants within the regulatory perimeter, depending on the outcome of the provisional market investigation reference (MIR) to the CMA; and proposed a study on investment platforms. On these areas PS18/8 notes:
    • the FCA's decision "to make a MIR on investment consultancy and fiduciary management services and to reject the UIL". The CMA's market investigation into investment consultants is expected to conclude by March 2019;
    • the FCA "recommended that the Treasury consider an extension of our regulatory perimeter to include asset allocation advice subject to the findings of the market investigation reference to the CMA"; and
  • the Investment Platforms Market Study terms of reference were published [July 2017]. The FCA expects to publish its interim report by the summer of 2018.

FCA publishes its Approach to Supervision and its Approach to Enforcement

The FCA has described their Approach to Supervision and Approach to Enforcement [21.03.2018] in the consultation documents it has published [21.03.18]. These form part of the FCA Mission in which it committed to publishing documents explaining its approach to regulation, to provide "transparency to its thought process and decision-making".

Approach to Supervision

The FCA's Approach to Supervision highlights their intention to have a "more forward-looking and pre-emptive approach in our engagement with firms." For the FCA to supervise firms effectively they explain they need "a thorough understanding of the business models, culture and drivers of behaviour within the firms we regulate". The FCA seeks to take "prompt and incisive action" once they identify harm using an "intelligence-driven and data-led approach." The FCA seeks feedback on whether the Approach document sets out its supervisory approach clearly. It contains sections on how and why the FCA supervises, and on their principles, priorities and focus in doing so.

Approach to Enforcement

The FCA explains their "overriding principle" in their Approach to Enforcement is "substantive justice" - to ensure it conducts investigations "in a consistent and open-minded way to get the right outcomes". The FCA will decide whether to take enforcement action on the basis of "serious misconduct", whilst considering a number of factors including intentional wrong-doing, failing to act on feedback, recklessness or negligence. From previous experience, the FCA notes that even where harm has already been caused, early detection and intervention is important in preventing its escalation. The FCA requests views on various questions on its approach "to find out if we are being clear with our approaches and what else we could be doing."

The FCA seeks responses to their questions on both Approach publications by 21 June 2018.

FCA updates MLRs Annex 1 financial institutions notification form

The FCA has published its form for Notification to amend firm details for an Annex I financial institution [24.03.2018] for use by firms registered as Annex 1 financial institutions under the Money Laundering Regulations. Only firms providing the services listed on the form, which include portfolio management and advice, should use this form to notify the FCA of changes - such as to the firm's name, business activities or contact details.

FCA consults on its proposed changes to the Financial Crime Guide

The FCA are consulting on proposed changes to the Financial Crime Guide (GC18/1) [27.03.18] which includes the addition of a chapter on insider dealing and market manipulation, as the Guide currently contains no guidance on them. The FCA also intends to make various other "minor changes" as a result of recent regulatory developments and to keep the Guide up to date. The publication gives firms an opportunity to comment on its proposals and will be relevant to firms subject to the financial crime rules in SYSC 6.1.1 (Adequate policy and procedures). The FCA asks for feedback by 28 June 2018.


Delegated Act on MMF Regulation adopted by the Commission

The European Commission has adopted a Delegated Regulation amending and supplementing the Money Market Funds Regulation (EU) 2017/1131 in relation to simple, transparent and standardised (STS) securitisations and asset-backed commercial papers (ABCPs), requirements for assets received as part of reverse repurchase agreements, and credit quality assessment methodologies. The Regulation will enter force on the twentieth day following publication in the Official Journal. It applies from 21 July 2018 with the exception of Article 1 containing replacement wording for Article 11(1)(c) of the MMF Regulation, which applies from 1 January 2019.

ESMA publishes official translations of its Guidelines on Stress Tests Scenarios under MMF Regulation

ESMA published the official translations [21.03.2018] on stress testing scenarios under Article 28 of the MMF Regulation. Read more in our earlier updates here and here. The National Competent Authorities to which the Guidelines apply must notify ESMA whether or not they intend to comply with the Guidelines within 2 months of their publication.

ELTIFs Regulation published in the Official Journal

The Commission Delegated Regulation (EU) 2018/480 supplementing the European long-term investment funds (ELTIFs) Regulation (EU) 2015/760 has been published in the Official Journal [23.03.2018] and will come into effect on the 20th day following such publication. The regulatory technical standards include articles on financial derivatives solely serving hedging purposes; the sufficient length of the life of ELTIFs; criteria for assessing the market for potential buyers; criteria for valuing assets that are to be divested; and retail investor requirements. To read more on the delegated regulation in our earlier update click here.

EBA and ESMA publish translations of their joint guidelines on assessment of suitability of management bodies' members and key function holders

The ESMA and EBA Guidelines [21.03.2018] specify the requirements for assessing the suitability of members of the management body and of certain key function holders in a range of firms including investment firms. Read more on the joint Guidelines in our earlier update. Competent authorities must notify the EBA and ESMA whether or not they intend to comply with the Guidelines ("by incorporating them into their supervisory practices") by 21 May 2018 and are to ensure that firms to which they apply comply with the Guidelines which apply from 30 June 2018.

ESMA publishes updated Q&As on investor protection topics under MiFID II & MiFIR

ESMA has included some new Q&As and updated others in their updated Q&As on the implementation of investor protection topics under MiFID II/MiFIR [23.03.18]. The updated Q&As are on inducements (research) and costs and charges information. The new Q&As are on inducements, post-sale reporting and various other issues. The new or updated Q&A are:

  • Section 7 Inducements (Research) Question 8: concerns whether macro-economic analysis can be considered research that can be paid for from a research payment account and client research charges under Article 13(1)(b) MiFID II Delegated Directive; and Question 9: concerning how research related to fixed income, currencies or commodities should be treated for the purposes of the MiFID II inducements restriction for firms providing portfolio management or independent investment advice (Article 24(7) and (8)).
  • Section 8 Post-sale reporting Question 11: the meaning of "hold a retail client account" in the context of Article 62 MiFID II Delegated Regulation; and Question 12: for the purposes of Article 62(1) MiFID II Delegated Regulation, if the same threshold is repeatedly exceeded in the same reporting period, whether the firm should report this to the client each time.
  • Section 9 Information on costs and charges Question 7: how investment firms use product costs in the PRIIPs KID.
  • Section 12 Inducements Question 6: how investment firms providing portfolio management treat inducements they receive after 3 January 2018 in relation to financial instruments in which they invested, on the client's behalf, prior to that date.
  • Section 15 Other issues Question 1: how the term "ongoing relationship" should be understood in various articles where it is used in the MiFID II Directive and MiFID II Delegated Regulation.

ESMA updates Benchmarks Regulation implementation Q&As

ESMA has updated its Benchmarks Q&A [22.03.18] in relation to how Article 16 of the Benchmarks Regulation ((EU) 2016/1011) should be applied by supervised contributors during the transitional period.

ESMA updates MiFID II and MiFIR Q&As on market structures

ESMA has updated its Q&As on MiFID II and MiFIR market structure topics [28.03.2018]. The updated Q&As clarify a number of areas.

  • Section 3 Direct Electronic Access (DEA) and Algorithmic trading Question 23: whether suitability checks and controls that a DEA provider conducts on clients using the service also apply to clients that are not investment firms authorised in the EU; and, where a DEA client extends its access to its clients, if the DEA provider is responsible for sub-delegated clients' conduct.
  • Section 4 Tick Size Regime Question 8: when the Average Daily Number of Transactions (ADNT) is not available for instruments, which liquidity band trading venues apply until the ADNT is published by the NCA or ESMA; and, when can the trading venue proceed to adopt the liquidity band?
  • Section 5 Multilateral and bilateral systems Question 6: whether a trading venue can control access to the fee and other information required to be published by Article 4 of RTS 10; and Question 22: Commission Delegated Regulation (EU) 2017/565 clarifies the conditions under which a systematic internaliser (SI) can engage in matched principal trading to execute client orders – can SIs engage in other types of riskless back-to-back transactions?

The Commission hosts a high-level meeting on sustainable finance in Brussels

The European Commission [22.03.2018] hosted a high-level conference "on its strategy to reform the financial system in support of the EU's climate and sustainable development agenda" which was intended also to be an opportunity for discussing how to put into practice the Commission's Action Plan on Sustainable Finance. Read more on this Action Plan in our earlier updates here and here.


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