United States: In Principle: 10 Things Authorised Firms Need To Know For 2019

Introduction

Executive Summary

In the 2018 edition of this publication, we ended the introduction with the line, "We can only hope that we will enter 2019 with greater certainty than 2018 as to how the regulatory landscape will look." Unfortunately, certainty still remains in rather short supply. With Brexit now (at least in theory) a matter of weeks away, it remains unclear what will happen: the government's original proposed Withdrawal Agreement has been decisively rejected, but Parliament has indicated that it would support that agreement if the "Irish Backstop" provisions are renegotiated. The Prime Minister has therefore been mandated to return to negotiations on this point, in the face of statements by European Union leaders that there is no prospect of such negotiations going ahead. At the same time, Parliament has signalled that it "rejects" a no-deal Brexit, but not agreed to a proposal which would have made this rejection binding. Further Parliamentary proceedings are now planned for the middle of February. Whether there is a hard, soft or no Brexit, there remain a number of issues beyond Brexit that authorised firms will have to consider in the year ahead. Including Brexit, here are 10 things that authorised firms need to know for 2019.

1.Brexit

In the absence of a decision of what will happen come the 29 March 2019 (or indeed, come some future date if "exit day" is postponed"), firms have been left in a state of uncertainty. Whilst this makes planning for what will happen even more difficult, it is possible to plot out how certain more likely scenarios would play out. We consider what asset managers would face if the original Withdrawal Agreement is largely accepted (notwithstanding a change to the Irish backstop), what would happen in the event of the UK leaving the EU without an agreement, and what effect the UK's remaining in a customs union with the EU would have on asset managers. We also consider what preparations the FCA has made for a no-deal scenario, in particular surrounding the "temporary permissions regime".

2. The Extension of the Senior Managers and Certification Regime

The Senior Managers and Certification Regime (SMCR), which is currently in force for all banks, building societies, credit unions, and dual regulated investment and insurance firms, will be extended to cover all FCA solo-authorised firms by 9 December 2019. While the Financial Conduct Authority (FCA) will continue to approve people who take on Senior Manager roles, the obligation to certify employees below Senior Manager level as fit and proper will devolve on the firms themselves. Firms will also be required to train staff on the Conduct Rules and implement new or update existing systems and controls, including a variety of policies and procedures. Although the implementation is almost a year away, firms would be well advised to have the new requirements at the forefront of their minds to ensure a smooth transition.

3.Market Abuse

Market abuse continues to be an area of very significant interest for the FCA and growing interest across the rest of the EU. With the FCA's insight that compliance with the Market Abuse Regulation (MAR) is "state of mind" rather than a matter of following procedures, firms will have to be particularly vigilant to ensure that they remain compliant.

4.The FCA's Recent Enforcement Trends

Until the end of 2018, the FCA had a comparatively quiet year, at least in terms of the number of investigations publicly brought to a conclusion and the consequent number of fines issued. The number of penalties was down, and the length of investigations was increasing substantially. We have looked at the number and distribution of investigations and decision notices to put together a picture of the FCA's current enforcement trends.

5. Cybersecurity and Data Protection

2018 was an important year for data protection law with the entry into force of the General Data Protection Regulation (GDPR) in May. We expect to see a trickle of enforcement cases in 2019 under the new regime as the courts and tribunals interpret the new law's provisions. Especially with the greatly increased size of the penalties available for breaches, firms should continue to carefully monitor compliance with data protection obligations. Further regulatory guidance on core provisions of the GDPR is expected during 2019.

6. EU Securities Financing Transaction Regulation

The Securities Financing Transaction Regulation (SFTR) is one of the major pieces of post-financial crisis legislative reforms and introduces a reporting and transparency regime applicable to firms that parallels the over-the-counter (OTC) derivatives reporting requirements under the European Market Infrastructure Regulation (EMIR). All counterparties are required to report details of any securities financing transactions that they have concluded, modified or terminated to a registered or recognised trade repository. Whilst the reporting obligation under the SFTR is not expected to take full effect until 2020 at the soonest, for firms that regularly deal with repos and buy-sellback transactions, this piece of legislation should be firmly on the radar, given the requirement to build operational infrastructure to support the new reporting requirement.

7. Amendments to the European Market Infrastructure Regulation

EMIR is subject to a significant reform proposal, the EMIR "refit," which includes a number of changes that are expected to become effective in 2019. These are, in some way or other, likely to impact all firms currently subject to EMIR. EMIR is proposed to be extended in scope by clarifying that all alternative investment funds (AIF) should be considered to be financial counterparties (FC), which has caused some confusion as to the proper classification of non- EU AIFs with non-EU managers. The refit seeks to alleviate some of the regulatory burden for smaller counterparties by introducing an FC+ and FC- concept to exclude the below-threshold FCs from the scope of the clearing obligation and by making NFC- reporting the responsibility of counterparty FCs. A number of the amendments that are likely to take effect in 2019 therefore seek to address issues raised by industry since before EMIR was published in 2012. Clearing and margin requirements established under the current EMIR regime will also continue to be phased in during 2019, thereby completing the phase-in requirements for all counterparty categories subject to clearing.

8. EU Benchmarks Regulation and LIBOR Cessation

We are now in the "transitional period" of the Benchmarks Regulation (BMR), whereby EU-based existing "users" of benchmarks may continue to use non-EU-administered benchmarks in financial instruments until 1 January 2020, notwithstanding that such benchmarks are not listed on the European Securities and Market Authority's (ESMA)s register of "approved benchmarks." Post-1 January 2020 treatment of non-EU benchmarks is unclear, given the lack of available "routes" into the EU for non-EU-administered benchmarks under the BMR: No jurisdiction has, for example, been declared "equivalent" to the EU such that benchmarks administered in that jurisdiction may continue to be used. An additional wrinkle to 2019 compliance is that LIBOR is expected to cease to exist from the end of 2021. The FCA has stated that, from that time, it no longer expects panel banks to contribute to LIBOR; thus, it is expected to disappear. The impact of this is that, to the extent that users of benchmarks currently reference LIBOR in financial instruments and wish to continue to do so, the fact of LIBOR's possible cessation will need to be addressed in "robust written plans," which users of benchmarks are expected to prepare and, on request, make available to the FCA. As explained in the following, the FCA has also indicated that benchmark supervision is an important supervisory priority for this year.

9. EU Action Plan on Sustainability and Asset Management

In November 2018, the EU Commission issued a consultation on whether, and how, asset managers should be required to take principles of sustainability into account when making decisions. This proposal signals a key shift in using financial regulation to address environmental and social concerns, whether or not it is the case in practice that such matters are currently addressed by asset managers. While there is currently no clear indication of the shape of the rules affecting managers, the industry will be keeping a keen eye on these initiatives.

10. Individuals on the Enforcement Agenda: 2018 Key Cases and Enforcement Round-Up

In keeping with investigations that take longer, it is perhaps no surprise that the amount of case law that was generated in 2018 is somewhat smaller than in previous years. This notwithstanding, both the Upper Tribunal (which hears references from the FCA's Regulatory Decisions Committee (RDC)) and the courts have provided several relevant judgments. With the wider rollout of the SMCR, it seems likely that the regulator will continue, and perhaps sharpen, its focus on individuals this year.

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