UK regulatory 

FCA speech on Ageing Population Occasional Paper

Linda Woodall, Director of Life Insurance and Financial Advice, delivered a speech on the launch of the FCA's Ageing Population Occasional Paper [16.10.17].  She provided an overview of the Occasional Paper and the FCA's findings.  Read more on the Occasional Paper here. In the speech, Ms. Woodall indicated that the FCA will publish its 2017 Financial Lives Survey [see below] containing data for firms to use to help them – and the FCA – understand consumers better and to assist the FCA with their ageing population work.  The FCA said it will publish later this year its Approach to Consumers containing factors that have bearing on how the FCA is to exercise its judgement and "'regulate for the future'". 

FCA publishes results of its first Financial Lives Survey

As indicated in Linda Woodall's speech [see above], the FCA has published a report , Understanding the Financial Lives of UK Adults [18.10.2017],  containing the findings from its 2017 Financial Lives Survey. The report forms the second in a series of consumer-focused publications planned by the FCA, with the first being an Occasional Paper on the Aging Population – read more on the Occasional Paper here.  The report shows, among other things, that 50% of UK adults show characteristics of potential vulnerability, increasing to 69% in those aged 75 and over and 77% in those aged 85 and over.  The report is based on responses from nearly 13,000 UK consumers aged 18 years and over which is the largest tracking survey of UK consumers' use of financial services that the FCA has carried out.

FCA launches Asset Management Authorisation Hub

The FCA has now launched the Asset Management Authorisation Hub, on its website [16.10.2017].  For further information on the Hub, which aims to support asset management firms in the authorisation process – from the early stages and pre-authorisation, through to application and beyond - read more here.


EU regulatory 

ESMA publishes additional Q&As on UCITs and AIFMD

ESMA published some new Q&As on UCITs and AIFMD [05.10.2017].  Both the UCITs and AIFMD Q&As include one new entry regarding periodic reporting to investors by UCITs and AIF managers as defined, under Article 13 of the Securities Financing Transactions Regulation, where such UCITs or AIFs use securities financing transactions and total return swaps.  The AIFMD Q&A also includes two new entries on remuneration, concerning disclosure requirements under Article 22(2)(e) of the AIFMD.  Specifically, the question addresses whether such requirements apply to staff of the delegate of an AIFM to whom portfolio management or risk management activities have been delegated? – in short, yes – and whether disclosure under Article 22(2)(e) and (f) of the AIFMD may be made by way of a link from the annual report to a document where the relevant information is available? – in short, no.

ESMA chair speaks on ESMA's role in financial education and on investor protection in Europe

Steven Maijoor, chair of ESMA, gave a speech [03.10.2017] at the International Organization of Securities Commissions World Investor Week, in which he warned of the low level of financial education in Europe and the "need for a serious discussion around financial education" in light of the:

  • "shift" he identified from "public pension schemes where no financial decision was expected from workers to systems where workers will be required to choose among several privately offered options";
  • move from placing savings in bank deposits to investing them on financial markets to seek a better return;
  • easy access to investing on the financial markets enabled by digitalisation; and
  • threat of "aggressive marketing of highly speculative products" to consumers enabled by digitalisation.

Maijoor spoke about the important part financial education plays in the Capital Markets Union: as to build investors' confidence in the financial markets they need to understand at least the basics - as well as feeling protected.  Maijoor noted that strong investor protection rules are "the most effective way to protect investors irrespective of their actual financial literacy" and spoke about ESMA's work on the single rulebook for which, Maijoor said, ESMA placed a "strong emphasis" on investor protection. He referred to investor protections in MiFID I that are enhanced in MiFID II: notably conflict of interest, suitability and appropriateness, and safeguarding of clients' assets; while other areas in MiFID II are new: such as product governance, and various elements of the inducements rules.  He also spoke about ESMA's work on supervisory convergence producing guidelines on knowledge and competence of staff, Q&As on MiFID II investor protection issues, guidelines on complex products and product governance and the ESMA guidelines on suitability that are currently under consultation.  ESMA is also in the process of discussing the possible use of its product intervention powers that will be effective from January 2018 under Article 40 of MiFIR.

ESMA briefing on Legal Entity Identifier

ESMA has published a briefing note on the Legal Entity Identifier (LEI) [09.10.2017] as part of its "efforts to raise industry awareness and facilitate compliance with the LEI requirements under MIFID II ahead of its 3 January 2018 launch".  ESMA cautions against delay in complying with the LEI requirements as "advance preparation will help in avoiding backlogs and ensuring that all market participants are ready for the new regime". 

LEIs are 20-digit alpha-numeric codes firms already require in order to fulfil reporting obligations under a range of financial regulations and directives - including MAR and AIFMD - and which will also be necessary under MiFIR for: investment firms executing transactions in financial instruments; legal entity buyer/seller clients on whose behalf an investment firm executes transactions; and legal entities deciding to acquire financial instruments – which catches investment managers with a discretionary mandate for its clients.  Such entities need a LEI regardless of where they operate or are legally based.

An investment firm reporting under MiFIR "should have appropriate arrangements in place in order to collect and verify the LEI of its client before the transaction takes place.  In particular investment firms have to ensure that the length and construct of the code are compliant with the ISO 17442 standard, that the code is included in the Global LEI database and that it pertains to the client concerned" says ESMA.  Legal entity clients, including charities and trusts, must obtain their LEI code so investment firms can act on their instructions or take decisions to trade on their behalf from 3 January 2018 onwards.  The FCA has also reminded firms of this requirement, see here. The ESMA briefing includes some information on how to apply for a LEI.

Council adopts new venture capital rules as part of Capital Markets Union

The regulation containing the new venture capital rules [09.10.2017] amends earlier regulations on European venture capital funds (EuVECA) and on European social entrepreneurship funds (EuSEF).  Notably, it extends the scope of the earlier regulations in a number of ways including "by opening up the use of the designations EuVECA and EuSEF to managers of collective investment undertakings" authorised under the AIFM Directive.  For further information see here.

Conditions for assessing whether changing or ceasing to provide a non-compliant benchmark would breach the rules of any investment fund referencing the benchmark

The European Commission adopted a delegated regulation [03.10.2017] setting out conditions for competent authorities to take into account "when assessing whether the cessation of or the changing of a benchmark that does not meet the requirements of [the Benchmarks Regulation] would result in a force majeure event, or would frustrate or otherwise breach the terms of any financial contract or financial instrument or the rules of any investment fund which references that benchmark".  Based on this assessment, competent authorities of the Member State where the index provider is located are to permit the use of the non-compliant benchmark under article 51(4) of the Benchmarks Regulation.  However, after 1 January 2020, no financial instruments, financial contracts or measures of investment fund performance are to add a reference to such an existing benchmark.

The conditions are:

  • that for the benchmark to be compliant with the Benchmarks Regulation requires "a material change" to: the nature of the input data, how such data is determined or gathered, or to other aspects of how the benchmark is provided resulting in "a significantly different value of the benchmark";
  • that changing the nature of the input data or how such data is determined for compliance with the Benchmarks Regulation "would undermine the representativeness of the benchmark" in respect of the market, or economic reality measured;
  • the lack of a substitute benchmark compliant with the Benchmarks Regulation;
  • existing financial contracts, instruments and funds referencing the benchmark make no provision for a substitute benchmark, or a mechanism to select a substitute or any other appropriate contingency measures; and
  • that transition to a new administrator would "lead to a substantial change in the benchmark".

EIOPA guidelines on "execution-only" IBIPs sales

The European Insurance and Occupational Pensions Authority (EIOPA) published its Final Report containing the final text of its Guidelines on Insurance-Based Investment Products (IBIPs) that incorporate a structure which makes it difficult for the customer to understand the risks involved [11.10.2017].  Competent authorities will have two months after the issue of the translated versions of the guidelines into the official languages of the EU to confirm to EIOPA if they comply or intend to do so.  The guidelines apply to execution-only sales of IBIPs and have been developed in line with Article 30(7) and (8) of the Insurance Distribution Directive, in an attempt to minimise potential risks of consumer detriment from mis-selling IBIPs.  The Guidelines are principally concerned with identifying product features that make it difficult for customers to understand the risks involved, and EIOPA notes it will not be possible for products with such features to be sold on an execution-only basis.  Under the disclosure rules for PRIIPs, the KID must contain a comprehension alert if the associated risks of an IBIP are difficult for customers to understand.  With a view to promoting a consistent approach by national competent authorities, EIOPA proposes to address this separately. 

ESMA to publish register of administrators and third party benchmarks under the Benchmark Regulation

ESMA has updated the Benchmarks page of its website [13.10.2017] to include a section on Regulatory Implementation.  The new section states that ESMA will publish a list of national competent authorities with responsibility for obligations under the Benchmarks Regulation and, from 1 January 2018, when most provisions in the Benchmarks Regulation will apply, ESMA will start to publish a register of administrators and third country benchmarks - initially as an excel file until the third quarter of 2018, when the final register interface will be available.  For more on Benchmarks, see our previous update.


Brexit

ESMA statement on its key activities over the last year covers MiFID II preparations and Brexit

Steven Maijoor, chair of ESMA, delivered a statement [09.10.2017] to the Economic & Monetary Affairs Committee at the European Parliament, on ESMA's activities over the last year, focussing on implementing MiFID II and Brexit.  Maijoor noted the "resource intensive" nature of MifID II implementation pointing out that 3 January 2018 is the starting date but saying "we should not forget that MiFID II implementation will keep the large part of the regulatory community and financial sector busy for many months afterwards." Nonetheless ESMA's MiFID II preparations have been influenced by the need to complement the single rulebook by "supervisory convergence measures" so ESMA has issued a large number of guidelines and Q&As in the last 12 months to seek to ensure a "consistent application of the rules coming into force" a notable feature of which is an emphasis on consumer protection. 

In preparation for Brexit ESMA has issued one general Opinion (May 2017) and three sector-specific Opinions (July 2017)  because of concerns about regulatory arbitrage between the EU-27 Member States trying to attract businesses re-locating to maintain Single Market access and addressing issues around outsourcing and delegation to third countries.  Read more here on the general Opinion and here on the sector specific guidelines on investment funds.  ESMA also launched the Supervisory Cooperation Network – so competent authorities can discuss individual relocation cases on an anonymous basis.  Brexit may cause significant financial stability risks. So ESMA is working on "possible mitigating actions" against the greater risks investors and markets may face if the UK exits the EU with no arrangements in place (cliff-edge effect) and requested contingency plans from individual supervised entities.  The 3rd country equivalence regime has been under scrutiny as a result of political discussions surrounding Brexit.  

UK Parliament's EU Financial Affairs Sub-Committee takes evidence from lawyers on post-Brexit regulation

Law firms specialising in international corporate and commercial law gave evidence [11.10.2017] to the EU Financial Affairs Sub-Committee (Committee) regarding supervision and regulation after Brexit (read the uncorrected transcript here).  The discussion covered, amongst other things: equivalence as a basis for market access, legal obstacles to an agreement on market access for financial services, and options for a transitional arrangement covering financial services.  The scope of the Committee's inquiry is financial regulation, its institutional structures in the context of how financial regulation and supervision could develop after the UK's withdrawal from the EU "to ensure financial stability and potentially to maintain equivalence or some other form of close relationship between the UK and EU regulatory regimes in order to preserve market access." The Committee has already heard evidence from academics and the Loan Market Association, and will hear further evidence from industry groups on 18 October 2017 [16.10.2017].  This section contains Parliamentary information licensed under the Open Parliament Licence v3.0.


Recent articles and publications

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,