UK Regulatory

Fund objectives working group meeting

The FCA has updated its page on the Fund Objectives Working Group [23.11.2017]. In the Asset Management Market Study (read more here) one area identified for further review was how useful fund objectives are for investors. The FCA said it would chair a working group on how to improve the clarity of funds' objectives.  Summaries of its meetings on 25 September 2017 and 31 October 2017 are now available.

FCA COO discusses cyber security in the financial services industry.

Chief operating officer at the FCA, Nausicaa Delfas, has delivered a speech at the Cyber Security Summit and Expo 2017 [20.11.2017] on how to address cyber issues within firms.

Ms Delfas set the scene by saying "cyber risk remains one of the FCA's top priorities" and "cyber resilience is a key area of focus" internationally as well as in the UK. She described the FCA's objectives as being: "to secure appropriate protection for consumers, protect and enhance the integrity of the UK financial system and promote effective competition in the interests of consumers." Cyber risks "challenge" all these objectives she said.

In the context of how to address these risks Delfas flags her earlier comments in a previous speech on "people, processes and technology" saying it is about not just having the right technological protections in place but the right security mind set in firms – from the board, down. "Managing this is not tick box" she says," – it requires real thinking outside the box." 

Cyber resilience is "'beyond compliance'" it is business-led and "'supplier risk'" is significant. This, Delfas says, is not just limited to risks from IT suppliers. It extends along the supply chain – payroll, health, audit to name a few: "third, or fourth, or fifth party risk." One of the largest recent data breaches she explains was via a firm's air conditioning contractor. She cites some questions boards should be asking and identifies innovations that could help firms tackle the issues:

  • Audits of key suppliers – but these are "mammoth initiatives" both to do and to respond to and could  "end up with a world where everyone is auditing everyone else: it this really sustainable, and cost effective?'" she asks;
  • Intermediaries carrying out assessments to a common standard: this could be another approach;
  • Automated tools: the FCA is seeing "growth of tools that automatically measure the cyber security indicators of companies on the internet".
  • 'Nudge theory': can be useful in changing staff behaviours relating to cyber security – frequent, small nudges such as fake phishing scams encourage discussion about the showing the FCA "far better cultural outcomes than traditional, annual mandatory training regimes." Could the same approach be used with suppliers?

Cyber is an "enormous challenge" and "easier to perpetrate than defend". So it must be considered to be a business-led risk, from board-level down and Delfas exhorts firms in doing so to "Remember people, processes and technology".

Click here for more information from a previous speech.

Autumn Budget 2017: Asset management

The Chancellor announced measures relevant to Financial Services in the Policy Paper Autumn Budget 2017 [22.11.17]. These include Investment Management Strategy 2 which the Government is to publish with a view to making sure that the asset management sector "continues to thrive". There will be a number of actions carried on with industry on: skills, fintech, "mainstreaming innovative investment strategies" and continuing with the programme of international engagement. For more information on the Autumn Budget click here. This section contains public sector information licensed under the Open Government Licence v3.0.

FCA: Regulation round-up: November 2017

The FCA's November 2017 Regulation round-up [16.11.2017] includes:

  • Our Future Approach to Consumers – the first of a series of documents announced in the FCA's Mission 2017 that explained the FCA's approach to regulation in more detail. This Approach document explains the FCA's approach to regulating for retail customers (read our update here);
  • announcements by the European Commission and the US Securities and Exchange Commission  providing clarity to firms on accessing US research (read our update here);
  • Regulatory Sandbox: report on how it has worked in its first year (read our update here);
  • FCA's alert for principals on their appointed representative and introducer arrangements (read our update here);
  • selected information the FCA has issued on MiFID II.

FCA updates information on cancelling authorisations.

The FCA website has been updated [20.11.2017] in respect of cancelling authorisation. Firms must have stopped carrying on regulatory activities, or plan to stop within 6 months of submitting an application. If applications are submitted correctly and FCA considers them to be complete, a case officer has 6 months to make a decision otherwise it could be a 12 month process. Small registered AIFMs must notify the FCA when they cease to satisfy the conditions of registration in accordance with regulation 15(1) of the AIFMD Regulations. 

EU Regulatory 

European Commission consults on institutional investors' and asset managers' sustainability duties

The Commission has published a public consultation on institutional investors' and asset managers' duties regarding sustainability [13.11.2017]. It follows a recommendation by the High-Level Expert Group on sustainable finance in its interim report [July 2017] that the Commission should clarify that the fiduciary duties of institutional investors and asset managers include environmental, social and governance (ESG) factors and long-term sustainability. This is part of the Commission's effort to encourage private capital to invest in green or sustainable investments to support the EU's transition to a low-carbon economy. The consultation is open for responses until 22 January 2018 (online only) and includes questions addressed to all respondents; as well as to end-investors; and to investment entities.

Joint Committee of ESAs: updated Q&A on PRIIPs KID

The updates to the PRIIPs Q&A [20.11.2017] are in respect of general topics, market risk assessment, performance scenarios, derivatives, and multi-option products (MOPS).

  • General topics: is a KID always required when an investment product is listed on a regulated market; and whether the terms "biometric risk premium" and "insurance premium" used in the Delegated Regulation have the same meaning.
  • Market risk assessment: how should credit-linked notes be treated under the Delegated Regulation?; and on the correction for risk neutrality in point 22(c) of Annex II of the Delegated Regulation.
  • Performance scenarios: how should the number of trading periods to use be calculated? (Point 9 of Annex IV); and how should the term "rolling" in Point 10(c) of Annex IV of the Delegated Regulation be applied?
  • Derivatives: altering the prescribed KID template wording for OTC derivatives.
  • Multi-option products: on how does the information on the underlying options of a MOP need to be provided?; and how should information on costs be reflected in the generic KID in the case of article 10(b) of the Delegated Regulation?

ESMA: updates MIFID II Q&As on market structure issues and transparency

ESMA has updated two sets of MiFID II Q&As [15.11.2017]: on market structure issues and on transparency. New market structure Q&As have been added to the Direct Electronic Access (DEA), tick size regime and multilateral and bilateral systems sections. New transparency Q&As have been added to the sections on general transparency topics, equity transparency, non-equity transparency, pre-trade transparency waivers, systematic internaliser regime, data reporting services providers and third country issues.

ESMA: webinar on LEI requirements

Staff from ESMA took part in a webinar organised by the Global Financial Markets Association, in which they presented on Legal Entity Identifier (LEI) requirements under MiFID II to try to increase industry awareness of, and facilitate compliance with LEI requirements, before MIFID II takes effect. ESMA also provided slides on the topic. See our earlier update on ESMA's latest briefing note on LEI here.

ESMA: Final Report on Money Market Funds Rules

ESMA published its Final Report [17.11.2017] on the Money Market Funds Regulation (MMF). The report contains final versions of the technical advice, draft implementing technical standards (ITS), and guidelines on stress test scenarios MMF managers are to carry out under the MMF Regulation. "Key requirements" ESMA says "relate to asset liquidity and credit quality, the establishment of a reporting template [for reporting by managers to the competent authority of their MMFs], and stress test scenarios". For background on the MMF Regulation's progress click here.

ESMA's priorities for 2018

Steven Maijoor, ESMA's chair, addressed the EFAMA Investment Management Forum 2017 [16.11.2017] on ESMA's priorities for 2018. He covered a number of key issues including: costs and charges of investment funds, investment fund stress testing and supervisory convergence in the context of Brexit.

Maijoor referred to ESMA's preliminary findings on the cost and past performance of UCITS, retail AIFs and structured products (see our earlier update here). ESMA has been analysing costs impacts – including implicit and explicit costs and charges that the funds industry levies - and the effect inflation has on investors' returns from UCITS. In the 2013 – 2015 period, charges reduced the investment return of the average EU investor by 2.5% a year, meaning that, in relative terms, on average, almost 30% of gross return was taken up with ongoing fees and one-off charges - although this varied "quite significantly between countries and asset classes." Maijoor also pointed out that retail investors and those investing in actively managed funds were "more affected" than institutional investors and those investing in passive funds: with much of the evidence suggesting "investors do not react to the level of the costs of their investment funds at all." The findings "certainly underline the relevance of cost and performance transparency and ESMA will continue to monitor and assess the situation". ESMA expects to deepen its analysis on UCITS funds by late 2018 and expand this work to include AIFs and structured products. ESMA also has plans for work on how active and passive funds perform. 

Maijoor spoke about investment research as MiFID II has "banned" inducements for independent advice and portfolio management. He clarified that where portfolio managers receive investment research from third parties it is not an inducement if the portfolio manager either pays for it from "their own resources" or from the research charge to the client in their dedicated research payment account. This "new model of payments for research" he said should make portfolio managers think more carefully about the research they need and its value-add. In turn this"should help ensure better use of the research budget" and "provide better opportunities for independent research providers to compete".

Maijoor urged supervisors tackling closet indexing to focus on two aspects: that "closet indexers are not only likely to be charging unduly high fees, but they are also failing to deliver the service to which they committed themselves in their offering documents". Read more here.

ESMA intends to look closely at performance fee structures, for which the objective should be to ensure "performance fee models are fair and consistent with the investment policy of the fund." Maijoor notes there is no consistent approach between Member States but given the cross-border nature of the fund market in the EU, investors should be treated fairly wherever they live and "regardless" of the fund's domicile. Disclosure improvements he said "can only achieve so much and we should not expect that the average retail investor will always read the small print". So it is necessary to review performance fee structures and "test them" against investors' "reasonable expectations...about when such a [performance] fee will be levied".

Regarding investment fund stress testing, in the context of the Money Market Funds (MMF) Regulation, ESMA is to issue guidelines for common stress test scenario parameters but has decided not to specify them yet, planning to "make progress on this when we issue the next iteration of the guidelines." It must update the guidelines each year to keep them current. ESMA plans to issue more general guidance on stress tests for UCITS and AIFs and is to consult with industry next year, and expects publication to be in 2019.

With regard to Brexit, Maijoor referred to the opinions ESMA issued (in May 2017, read more here; and July 2017, read more here) regarding UK entities, activities and functions relocating into EU 27 Member States. He stressed that ESMA considered these opinions to be in line with the Level 1 requirements; not to undermine freedom of establishment; and that they "do not call into question the delegation model. Rather, they aim to provide clarity on such elements as the appropriate substantive presence in the home Member State, the importance of oversight arrangements and the role and status of non-EU branches".

ESMA: Updated MAR Q&As

ESMA has added two new questions [21.11.2017] to its MAR Q&A at section 7 on Managers' transactions (questions 7.8 and 7.9). These are in relation to trading during closed periods by persons discharging managerial responsibilities (PDMRs). 

Recent Pinsent Masons publications

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