Article

Key Regulatory Topics: Weekly Update 12 May - 18 May 2023

Published Date
May 19, 2023
This week, the FCA published four engagement papers on the new UK prospectus regime, setting out proposed changes across four areas - admission to regulated markets, further issuances of equities, protected forward-looking statements and improvements to wholesale debt capital markets. The PRA published its policy statement on model risk management principles for banks, and confirmed it will provide an update for “Simpler-regime Firms” in due course. In Europe, the EC adopted the Delegated Regulation on specific liquidity measurement for IFD firms, while the EBA published draft RTS on prudential consolidation of investment firm groups under the IFR.  This week also saw the EC’s adoption of the draft UK-EU Memorandum of Understanding establishing a framework for structured regulatory cooperation in the area of financial services.

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Institutional and wholesale digital assets: latest developments – Wednesday 24 May, 9:00 – 10:00 am

This session will focus on the latest law and regulation of institutional/wholesale digital assets products and services; considering amongst others, prime and custody services, derivatives and digital securities. The first quarter of 2023 has seen a flurry of new developments which are going to form the fundamental legal and regulatory building blocks in relation to this fast-growing sector. These include, for example, proposed new regulated activities regimes; new disclosure/whitepaper rules; new market abuse regimes; reforms to underlying property law; reforms to insolvency law; and proposed new industry standard derivatives documentation. In this session our digital assets experts will discuss the key issues from these proposals, and the areas where market participants will want to input into the design of these new regimes.

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Corporates and issurers

Four FCA engagement papers on new UK prospectus regime

On 18 May, the FCA published four engagement papers in relation to the future UK prospectus regime: (i) admission to trading on a regulated market – the FCA considers that there are strong arguments for retaining the bulk of current prospectus requirements on issuers seeking to have transferable securities admitted to trading on regulated markets. However it sets out where it considers there may be opportunities for small changes, which cumulatively could represent a significant improvement on the current requirements, including: when a prospectus should be required for admission to regulated markets and when exemptions should apply; the required content of a prospectus for initial admissions; the format of a prospectus; and the responsibility for a prospectus and how it is approved; (ii) further issuances of equity on regulated markets – the FCA considers, as a starting point, that prospectuses should not be required for further issuances for equity securities admitted to trading on regulated markets unless there is a clear argument that to do so is necessary for investor protection, taking into account other existing disclosure requirements on issuers. It seeks views on this, as well as: whether there should be a percentage threshold (of existing share capital) for a requirement to publish a prospectus; and what document should be required if a prospectus is not required; (iii) protected forward-looking statements (PFLS) – PFLS will be introduced by the FSMA 2000 (Public Offers and Admissions to Trading) Regulations 2023. PFLS will be subjected to a recklessness/dishonesty liability standard, with the burden of proof on investors, rather than the current negligence liability standard and reverse burden of proof. The FCA sets out its initial considerations for the rules that will specify what types of information can be considered PFLS, any conditions as to how it is prepared, and how it is presented within a prospectus; and (iv) non-equity securities – the FCA asks for views as to whether the regime can be improved for wholesale, debt capital markets. Areas discussed include: removing the dual disclosure standards; requiring additional disclosure for certain types of non-equity securities that are that are structured finance products or traded investment products; and if disclosure requirements for secondary issuances of non-equity securities should be revised. The deadline for comments is 29 September. The FCA intends for feedback to begin a dialogue that will inform further development of proposed rules, on which it will consult formally during 2024.

Admission to trading on a regulated market (i)

Further issuances of equity on regulated markets (ii)

PFLS (iii)

Non equity securities (iv)

Conduct and governance

FCA consults on amendments to remuneration requirements for small dual-regulated firms

On 12 May, the FCA began consulting on proposals to enhance the proportionality of the remuneration requirements for small dual-regulated firms. The FCA proposes to: (i) amend its proportionality thresholds which allow smaller, less complex dual-regulated firms to be excluded from some of the remuneration rules by increasing the total assets threshold and changing the additional criteria that firms with over £4 billion of total assets must meet; (ii) remove the requirement for smaller, less complex dual-regulated firms to apply the rules on malus and clawback; and (iii) align some minor differences between its rules and the PRA Rulebook, including those relating to the identification of dual-regulated firms’ remuneration code staff. The FCA expects to publish its final rules in Q4. The FCA proposes for the amended rules and guidance to apply in respect of firms’ first performance year, beginning after the publication of the final rules. The FCA notes that its proposals are broadly consistent with those set out by the PRA in their February consultation on the same topic. The deadline for comments is 9 June.

Consultation

Consumer/retail

ESAs consolidated Q&As on PRIIPs KID

On 18 May, the ESAs consolidated a set of Q&As on the Regulation on key information document (KID) requirements for packaged retail and insurance-based investment products (the PRIIPs Regulation) and its Delegated Acts. The consolidated document combines responses given by the EC to questions requiring the interpretation of Union Law, which are colour coded in blue, and responses generated by the ESAs relating to the practical application or implementation of the PRIIPs Regulation and its Delegated Acts, which are not colour coded.

Q&As

FCA research into consumer experience of the cost of living crisis

On 17 May, the FCA published the findings of a survey into the consumer experience of the rising cost of living in the six months to January 2023. The note includes statistics on the different ways that the rising cost of living has had an impact on consumers, including struggling to meet bill and credit commitments, or choosing to cancel or withdraw insurance coverage. It also includes positive stories of consumers’ dealings with firms that reflect the guidance the FCA has issued, to encourage consumers to seek support early, and to illustrate to firms the real-life, beneficial impact of proactive support and appropriate forbearance. The FCA hopes that the survey findings highlight the continued importance of ensuring consumers get appropriate support when facing financial difficulty and ideally seek such support at an early stage. The survey was run among respondents to the FCA’s main Financial Lives 2022 survey, a full report of which will be published later this year. 

Research note

FOS approach to complaints involving discrimination

On 15 May, the FOS published guidance for firms on its general approach to complaints involving discrimination. The FOS explains that it assesses complaints involving discrimination in its usual way: taking account of relevant law and regulation, regulator’s rules, guidance and standards, codes of practice and good industry practice. The FOS will consider, and take into account when deciding on appropriate action: (i) firms’ overarching duty to treat customers fairly and whether they have met its expectations, on a case-by-case basis. In some cases, firms might have followed a standard process, but that might not have been appropriate or fair in the circumstances; (ii) how firms handled the matter once the consumer made a complaint about discrimination. The FOS will assess what actions have been taken, and the speed of the firm’s response. When handling a complaint of this manner, the FOS expects that firms carry out a fair and impartial investigation; if relevant (iii) whether the firm was aware, or should have been aware, that its customer was vulnerable; and (iv) what support the firm offered or put in place. The FOS will consider how a firm’s mistake has impacted a customer’s life and what the customer wishes. Possible solutions include: (a) ensuring the consumer hasn’t lost out financially; (b) asking firms to apologise; (c) asking firms to pay compensation to acknowledge the emotional and practical impact of mistakes; and (d) directing firms to review a decision or to make adjustments to how they communicate with the consumer. The FOS illustrates a number of case studies to serve as examples and further guidance.

Guidance

Financial crime and sanctions 

FCA speech on changing financial crime threats and the response required from firms

On 17 May, the FCA published a speech by Sarah Pritchard, FCA Executive Director of Markets and Executive Director of International, on how firms need to respond to changing financial crime threats. Key points include: (i) Ms Pritchard considers that it is the first line of defence that will understand the business and know how to creatively reduce risk. Those working on the first line need to frequently review the risks and threats to customers and assess whether their controls are equipped to deal with them. This review may include assessing how threats are identified, whether controls are updated in light of changes to threats and if customers are made aware of the risks and how they can spot scams; (ii) Ms Pritchard highlights that firms need to be considering how the Consumer Duty will apply in the context of financial crime. This will include considering how financial crime risks can be reduced when new products are designed; and (iii) the FCA has been using a new synthetic data tool to directly test firms’ systems for screening names that are on the OFSI consolidated sanctions list. This has shown that some firms do not have adequate sanctions controls and are overly reliant on third-party providers whose systems are not tailored to meet the specific requirements of the business.

Speech

EC updates list of high-risk third countries under MLD4

On 17 May, the EC adopted a Delegated Regulation that amends the list of high-risk third countries with strategic AML and CTF deficiencies, produced under Article 9(2) of MLD4. The Delegated Regulation: (i) adds Nigeria and South Africa to the list; and (ii) removes Cambodia and Morocco. The Council and the EP will scrutinise the Delegated Regulation and if neither objects, it will enter into force 20 days following its publication in the OJ.

Draft Delegated Regulation  

Home Office consults on new draft information orders code of practice under PoCA and TA 2000

On 16 May, the Home Office began consulting on a new draft information orders code of practice issued under the Proceeds of Crime Act 2002 (PoCA) and the Terrorism Act 2000 (TA 2000). The code of practice provides guidance to the Director General of the National Crime Agency (NCA) or an authorised NCA officer on how to use certain powers. A new Code of Practice needs to be made to reflect possible future changes to POCA by the Economic Crime and Corporate Transparency Bill, which include creating additional information order powers that will assist the NCA with operational analysis of information that is relevant to ML/TF or suspected ML/TF. The deadline for comments is 20 June.

Consultation

Draft code of practice

Council of the EU adopts recast revised WTR

On 16 May, the Council of the EU announced that is has formally adopted the recast revised WTR. The Regulation will now be published in the OJ. The recast revised WTR will enter into force 20 days after publication and apply 18 months after that. The Council has also published the voting result for adoption of the Regulation.

Recast revised WTR press release

Recast revised WTR voting result

Trilogue negotiating positions on AMLR, MLD6 and AMLA Regulation

On 15 May, the Council of the EU published tables setting out the negotiating positions taken by the EC, the Council and the EP ahead of the commencement of the trilogue negotiations on the AMLR, MLD6 and the AMLA Regulation.

AMLR table

MLD6 table

AMLA Regulation table

Fintech

Please see the Financial Crime section for the adoption of the recast revised WTR by the Council for the EU.

Treasury Committee calls for consumer trading of unbacked cryptoassets to be regulated as gambling

On 17 May, the Treasury Committee published a report setting out recommendations to the Government on regulating crypto. The Committee’s key conclusions and recommendations include: (i) recognising the potential for some forms of cryptoassets and their underlying technologies to bring benefits to financial services, it is important that the Government and regulators strive to keep pace with developments, including by ensuring that the FCA’s authorisations gateway is open and effective, so that potential productive innovation in financial services is not unduly constrained; (ii) while the extent of the benefits cryptoasset technologies may bring to financial services remains unclear, the risks posed by cryptoassets to consumers and the environment are real and present and therefore it recommends that the Government takes a balanced approach to supporting the development of cryptoasset technologies; (iii) the Government should seek to avoid expending public resources on supporting cryptoasset activities without a clear, beneficial use case; and (iv) regardless of the regulatory regime, their price volatility and absence of intrinsic value means that unbacked cryptoassets will inevitably pose significant risks to consumers. Consumer speculation in unbacked cryptoassets more closely resembles gambling than it does a financial service. The Committee are concerned that regulating retail trading and investment activity in unbacked cryptoassets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, or protected when it is not. Therefore, the Committee strongly recommends that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service.

Press release

Report

Summary report

Council of the EU adopts MiCA

On 16 May, the Council of the EU announced that is has formally adopted MiCA. The Regulation will now be published in the OJ. MiCA shall enter into force 20 days after publication and apply 18 months after that, except for the requirements relating to asset-referenced tokens and e-money tokens which will apply after 12 months. The Council has also published the voting result for the adoption of the regulation.

MiCA press release

MiCA voting result

Fund regulation

Please see the Markets and Market Infrastructure section for the FCA speech on the drive for data and increasing resilience in NBFI.

ESMA calls for amendments to UCITS Directive and AIFMD in relation to undue costs

On 17 May, ESMA published an opinion to the EC with suggested clarifications of the legislative provisions under the UCITS Directive and AIFMD relating to the notion of undue costs. ESMA explains that the initiative was prompted by one of the findings of the ESMA 2021 Common Supervisory Action on costs and fees, which showed divergent market practices as to what industry reported as “due” or “undue” costs in funds. ESMA’s proposal is to take as a basis the supervisory expectations enshrined in the 2020 supervisory briefing on the supervision of costs and ground these expectations into clearer legal requirements. This would clarify the notion of due/undue costs for UCITS and AIFs and provide national competent authorities with a stronger legal basis to take supervisory and enforcement actions. ESMA is of the view that the EC: (i) should clarify the eligibility of costs in light of the list of costs included in the PRIIPs Regulation. ESMA could be empowered to develop draft RTS in order to: specify the circumstances in which the costs included in the PRIIPs list should be considered as undue/not eligible and specify under which conditions NCAs may authorise additional cost categories; (ii) should consider introducing the notion of undue cost in Article 14 of the UCITS Directive and Article 12 of the AIFMD. Where a manager has intentionally or negligently committed an infringement, the manager should be sanctioned with a fine that is proportionate to the harm caused to investors; and (iii) should consider introducing obligations for managers to develop a pricing process. ESMA states that its opinion will be taken into account by the EC in the context of the EC’s Retail Investment Strategy and subsequent legislative proposals.

Press release

Opinion

Markets and markets infrastructure 

FSMA 2000 (Commodity Derivatives and Emission Allowances) Order 2023

On 17 May, the Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023 was published, together with an explanatory memorandum. The purpose of the instrument is to streamline the process for determining when a firm trading commodity derivatives or emission allowances needs to be authorised as an investment firm, as part of the Wholesale Markets Review reforms. The FCA intends to establish a simpler and lower cost regime for determining when such a firm needs to be authorised as an investment firm. Currently firms are required to perform calculations to determine whether their trading activity is ancillary to their main commercial business, and therefore whether they fall within the RAO Schedule 3 exemption from the commodity position limits regime. The instrument: (i) removes the obligation for firms relying on the ancillary activities exemption to notify the FCA of their exemption annually; (ii) removes article 72J of the RAO which enables firms to carry on their business without obtaining authorisation if there is no data available to enable them to perform the test establishing when an activity is ancillary; and (iii) removes references to Commission Delegated Regulation (EU) 2017/592 which outlines the RTS for determining when a firm’s activity is considered to be ancillary to its main commercial business. The instrument will come into force on 1 January 2025.

FSMA 2000 (Commodity Derivatives and Emission Allowances) Order 2023

Explanatory memorandum

FCA speech on the challenge of changing global markets

On 16 May, the FCA published a speech by Sarah Pritchard, FCA Executive Director of Markets and Executive Director of International, on meeting the challenge of changing global markets. Highlights include: (i) Ms Pritchard refers to the recently published consultation on reform to the listings regime. The FCA considers that there is a strong and pressing case for change to refocus UK listed markets, making it easier for firms to list while leading to a shift in responsibility and increased risk for shareholders. The FCA encourages further views on its proposals; (ii) the FCA will shortly be considering what if any reforms should be made to the prospectus rules. The FCA aims to move away from written evidence and papers and towards a more discussion-based engagement with industry and stakeholder groups (we have covered the FCA’s engagement papers in the Corporates/Issuers section above); and (iii) the FCA plans to engage with the input into HMT’s call for proposals for metrics that will help the FCA and others demonstrate how they are advancing its new secondary international competitiveness and growth objective, once in force.

Speech

Delegated Regulations amending RTS on transparency requirements for equity and non-equity instruments under MiFIR published in OJ

On 16 May, two Delegated Regulations relating to RTS under MiFIR were published in the OJ: (i) Delegated Regulation (EU) 2023/944 amending and correcting the RTS laid down in Delegated Regulation (EU) 2017/587 as regards certain transparency requirements applicable to transactions in equity instruments; and (ii) Delegated Regulation (EU) 2023/945 amending the RTS laid down in Delegated Regulation (EU) 2017/583 as regards certain transparency requirements applicable to transactions in non-equity instruments. The Delegated Regulations will enter into force 20 days after publication in the OJ, on 5 June. However certain provisions have a delayed application in both Delegated Regulations until 1 January 2024.

Delegated Regulation 2023/944

Delegated Regulation 2023/945

Delegated Regulation amending RTS on MiFID II tick size regime

On 16 May, Delegated Regulation (EU) 2023/960 amending the RTS laid down in Delegated Regulation (EU) 2017/588, which supplement MiFID II in relation to the tick size regime for shares, depositary receipts and exchange-traded funds, was published in the OJ. For the purposes of the tick size regime, trading venues must use the calculations of the average daily number of transactions that competent authorities publish on 1 March. The application date of the data published by competent authorities is changed from 1 April, to the first Monday of April, to allow trading venues the weekend to make necessary adaptations to their IT systems and infrastructures. It will come into force 20 days after its publication in the OJ, that is, 5 June.

Delegated Regulation

FCA speech on the drive for data and increasing resilience in NBFI

On 16 May, the FCA published a speech, given by Ashley Alder, FCA Chair on the drive for data and increasing resilience in non-bank financial intermediation (NBFI). Mr Alder considers it essential that policy makers recognise that investment funds and other NBFI entities are structurally very different to banks, and carry out very different economic functions. Therefore traditional approaches to bank regulation are of limited relevance to the design of frameworks which might ensure increased resilience within the NBFI sector. While lots of data is available to assess risks in the open-ended fund, money market fund and CCP segments of NBFI, data is lacking in relation to private investments and funding markets. Therefore, Mr Alder considers that improving data in these areas should be a priority globally, to enable regulators to spot risks in private markets and supervise them credibly. This should include a good understanding of hidden on- or off- balance sheet leverage, a better assessment of liquidity risks, and better information on exposures between private markets and traditional banks. Disclosures should be sufficient to enable banks to accurately assess levels of leverage and concentration risks amongst their clients. Mr Alder states that the FCA's April 2023 recommendations for liability-driven investment asset managers intended to address deficiencies in risk management should be considered relevant to all NBFI firms and sectors.

Speech

IOSCO good practices on implementation of IOSCO principles for ETFs

On 12 May, IOSCO published a report setting out good practices to support the implementation of its Principles for exchange traded funds (ETFs) covering effective product structuring, disclosure, liquidity provision, and volatility control mechanisms. The good practices: (i) highlight issues for regulators, responsible entities and/or trading venues to consider when putting into practice the ETF Principles and other relevant IOSCO standards and guidance; (ii) take account of the differences among jurisdictions in the way that ETFs operate, the way they are regulated, and the markets in which they trade; and (iii) are broadly categorised under four themes that encompass the full life cycle of ETF products: (a) effective product structuring, including range of assets, strategies for ETF offerings, effective arbitrage mechanisms; (b) disclosure requirements, including on fees and on clear differentiation of ETFs from other exchange traded products and collective investment schemes; (c) liquidity provisions, including market monitoring and ensuring orderly trading; and (d) volatility control mechanisms, including communication between trading venues.

Press release

Report

Payment services and payments systems 

EC report on assembling payment account related data under PAD

On 13 May, the EC published its first report in relation to compliance with the Payments Account Directive (PAD) covering the period from 2016 to 2021, as mandated by Article 27. The EC notes that the timespan of the data collected and the differences in data collection methods makes it difficult to draw definitive conclusions on the impact of the PAD. The report confirms however that the main measures of the PAD, regarding transparency and comparability, the switching service, and the right to a payment account with basic features (PABF), have all generally been put in place. The EC’s findings include that: (i) in some Member States the figures for account switching are very low; (ii) in most Member States, all credit institutions that provide standard payment accounts have to offer PABF. However in some Member States only certain credit institutions are obliged; (iii) the data show that a considerable number of PABFs have been opened during the period reported, albeit only few in some Member States. Nevertheless, there has been a significant uptake in some Member States with a previously higher percentage of unbanked population. In order to ensure more complete availability and comparability of data going forward, the EC is working with Member States to agree the relevant data sets to be collected/provided.

Report

EC report on application of PAD

On 12 May, the EC published a report on the application of the Payments Account Directive (PAD). The EC’s conclusions include that the PAD: (i) in general, has helped to create transparency and comparability of payment account fees. However, some Member States have created an additional layer of new legislation when transposing the PAD, rather than replacing existing legislation, and this makes the national and EU regulatory framework more fragmented. This has also caused the duplication of documents on fee levels of payment accounts in Member States where documents with the same information already existed. Some aspects of the measures of the comparative sites also require improvement as cross-border transparency and comparison are not yet possible due to differences in the terminology used and to language barriers; (ii) has ensured that consumers have access to payment accounts with basic features which are offered by all or many credit institutions in each Member State; and (iii) has enabled all EU consumers to easily switch accounts domestically, although there are considerable differences between the different Member States in the number of yearly switches. Therefore additional measures could be useful, parti

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