Financial Services Speedread 12 January 2022 edition

1. FCA update: discontinuation of LIBOR

On 4 January 2022, the FCA provided an update on the LIBOR transition, outlining that:

• 24 LIBOR settings have now been discontinued;

• Under the UK Benchmarks Regulation (UK BMR), 1, 3 and 6 month Sterling and Japanese Yen settings are now Article 23A benchmarks, meaning they are now permanently unrepresentative of the underlying market they seek to measure;
• The above six benchmarks are now known as "synthetic LIBOR" as they are calculated in a manner that is not dependent on panel banks' submissions;
• These six "synthetic" rates can be used in legal contracts (except those for cleared derivatives) but not in new contracts;
• The use of synthetic JPY LIBOR will end from 31 December 2022;
• Firms should continue their efforts to move away from synthetic GBP LIBOR as its availability is not certain after 2022; and
• Panel bank submissions will continue to be used for five USD LIBOR settings until mid-2023, but new use of these five settings is now prohibited except in certain circumstances.

2. ESMA final report: guidance on MiFID II appropriateness and execution-only requirements

On 3 January 2022, ESMA published the final report on its guidelines on the appropriateness and execution-only requirements for non-advised and non-managed services (together "non-advised services") under MiFID II and the MiFID II Delegated Regulation 2017/565.

ESMA's new guidance aims to clarify and encourage consistency when applying the requirements, including (but not limited to) the following:

• Firms should, in good time before the provision of non-advised services, inform their clients, by using clear and simple language, about the appropriateness assessment and its purpose which is to enable the firm to act in the client's best interest;
• Firms' policies and procedures should aim to enable firms to collect all information necessary to conduct the appropriateness assessment in relation to the specific product types offered or demanded, and should give attention to clarity, exhaustiveness, comprehensibility, layout, and format of appropriateness questionnaires; consider whether the order in which questions are asked is effective; collecting information on a series of items through a single question should be avoided;
• Firms should ensure that they ask for information that takes into account the type and characteristics of the investment products or services that are considered (i.e. more in-depth information for more complex and risky products and questions to demonstrate that the client understands what makes the product more complex and risky) and the nature of the client.
• Firms should take reasonable steps to check the reliability, accuracy and consistency of information collected about clients and not merely rely on the fact that clients are expected to provide correct, up-to-date, and complete information as is necessary for the appropriateness assessment.
• When firms rely on previously collected information on clients' knowledge and experience, firms should establish procedures defining the frequency of updating such information. Firms should develop a policy to assess knowledge and experience on a more regular basis with regard to groups of clients that are deemed more vulnerable.

The guidelines will come into force six months after being translated into all EU official languages and published on ESMA's website.

No updates included for this fortnight's edition of the FSS.

3. Reverse solicitation and asset managers: ESMA responds to Commission

On 3 January 2022, ESMA published a letter dated 17 December 2021 to the European Commission outlining its view on how reverse solicitation is functioning in Europe.

The Commission sent ESMA a letter on 24 September 2021 asking for national competent authorities (NCAs) to provide their input on questions relating to the use of reverse solicitation via asset managers and the resulting effect on passporting activities.

ESMA in its letter suggests that the European Commission might want to start collecting data from firms on the extent they use reverse solicitation to sell investment funds. This could be the start of wider reporting obligations across different sectors which rely on the use of reverse solicitation. This is because:

• the vast majority of NCAs have no information to hand on the use of reverse solicitation by asset managers or investor associations;
• although some NCAs consider reverse solicitation is being relied upon to avoid third-country and EU passport regimes, there is no "tangible data" to confirm this view; and
• currently, asset managers are not required to report any information on subscriptions relying on reverse solicitation to their NCAs.
  On a separate point, to allow the exchange of notifications of cross-border marketing amongst NCAs, ESMA will focus on the extension of the notification portal under Article 13(2) in its 2022 IT budget.

No updates included for this fortnight's edition of the FSS.

4. New Delegated Regulation amending list of high-risk third countries under MLD4

On 7 January 2022, the European Commission adopted a Delegated Regulation that makes changes to the list of high-risk third countries with strategic AML and CTF deficiencies found in Delegated Regulation (EU) 2016/1675. The list of countries in the Delegated Regulation is amended from time to time in response to AML/CTF standard setters e.g. the Financial Action Task Force.

The Delegated Regulation will amend the Annex to Delegated Regulation (EU) 2016/1675 by:

• adding Burkina Faso, Cayman Islands, Morocco, Senegal, Haiti, the Philippines, South Sudan, Jordan and Mali to the Annex in respect of third countries that have been identified as having strategic AML and CTF deficiencies; and
• deleting Ghana, Botswana, Mauritius, the Bahamas and Iraq from the annex referring to strategic AML deficiencies and CTF deficiencies.

The Delegated Regulation will be submitted to EU co-legislators to consider for approval and if no objections are made to the legislation, it will enter into force 20 days after it is published in the EU Official Journal.

5. FCA commences criminal proceedings against two former directors of Collateral (UK) Ltd

On 7 January 2022. the FCA published a press release stating that it has commenced criminal actions against two individuals under the Fraud Act 2006 and one charge under the Proceeds of Crime Act 2002. The individuals are two former directors of Collateral (UK) Ltd.

The FCA alleges that the two individuals dishonestly represented to investors that their company, Collateral (UK) Ltd, was authorised and regulated by the FCA to operate as a peer-to-peer lender knowing this was untrue.

The two individuals are due to appear at Westminster Magistrates Court on 26 January 2022.

6. ESMA publishes final report amending MAR Guidelines on delay in the disclosure of inside information

On 5 January, ESMA published its final report on the amendment to the Market Abuse Regulation (MAR) guidelines on delayed disclosure in relation to prudential supervision. This report follows a consultation carried out during the summer of last year.

The guidelines add additional circumstances to the list of legitimate interests of issuers for delaying public disclosure of inside information under Article 17(4) of MAR.

The report sets out amendments to the guidelines which include:

• adding the case where institutions intend to carry out redemptions, reductions and repurchases of own funds, pending regulatory authorisation to the list of legitimate interests;
• adding the case of draft Supervisory Review and Evaluation Process decisions or any related preliminary information to the list of legitimate interests; and
• adding a section clarifying that Pillar 2 Capital Requirements and Pillar 2 Capital Guidance are likely to satisfy the definition of inside information under MAR and therefore require public disclosure.

The revised guidelines will come into force two months after being translated into all EU official languages and published on ESMA's website

7. EBA publish its Opinion on de-risking

On 5 January 2022, the EBA published its Opinion and Report on the scale and impact of de-risking in the EU and the steps that competent authorities are required to take to help minimise the impact of de-risking. De-risking is where a financial institution takes a decision to refuse to enter into, or to terminate, business relationships with individual customers or categories of customers associated with higher money laundering (ML) / terrorist financing (TF) risk, or to refuse to carry out higher ML/TF risk transactions.

The EBA is concerned that de-risking categories of customers in some circumstances can signify ineffective ML/TF risk management. The Opinion and Report note a number of actions that can be taken by competent authorities and the European Commission to minimise the risk of de-risking such as:

• encouraging competent authorities to engage more actively with institutions that de-risk and users of financial services that are particularly affected by de-risking; and
• clarifying the interaction between the Payment Account Directive, the Payment Services Directive and AML/CTF requirements particularly in relation to the right to open and use a payment account with basic features.
  

8. FCA update: 5-year extension to PRIIPs exemption

On 29 December 2021, the FCA released a statement in relation to the 5-year extension to the Collective Investment in Transferable Securities (UCITS) exemption under The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. Under the Financial Services Act 2021, a PRIIPs key information document (KID) or UCITS key investor information document (KIID) can still be used for UCITS funds offered to retail investors up until 31 December 2026.

As long as firms provide a UCITS KIID or a non-UCITS retail schemes KIID in compliance with Article 14(2) of the PRIIPS Regulation, the FCA does not intend to take enforcement action against firms for breaching Article 14(1).

To reflect the extension, the FCA plans to amend the following Article 18 of the UK PRIIPs Regulatory Technical Standards (RTS), COBS 13.1.1B G(1), and COLL 4.7.1A 6(1)(b)

No updates included for this fortnight's edition of the FSS.

9. ESMA issue call for evidence on DLT

On 4 January 2022, ESMA published a call for evidence on the Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT) (the DLT Pilot).

The DLP Pilot aims at developing the trading and settlement for 'tokenised' securities and will most likely apply from the start of 2023. Under the DLT Pilot, ESMA must assess whether amendments need to be made to the regulatory technical standards (RTSs) for some pre- and post-trade transparency and data reporting requirements under MiFIR to ensure they are effectively applied to DLT securities. Amendments should not increase the regulatory burden for DLT market infrastructure compared to trading standard financial instruments. ESMA is therefore looking for input from stakeholders on using DLT for trading and settlement and also amending the RTSs.

The call for evidence addresses the following RTSs:

• RTS 1 – equity transparency;
• RTS 2 – non-equity transparency;
• RTS 3 – double volume cap and provision of data;
• RTS 22 – transaction reporting;
• RTS 23 – reference data;
• RTS 24 – order record keeping; and
• RTS 25 – clock synchronisation.

Stakeholders have until 4 March 2022 to provide comments.

10. EU Commission: nuclear and gas activities to be included in the Taxonomy Delegated Act

On 1 January 2022, the European Commission issued a press release confirming that certain gas and nuclear activities will be included in the Taxonomy Complementary Delegated Act.

Taking into account the different challenges faced by Member States to transition to "climate neutrality" under the EU taxonomy, such as those member states still heavily reliant on coal, the EU Commission believes natural gas and nuclear will provide a means to aid such a transition. Under the revised EU Taxonomy framework, such energy sources will be classified under "clear and tight conditions". For instance, by 2035, gas must have low emissions or be renewably sourced.

Furthermore, the Taxonomy Disclosure Delegated Act will be amended to allow investors to identify if activities involve gas or nuclear activities.

The Commission plans to formally adopt the Taxonomy Complementary Delegated Act in January 2022 (subject to a consultation currently being carried out), before it is sent to the European Parliament and the Council for scrutiny.

11. FCA publish policy statement updating authorisation application fees

On 10 January 2022, the FCA published a new Policy Statement (PS22/1) setting out the structure for authorisation application fees effective from 24 January 2022. These changes come as a result of a consultation carried out in November 2020 (CP20/22) and the feedback detailed in a consultation in April 2021 (CP21/8).

The charges have been condensed into ten pricing categories (which can be found in FEES 3 Appendix 1AR). The pricing categories start at a fee of £250 and go up to £200,000. The FCA have noted that further work is required before they can introduce the £250 fee for stand-alone long Form A applications for Senior Manager Functions and Controlled Functions for Appointed Representatives.

Some other additional charges are also being introduced:

the FCA are introducing a new category 3 charge of £1,000 to be applied to firms with restricted permissions for debt counselling and debt adjustment as the activity is ancillary to its main business; and

the FCA are introducing a category 4 charge of £2,500 for lead generator Claims Management Companies applying only for the permission to seek out people who may have a claim.

Further information can be found on the FCA webpages, here and here.

12. ASA publishes four negative rulings cryptoasset advertising (Crypto.com, Skrill and Arsenal Football Club, and Coinbase)

The ASA has been focused on taking action against cryptoasset advertising which breaches the CAP code, and have stated that this is a "red alert" priority issue for them. In this vein, the ASA has over the last weeks challenged four decisions against where its challenges to cryptoasset advertising were upheld (summarised below).

Decision against Crypto.com

On 5 January 2022, the ASA published a decision regarding the use of two in-app ads for Crypto.com: (a) the first ad included the text "Buy Bitcoin with credit card instantly"; and (b) the second ad included text which stated "Earn up to 3.5% p.a.", with the number in the text increasing to "8.5%".

The ASA challenged the ads (and the challenge was upheld) on the basis that:

• The ads were misleading in that neither of the ads nor the landing pages associated with them contained any risk warning making consumers aware that cryptocurrency could go down as well as up, or that cryptocurrency was unregulated in the UK;
• The ads did not contain reference to tax, and encouraged purchase on credit, and therefore the ads took advantage of consumer's lack of experience and credulity;
• The first ad did not make it sufficiently clear that additional fees could be incurred when purchasing on credit, or that some credit card issuers did not allow users to buy cryptocurrencies. As such information would likely be material to a consumer, the ad was misleading; and
• The second ad was misleading on the basis that it was not clear that the increase in return from 3.5% and 8.5% was dependent on the type of cryptocurrency, amount held and duration for which the assets were held, and that the basis used to calculate these figures was unclear and unsubstantiated.

As a result Crypto.com has been informed that the ads could not appear again in this form.

Decision against Arsenal Football Club plc

On 22 December 2021, the ASA published a ruling against Arsenal Football Club plc relating to both a Facebook post and content on Arsenal's website advertising $AFC Fan Tokens which were published in August 2021.

The ASA challenged the ads (and the challenge was upheld) on the basis that:

1. The ads were irresponsible and took advantage of consumers' inexperience or credulity as they did not make clear that CGT could be payable on profits from investing and they "trivialised investment in cryptoasssets";
2. The ads were misleading because they did not make clear that cryptoassets are not regulated in the UK and that their value can go down as well as up; and
3. The ads were misleading because they did not make clear that it was necessary to buy the cryptocurrency Chiliz in order to purchase Fan Tokens. They also did not make clear that the Fan Tokens were a cryptoasset.

As a result Arsenal have been informed that these ads must not be used again and future ads must be sufficient so as to not be deemed irresponsible or misleading.

Decision against Skrill Ltd

On 22 December 2021, the ASA published a ruling against Skrill Ltd relating to a paid-for Reddit ad advertising the opportunity to "give crypto a go, for free".

The ASA challenged the ads (and the challenge was upheld) on the basis that:

• The ads were irresponsible because it gave the impression that investing in cryptocurrency is straightforward and risk free and it did not offer any warning about the overall risk of investments in cryptocurrency; and
• The ads were misleading because it did not include risk warnings to make consumers aware that their investments can go down as well as up and that cryptocurrency is unregulated in the UK.

As a result Skrill Ltd have been informed that the ad must not appear again in its current form. Subsequent ads must make clear that the value of cryptocurrency can go up and down and that cryptocurrency is unregulated in the UK.

Decision against Coinbase

On 15 December 2021, the ASA published a ruling against Coinbase Europe Ltd relating to a paid-for Facebook ad which warned customers not to "miss out on the next decade" making reference to Bitcoin's increase in value since 2010.

The ASA challenged the ads (and the challenge was upheld) on the basis that:

• The ad was misleading because it did not include any risk warning to make consumers aware that cryptocurrency could go down as well as up, or that it was unregulated in the UK.
• The ad took advantage of consumers' inexperience and credulity by not making it clear that tax could be paid on cryptocurrency profits and also by "irresponsibly" suggesting that cryptocurrency was straightforward and for everyone..
• The ad was misleading by implying that they were regulated because even though Coinbase held numerous licenses, consumers would assume regulation refers to the regulation of cryptocurrency services by the FCA, which was not the case.
• The ad did not make it clear that past performance or experience did not necessarily give a guide for future returns or guaranteed income and therefore was misleading.

As a result Coinbase Europe Ltd have been informed that the ad must not appear again in the form complained about and they must ensure future ads make it sufficiently clear that cryptocurrency can go down as well as up, the services are unregulated, tax could be due on profits and that past performance is not necessarily a guide for future performance.

The rulings can be found on the ASA webpage here.