Financial Services SpeedRead 3 August

1. HM Treasury consults on its post-Brexit overseas framework

On 22 July 2021, HM Treasury announced its next steps following the consultation published on 15 December 2020 regarding the Government's post-Brexit overseas framework.

The Government confirmed it will work closely with the FCA, the BoE and the PRA to review the overseas regulatory perimeter of the territorial scope of the prohibition on carrying on a regulated activity in the UK (under section 19 of FSMA) and the restriction on financial promotions capable of having an effect in the UK (under section 21 of FMSA). This review will seek to identify:

• whether the overseas perimeter remains appropriate for the UK following Brexit, including: (a) changes to the overseas person exemption (OPE) and removing the overlap between the OPE and equivalence provisions under MiFIR Title VIII; and (b) making the UK's overseas perimeter more coherent and easier to navigate;
• whether there are elements of the overseas regulatory perimeter that need updating to reflect modern working patterns and advancements in technology, such as the 'in the UK' test; and
• areas of the overseas perimeter that could be clarified to allow greater transparency and clarity for firms.
  Following this review, HM Treasury confirmed it will initiate a consultation on potential changes to the UK's regime for overseas firms and activities.

2. FCA publishes information for firms which use certain exemptions under the Financial Promotions Order

On 21 July 2021, the FCA published information for firms which use certain exemptions under the Financial Promotions Order (FPO). The FCA stated that following onshoring changes made to the FPO, the definition of Relevant Market no longer includes relevant UK markets. As a result, the exemptions under

Articles 37, 41, 67, 68, 69 of the FPO do not cover financial promotions relating to relevant UK markets or investments traded on such markets.
The FCA confirmed these exemptions will be restored by Government SI and it will not take enforcement action against persons for breach of the financial promotion restriction if such breach only comes about because the relevant exemption no longer applies on account of this omission.

3. FCA publishes final rules to strengthen investor protections in SPACs

On 27 July 2021, the FCA published its final rules and changes to its Listing Rules for certain special purpose acquisition companies (SPACs).

The main changes the FCA has made to its original proposals are to:

• lower the minimum amount a SPAC would need to raise at initial listing from £200 million to £100 million;
• introduce an option to extend the proposed two-year time-limited operating period (or three-year period if shareholders have approved a 12-month extension) by six months, without the need to get shareholder approval. The additional six months will only be available in limited circumstances. This is intended to provide more time for a SPAC to conclude a deal where a transaction is well advanced; and
• modify its supervisory approach to provide more comfort prior to admission to listing that an issuer is within the guidance which disapplies the presumption of suspension.

The new rules and guidance will come into force on 10 August 2021.

4. EU Commission letter and decision on the implementation of the Sustainable Finance Disclosure Regulation

On 8 July 2021, the EU Commission published a letter stating that the implementation of the Level 2 RTS for the Sustainable Finance Disclosure Regulation (SFDR) has been pushed back another six months to July 2022. ESMA also published a Commission Decision and Annex containing further answers in relation to the implementation of SFDR. In summary, ESMA:

• confirms that the SFDR applies to third country funds marketed through national private placement regimes and that both entity and product level disclosures apply in this instance;
• states that Article 9 products may need to use a Paris Climate Agreement aligned benchmark or climate transition benchmark where they exist and are available; and
• provides further guidance is provided in relation to the classification of Article 8 products.

5. FCA publishes policy statement to implement Proposed Investment Firms Prudential Regime

On 26 July 2021, the FCA published policy statement (PS21/9) containing feedback to its April 2021 consultation paper on the implementation of the Investment Firms Prudential Regime (IFPR) (CP21/7).

We summarise the key points raised in the policy statement below. Please refer to our briefing for further details.

• Changes to the definition of a small, non-interconnected (SNI) firm: the definition of an SNI firm will be amended to reflect that daily trading flow now also applies to firms that trade in their own name on an agency basis. Further, firms that are clearing members or indirect clearing members should automatically be non-SNI firms.
• ICARA: the FCA asks firms to compete their ICARA reports on a "best efforts" basis in 2022, and the report could cover only part of that year.
• Own funds requirements: Fixed Overheads Requirement: the FCA has clarified that the relevant expenditure for the fixed overheads requirements (FOR) should be calculated before the distribution of profits; and LLP members' shares in profits will receive the same treatment of deduction from total expenditure as those of ordinary and limited partnerships.
• Own funds requirements: K-COH and K-DTF: the decision of whether a transaction that a firm has executed falls under K-COH or K-DTF is a binary decision: K-COH if in the name of the client, and K-DTF if in the name of the firm even if the firm has executed orders on behalf of a client in its own name.
• Own funds requirements: K-AUM: the FCA expects firms to calculate AUM at every level where the firm has obligations in respect of discretionary management (and non-discretionary arrangements constituting advice of an ongoing nature). Firms should therefore consider the mandate it has been set by the delegating firm, as well as the mandate it has been set by its own clients. It does not consider this to be "double counting".
• Remuneration: the Remuneration Code will apply to carried interest, but has added a new rule which means that the requirements on pay-out in instruments, deferral, retention and ex-post risk adjustment do not apply to carried interest arrangements in specific circumstances. There are also provisions for the forfeiture or cancellation of carried interest where the MRT participated in or was responsible for conduct which resulted in significant losses to the firm, or the MRT failed to meet appropriate standards of fitness and propriety.
• Governance: the FCA will permit a non-SNI firm to rely on a group-level Remuneration Committee where the firm is part of an FCA investment firm consolidation group, and where the UK parent entity has a remuneration committee that meets certain requirements.

6. PRA publishes policy statement finalising approach to the supervision of international banks

On 26 July 2021, the PRA published a policy statement (PS19/21) aimed at existing or prospective PRA-authorised banks and designated investment firms that are headquartered outside the UK or are part of a group based outside of the UK. Appended to the Policy Statement is the finalised supervisory statement, which summarises the PRA's approach to international banking supervision. We summarise the key aspects of the policy statement and supervisory statement below.

• General approach, scope, and application: the PRA confirms that:
• firms, their home state supervisors, and home resolution authorities (where relevant) may decide how best to provide information to the PRA and, where appropriate, the PRA will seek to obtain group information from the home state supervisor;
• information requests will be tailored to each group;
• not all information will need to be provided regularly, but rather in response to ad-hoc requests and will only be required to be updated following a material change; and
• daily or weekly profit and loss data is only required in respect of global and local investment banking and trading business lines for branches and subsidiaries that have the most potential impact on UK financial stability.
• General expectations for effective supervision: the PRA proposes to consider the following general factors when assessing whether effective supervision is possible: whether the home jurisdiction's prudential supervision regime is sufficiently equivalent to the UK regime; whether there is sufficient supervisory co-operation with the home state supervisor; and the efficacy of the arrangements for resolution.
• Booking arrangements: the supervisory statement explains the stages of the booking lifecycle that are within the scope of the PRA's proposals, and clarifies the PRA's approach to ensuring controls exist from end-to-end trading book and banking book risks. Firms with material trading activity are advised to carry out a self-assessment of their compliance with the revised expectations on booking arrangements within a reasonable timeframe.
• Operational resilience: operational resilience rules do not apply directly to branches but the PRA will look at whether the home state's operational resilience regime can deliver similar outcomes to those required by the UK regime. The PRA wants to ensure that any operational disruption at group level does not pose a risk to the provision of services by the UK business.

The expectations in the supervisory statement take effect on Monday 26 July 2021. The PRA is planning to give all authorised firms in scope of the supervisory statement time to meet the expectations. However, firms are expected to provide their supervisors with a clear explanation of any gaps they need to address to comply with the expectations, and their proposed timeframe for doing so.

7. PRA publishes policy statement on remuneration: correction to the definition of "higher paid material risk taker"

On 21 July 2021, the PRA published a policy statement (PS18/21) which provides feedback to responses to Consultation Paper on 'Remuneration: Correction to the definition of 'higher paid material risk taker'. This policy statement is relevant to PRA-authorised banks, building societies, and PRA-designated investment firms.

The PRA's final policy is as follows:

• amendments to the Remuneration Part of the PRA Rulebook; and
• an updated Supervisory Statement on 'Remuneration'.

The PRA confirmed that all changes outlined in this PS will take effect from Friday 23 July 2021.

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

8. FCA consults on proposals to boost disclosure of diversity on listed company boards and executive committees

On 28 July, 2021, the FCA published a consultation paper (CP21/24) on proposals to improve transparency for investors on the diversity of listed company boards and their executive management teams. In particular, the FCA is consulting on changes to its Listing Rules to require listed companies to publish annually:

• a comply or explain statement on whether they have achieved certain proposed targets for gender and ethnic minority representation on their boards; and
• data on the make-up of their board and most senior level of executive management in terms of gender and ethnicity.

The FCA is also proposing changes to its disclosure and transparency rules to require companies to ensure any existing disclosure on diversity policies addresses key board committees and considers broader aspects of diversity, including, for example, ethnicity, sexual orientation, disability, lower socio-economic background and other characteristics.

The Listing Rule diversity targets are not mandatory, so the FCA is not setting "quotas", but providing a positive benchmark for issuers to report against. The proposals would apply to UK and overseas companies with equity shares in either the premium or standard listing segments of the FCA's Official List, while the disclosure and transparency changes apply to companies with securities traded on UK regulated markets, such as the Main Market of the London Stock Exchange.

The consultation closes on 22 October 2021 and the FCA will seek to make relevant rules by late 2021.

Please refer to our previous briefing for further details.

9. HM Treasury publishes consultation paper on a Senior Managers and Certification Regime for Financial Market Infrastructures supervised by the Bank of England

On 20 July 2021, HM Treasury published its consultation on the government's plans to create a Senior Managers and Certification Regime (SM&CR) for Financial Market Infrastructures (FMIs) supervised by the BoE.

HM Treasury confirmed the SM&CR for FMIs would replicate the existing SM&CR in Part 5 of FSMA, whilst integrating with the different existing regulatory regimes for FMIs.

HM Treasury clarified that the principal difference between the existing SM&CR regime and the proposed SM&CR for FMIs, is that the BoE, rather than the FCA or PRA, would be the sole regulator for the purposes of making rules, supervision and taking enforcement action against those in breach of the regime.

The consultation closes on 22 October 2021.

10. HM Treasury call for evidence on the review of the UK's AML/CTF regulatory and supervisory regime

On 22 July 2021, HM Treasury issued a call for evidence on the UK's AML/CTF regulatory and supervisory regimes. Under the UK Economic Crime Plan 2019-22, the Government is required to carry out a comprehensive review of both the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) and the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017. The call for evidence will focus on three themes: the overall effectiveness of the regimes and their reach (i.e. sectors in scope as relevant entities); whether key elements of the current regulations are operating as intended; and the structure of the supervisory regime including the work of OPBAS to improve effectiveness and consistency of PBS supervision.

Views are sought on:

• the effectiveness of the MLRs in driving activity which most contributes to the overarching objectives of the AML/CFT regime (high impact activity). This will explore whether a significant proportion of the regulated sector's financial crime resource is consumed with complying which obligations which makes a limited contribution towards the objectives of the AML/CTF rules; and
• whether current enforcement powers under the MLRs are sufficient and proportionate to breach caused.

11. HM Treasury consultation on amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017

On 22 July 2021, HM Treasury issued a consultation paper on amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) in light of updates to international standards set by the Financial Action Task Force and industry feedback on the MLRs.

The key amendments being consulted on are:

• removing Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) from the scope of the MLRs;
• allowing AML/CTF supervisors to have a right of access to view the content of a suspicious activity report submitted on request;
• updating the activities that make a relevant person a credit or financial institution under Regulation 10 of the MLRs, and aligning it with FSMA and defined terms under the RAO;
• introducing an ongoing obligation to report discrepancies in beneficial ownership information;

In addition, the consultation also proposes to extend the retained Regulation on Transfers of Funds (2015/847/EU) to include the transfer of assets. The purpose of this is to allow cryptoasset transfers to be traced, and therefore cryptoasset service providers will need to provide full information about the sender and beneficiary of cryptoasset transfers in the same way payment service providers currently do for wire transfers. The EU Commission is proposing to make a similar extension – please see item 12 below.

12. EU Commission adopts package of measures to implement anti-money laundering and counter-terrorist financing action plan

On 20 July 2021, the EU Commission published a package of legislative proposals which significantly overhauls the existing EU anti-money laundering (AML) and countering terrorism financing (CTF) framework. The package contains four legislative proposals with detailed and wide-reaching amendments. Please refer to our briefing for further details. We summarise the key aspects under each below.

(a) A new Regulation to establish a new authority for EU AML/CFT: the new Regulation proposes establishing a new authority for AML/CFT Authority (AMLA).

(b) A new Regulation establishing a single rulebook for EU AML/CFTI: The new Regulation transfers provisions from the existing MLD4 and MLD5 and introduces a number of substantive changes including:

• expanding "obliged entities" to include all cryptoasset service providers, crowdfunding service providers falling outside the scope of the EU Crowd Funding Regulation ((EU) 2020/1503), and other businesses which we do not list here;
• introducing a new grey list of third countries which are not on the EU AML high risk list, but are on the FATF list of monitored jurisdictions;
• prescribing data which must be obtained as part of standard due diligence as well as data on beneficial owners;
• requiring all obliged entities to appoint a board director (or equivalent) to be responsible for the implementation of measures to ensure compliance with the EU AML regulatory framework;
• requiring all obliged entities to appoint one compliance manager to be responsible for the day-to-day implementation of the obliged entity's AML/CFT controls; and
• banning anonymous cryptoasset wallets.

(c) A new Directive on AML/CFT repealing and replacing MLD4 (as amended by MLD5): the key proposals in the proposed Directive are:

• host member states can require electronic money issuers, payment service providers, and cryptoassets service providers that are operating in their territory, to appoint a central contact point in the host member state's territory; and
• the requirement for cryptoasset service providers to register with a local regulator (under MLD5) has been removed. We assume this is in anticipation of the introduction of MiCA, which proposes registration/licensing requirements, and therefore makes the registration requirements under MLD5 redundant.

(d) A revised 2015 Regulation on Transfers of Funds (2015/847/EU) to trace transfers of cryptoassets: the Regulation is being extended to cover transfers of cryptoassets. Therefore, full information about the sender and beneficiary of transfers will have to be included by cryptoasset service providers in the same way payment service providers currently do for wire transfers.

The full AML/CTF rulebook, including technical standards, is expected to be in place and apply by the end of 2025.

Linked, on 29 July 2021, the European Banking Authority (EBA) also launched a consultation on new guidelines on the role, tasks and responsibilities of AML/CFT compliance officers. The guidelines include provisions on the wider AML/CFT governance set-up. This consultation runs until 2 November 2021.

13. FCA publishes consultation paper on post-Brexit divergence for Packaged Retail and Insurance-based Investment Products Regulation

On 20 July 2021, the FCA published its proposal to change disclosure documents provided to retail investors under the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation.

A key element in the FCA's recent consultation on the New Consumer Duty was to ensure that firms provide information which is understandable and helps consumers to make informed decisions. For further information, please refer to our newsflash of 11 June 2021 and our briefing for more detail on the New Consumer Duty.

According to the FCA, the proposed rule changes for PRIIPS will give firms great flexibility to ensure that their communications meet this test. The FCA proposes to:

• clarify the scope of the PRIIPs regulation making it clearer that certain common features of these instruments do not make them into PRIIPS and guidance on the meaning of PRIIPs being 'made available' to retail investors; and
• amend the PRIIPs Regulatory Technical Standards to require written explanation on performance in the KID; combat the potential for PRIIPs being assigned an inappropriately low summary risk indicator in the KID; and address concerns over applications of the slippage methodology when calculating transaction costs.

The FCA confirmed that it has plans to amend the PRIIPs RTS by the end of 2021. Any changes made will come into effect on 1 January 2022.

14. High Court rules that electronic money safeguarding rules do not create a trust over clients in the case of Ipagoo LLP v the FCA

On 30 July 2021, the High Court (Chancery Division) handed down its judgment in the matter of Ipagoo LLP (in administration) v the Financial Conduct Authority [2021] EWHC 2163 (Ch). The High Court held that:

• Regulation 20-22 and 24 of the Electronic Money Regulations 2011 (EMRs), which requires electronic money issuers to safeguard client funds, do not create a statutory trust in favour of electronic money holders, but give holders a statutory right to be paid out of safeguarded funds (Relevant Funds) in priority to all other creditors on the electronic money issuer's insolvency, on the terms set out in Regulation 24; and
• the definition of "Asset Pool" in Regulation 24 (where the claims of electronic money holders are to be paid from in priority to all other creditors) includes a sum equal to any Relevant Funds which should have been, but were not, safeguarded.

The High Court's judgment is a marked departure from the FCA's view that electronic money issuers hold Relevant Funds as trustee, and which the FCA unsuccessfully argued in this matter. It is likely that the FCA will row back on its requirement for electronic money issuers to request trust letters from their safeguarding bank/custodian as set out in its 9 July 2020 temporary Finalised Guidance on "Coronavirus and safeguarding customers' funds", which it has consulted on making permanent in its 27 January 2021 Consultation Paper.

15. FCA proposes changes to streamline its decision-making

On 29 July 2021, the FCA published a consultation paper (CP21/25) on changes to its decision-making process. The FCA is proposing to move the following decision-making from its Regulatory Decisions Committee (RDC) to its Authorisations, Supervision and Enforcement Divisions, including:

• imposing a requirement on a firm or varying its permissions by limiting or removing certain types of business;
• making a final decision in relation to a firm's application for authorisation or an individual's approval that has been challenged;
• making a final decision to cancel a firm's permissions because a firm does not meet the FCA's regulatory requirements; and
• the decision to start civil and/or criminal proceedings.

The RDC will continue to make decisions in relation to contentious enforcement cases, where the FCA is proposing a disciplinary sanction or seeking to impose a prohibition order.

The consultation closes on 17 September 2021. Following this consultation, the FCA will consider the feedback and aims to publish a policy statement in or around November 2021.