Financial Services SpeedRead 9 March 2022 edition

1. Outcome of UK Prospectus Regime Review

On 1 March 2022, the UK Government published the outcome of its Prospectus Regime Review, setting out the Government's policy approach to reforming the UK's Prospectus Regime.

The Government will replace the current regime with a simplified structure which is more 'agile and effective', allows more people to own public companies, and improves the quality of the information investors receive.

The main points covered in the review outcome include:

• FCA's role – in line with the Future Regulatory Framework review, the FCA will be given an increased degree of responsibility regarding implementing the new regime through rules.
• Prospectus – the prospectus will remain a key part of the UK regime, but the criminal offence prohibiting requesting admission to trade on UK regulated markets without a FCA-approved prospectus will be removed. The FCA will be able to set out in its Handbook if and when a prospectus is needed, what it needs to contain and in which circumstances it needs to be reviewed and approved before publication.
  However, prospectuses will not be a part of the public offerings regime. Instead, public offerings of securities will be generally prohibited unless an exemption applies. The list of exemptions under article 1(4) of the existing Prospectus Regulation will be expanded (for example securities admitted to trading on some multilateral trading facilities). The Government is also looking to include non-transferable securities in the new regime.
• 'Necessary information' test – a single statutory 'necessary information' test will remain standard when preparing a prospectus (which may vary depending on whether it is a first or secondary issuance and will focus on the issuer or guarantor's creditworthiness if it concerns debt securities). Investors who can demonstrate they have suffered losses as a result of false or misleading information, or information being omitted, can seek compensation.
• Forward-looking information – the threshold for liability for certain categories of forward looking information in prospectuses will be increased.
• Private companies – private companies will be able to grow their businesses more quickly by increasing capital raising options available to them without needing to admit securities to listed markets. For example, the Government plans to remove the need for a FCA-approved prospectus for offers over EUR 8 million and replace it with the offering of securities through a firm-operated platform (which will become a new regulated activity).
• Overseas public offerings – a new regime of regulatory recognition for offers of securities listed on designated overseas stock markets into the UK will be developed.

2. HM Treasury: Wholesale Markets Review Response

On 1 March 2022, HM Treasury published its response to its July 2021 consultation on the Wholesale Markets Review (we covered this item in entry 7 of the Ashurst FSS dated 6 July 2021). The Wholesale Markets Review sets out proposals to amend UK MiFID following Brexit.

In its response, HMT confirms that the Government will be:

• making amendments to the UK systematic internalisers regime;
• removing the share trading obligation;
• delegating the fixed income and derivatives, and part of the pre-trade transparency, regimes to the FCA;
• assisting the FCA with the development of a private sector consolidated tape;
• removing the double volume cap; and
• reducing the scope of the commodities position limits regime and delegating it to trading venues.

For more information, please see our briefing.

3. HM Treasury Consultation response: Amendment to Section 48D of the Banking Act

On 2 March 2022, HM Treasury issued a response to its consultation on an amendment to section 48D of the Banking Act 2009 concerning the definition of an 'investment firm' (we covered this development in entry 4 of the Ashurst FSS dated 14 September 2021).

In the response, the Government confirms that it is proceeding with its proposal to amend the definition. The Government had consulted on amending the definition of "investment firm" in Section 48D to capture PRA-designated investment firms and FCA-regulated investment firms with permission to underwrite or deal on own account, so that short-term liabilities owed to these firms will continue to be exempt from bail-in. This was in response to the removal of FCA-regulated investment firms from the scope of the UK resolution regime, which raised the question of whether short-term liabilities owed to FCA-regulated investment firms should continue to be excluded from the Bank of England’s bail-in power under Section 48B of the Banking Act 2009.

4. Publication of the Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2022

On 1 March 2022, the draft Financial Services Act 2021 (Prudential Regulation of Credit Institutions and Investment Firms) (Consequential Amendments and Miscellaneous Provisions) Regulations 2022 were published. The SI is part of a package of instruments which supports the introduction of the IFPR and Basel III standard.

The SI:

• amends primary, secondary, and retained EU law and makes transitional provision for some securitisations, following the introduction of the IFPR and implementation of the Basel 3 standards on 1 January 2022;
• amends the Banking Act 2009 to guarantee that investment firms with permission to underwrite or deal on own account will continue to be exempt from bail-in if they are owed short-term liabilities; and
• addresses the legal deficiencies resulting from Brexit.

The SI enters into force on 17 August 2022.

5. European Court of Auditors publish Special Report

On 22 February 2022, the European Court of Auditors published "Special report 04/2022: Investment funds: EU actions have not yet created a true single market benefiting investors".

The ECA's report assessed the suitability of the EU regulatory framework, the EU's goal to create similar and effective supervision in all member states, and investor protection and financial stability work during the period from 2016 to July 2021. The report states that the "ambitious goals" of the EU to establish a single market for investment funds has not yet been achieved.

Although the actions of the EU have facilitated a single market for investment funds, "true cross-border activities and benefits for investors remain limited". The ECA also concluded that the "consistency and effectiveness of fund supervision and investor protection is insufficient".

In order to address the outstanding issues, the ECA have recommended an "overhaul of the legal framework" in order to facilitate "more effective convergence work, better investor protection and a streamlined reporting framework". The ECA have made the following specific recommendations to be actioned:

• Recommendation 1: Assess the suitability of the existing framework to achieve the desired objectives.
• Recommendation 2: Enhance the effectiveness of ESMA's convergence work.
• Recommendation 3: Protect investors better against undue costs and misleading information.
• Recommendation 4: Improve the identification of systemic risk.
• Recommendation 5: Streamline data collection and update reporting regimes.

Recommendations 1,2,3 and 5 are to be actioned by 2024 and Recommendation 4 is to be actioned by 2025.

The press release can be viewed here and the webpage can be viewed here.

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

6. Draft Economic Crime (Transparency and Enforcement) Bill 2022

On 28 February 2022, the government published a draft Economic Crime Bill (ECB). The draft ECB introduces a 'Register of Overseas Entities" which aims to crack down on foreign criminals who use UK property for money laundering purposes.

To ensure transparency and to prevent criminals from hiding behind shell companies, anonymous foreign owners will be required to confirm the identity of their beneficial owners and to register and verify them with Companies House. Sanctions for non-compliance include restricting the registration or disposal of the title of land owned by such companies. Such companies' managing officers can also face daily fines of up to £500 or imprisonment for up to five years.

The Register of Overseas Entities will apply retrospectively to property bought in England in Wales since January 1999 and since December 2014 in Scotland.

The new measures apply to foreign owners of UK property, which includes:

• any company (or similar legal entity) that is governed by the law of a non-UK country or territory;
• individuals with significant influence or control over the above entity (25% or more of the shares or voting rights).

The ECB also reforms and strengthens the UK's Unexplained Wealth Order (UWO) regime to allow authorities to inspect a property's origin and recover the proceeds of crime. UWOs can be taken against property held in trust and other complicated ownership structures, including opaque foundations. Law enforcement also has more time to review material provided in relation to a UWO under the ECB.

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

7. FCA's SCA webpage update: reauthentication exemption

On 1 March 2022, the FCA added a new section to its strong customer authentication (SCA) webpage regarding the reauthentication exemption.

Following PS 21/19 in November 2021, the FCA introduced a number of changes to the Regulatory Technical Standards on Strong Customer Authentication and Secure Communication (SCA-RTS), which will enter into force on 26 March 2022. The changes comprise a new exemption under Article 10A which will remove the need for customers to reauthenticate when they access their account information through a third party provider (who would need to obtain the customer's explicit consent at least every 90 days).

To ensure the continual growth of open banking, competition and innovation, the FCA "strongly encourage" account servicing payment service providers (ASPSPs) to apply the exemption as soon as possible after the changes to the SCA-RTS come into effect and are looking for most ASPSPs to adopt the exemption by 30 September 2022.

8. Insolvency and Companies Court retract ruling on whether the EMR and the PSR create a statutory trust

On 24 February 2022, the Insolvency and Companies Court withdrew its original decision that the Payment Services Regulations 2017 (SI 2017/752) (PSRs) and Electronic Money Regulations 2011 (SI 2011/99) (EMRs) create a statutory trust for payment service users and electronic money holders following an insolvency event. Instead, as a result of the recent High Court judgement in Re ipagoo LLP , the judge changed his original decision in Re Allied Wallet Ltd [2022] EWHC 402 (Ch) and held that a statutory trust would not arise under these regulations on insolvency.

In Re ipagoo LLP, it was held that the normal priority rules on insolvency would not apply if relevant funds had not been appropriately safeguarded and that an equivalent sum would need to be added to the asset pool, per the requirements under the EMRs. The FCA has made an application to appeal the decision in Re ipagoo LLP.

9. EBA publish final report and guidelines on the limited network exclusion under PSD 2

On 24 February 2022, the EBA published its final report "Guidelines on the limited network exclusion under PSD2".

The Guidelines set out how National Competent Authorities are to assess whether a network of service providers or a range of goods and services qualify as 'limited' and are therefore excluded from the scope of PSD2.

The Guidelines aim to address the inconsistencies across the EU in how the exclusion has previously been applied. It is expected that the following payment instruments may benefit from the exclusion: store cards, fuel cards, public transport cards and meal vouchers.

The Guidelines are to come into force on 1 June 2022.

The press release can be accessed here.

10. Letter from PSR to Treasury Select Committee regarding card payment fees

On 21 February 2022, the Treasury Select Committee published a letter it received from the Payments Service Regulator (PSR) dated 11 February 2022 regarding scheme fees and interchange fees.

This letter followed exchanges between the Treasury Select Committee and the PSR in December 2021 and January 2022. The PSR notified the Treasury Select Committee that they are carrying out work to assess the basis for card scheme fees and cross-border interchange fees. This will build upon their previous review into the supply of card acquiring services.

11. FCA's press release regarding Bitpanda GmbH

On 22 February 2022, the FCA published a statement regarding "Recent statements by Bitpanda GmbH (Bitpanda)" which announced the acquisition of Trustology Limited.

Trustology Limited is a cryptoasset business that has been registered with the FCA under the Money Laundering Regulations 2017 (MLRs) since October 2021.

As a result of the acquisition, Bitpanda has become the new beneficial owner of Trustology for the purposes of the MLRs. Under the MLRs, the FCA does not have the power to assess the fitness and propriety of beneficial owners or changes in control before the transaction is complete however the FCA does have the power to take steps to cancel or suspend the businesses' registration if it is not convinced that the beneficial owner is fit and proper.

12. ASA uphold complaint against Floki Inu

On 2 March 2022, the Advertising Standards Authority (ASA) published a ruling against Floki Ltd (trading as Floki Inu), a cryptocurrency, for breaching advertising rules relating to one of its advertisements.

The complaint related to a cryptocurrency poster displayed across the London Underground in November 2021. The advertisement consisted of a picture of a cartoon dog, text saying "MISSED DOGE. GET FLOKI" and an accompanying risk warning in smaller text at the bottom of the advertisement.

Upholding the complaint, the ASA concluded that the poster breached CAP Code Rules 1.3 (Social Responsibility) and 14.1 (Financial Products) by:

• recklessly taking advantage of consumers' fears of missing out and making light of investing in cryptocurrency. The ASA found that the size of the risk warning was too small and the image of the cartoon dog portrayed purchasing cryptocurrency as trivial; and
• exploiting consumers' credibility or inexperience by not making clear that they would need to pay CGT on profits from their cryptocurrency investments.

Floki Inu can no longer use the advertisement in the form complained about and must ensure it addresses the issues raised in the ruling.

13. European Commission (Platform on Sustainable Finance) Final Report by Subgroup 4: Social Taxonomy

On 28 February 2022, the EU Platform on Sustainable Finance published its final report on a social taxonomy for the purposes of EU legislation on sustainable finance and sustainable governance. The proposed structure of the social taxonomy includes the development of social objectives, types of substantial contributions, "do no significant harm" (DNSH) criteria, and minimum safeguards.

It also contains sub-objectives specifying different aspects of the following three social objectives:

• decent work (including for value-chain workers);
• adequate living standards and wellbeing for end-users; and
• inclusive and sustainable communities and societies.

The sub-objectives focus on health and safety, healthcare, housing, wages, non-discrimination, consumer health and communities' livelihoods.

The report also considers requirements for future social criteria and indicators within this framework.

The European Commission is expected to review the report.

14. Listed companies: new TCFD aligned climate-related disclosure requirements

On 25 February 2022, following a consultation in November 2021, the FCA published a primary market technical note outlining the finalised Task Force on Climate-Related Financial Disclosures (TCFD) aligned climate-related disclosure requirements for listed companies.

Premium listed commercial companies and some standard listed companies must include a statement in their annual financial report outlining:

• whether they have made climate-related financial disclosures in line with the recommendations of the TCFD;
• where the above disclosures can be found in their annual financial report (or other document);
• if they have not made the above disclosures, an explanation as to why and a description of the steps they are following or will follow to make such disclosures in the future (including a timeline); and
•  if they have made some or all of the above disclosures in a document which is not their annual financial report, an explanation as to why.

Guidance on whether climate-related financial disclosures align with TCFD recommendations can be found in the Listing Rules (at LR 9.8.6BG, LR 9.8.6CG and LR 9.8.6DG, and LR 14.3.28G, LR 14.3.29G and LR14.3.30G).

A "full, clear and meaningful explanation" should be given if the above disclosures are not made. An appropriate level of detail should also be given when outlining what steps need to be taken to make any outstanding disclosures in the future, so that both investors and stakeholders have a full understanding of the nature of the proposed steps.

15. New EU directive on corporate sustainability due diligence

On 23 February 2022, the European Commission announced that it had adopted a proposal for a Directive on Corporate Sustainability Due Diligence. The aim of the proposal is to "foster sustainable and responsible corporate behaviour throughout global value chains".

In-scope EU companies (EU limited liability companies of 500+ employees and EUR 150 million+ global net turnover (Group 1), and EU limited liability companies which operate in defined high impact sectors with 250+ employees and EUR 40 million+ global net turnover (Group 2)) and non-EU companies which are active in the EU and meet either the Group 1 or Group 2 turnover thresholds, will be subject to the new due diligence rules. The proposal does not directly include SMEs but includes supporting measures for those SMEs which could be indirectly impacted.

Companies in scope of the proposal must ensure their own operations, subsidiaries and direct and indirect value chains:

• incorporate due diligence into their policies;
• identify definite or potential adverse human rights and environmental impacts;
• prevent or alleviate possible impacts;
• remove or reduce actual impacts;
• create and maintain a complaints procedure;
• evaluate the success of the due diligence policy and measures; and
•  publicly communicate on due diligence.

Group 1 companies must also have a plan to ensure their business strategy is in line with limiting global warming to 1.5 degrees Celsius.

National administrative authorities will be responsible for supervising the new requirements and will be able to implement fines for non-compliance.

16. New heads for FCA's Leeds Office

On 28 February 2022, as part of its commitment to "expand its footprint across the UK" the FCA announced that William Hague, the FCA's former Chief People Officer, and Stephen Braviner Roman, the FCA's General Counsel, will take the lead in setting up the FCA's new Leeds office.

The FCA has recently recruited 95 people into new positions in its Authorisations division, and intends to double the number of personnel in Edinburgh to around 200.

However, the FCA clarified that the developments in Leeds and Edinburgh will not require roles in London to be restructured and is intended to increase the FCA's resource levels.

17. Barclays fined £783,800 by FCA for oversight failings with Premier FX

On 28 February 2022, the FCA published a final notice in which it fined Barclays Bank plc £783,800 for "failing to conduct its business with due skill, care and diligence" (Principle 2 of the Principles for Business). The FCA found that Barclays failed to effectively oversee and monitor its business relationship with the now liquidated Premier FX Ltd. For example, Barclays failed to ensure that Premier FX's business aligned with its expectations when it received information from Premier FX and failed to recognise the deficiencies in Premier FX's controls.

The FCA took Barclays's voluntary agreement to cover the losses of Premier FX customers whose claims have been approved by Premier FX's liquidators (£10,076,943.75) into account when deciding on the financial penalty.

In February 2021, the FCA publicly censured Premier FX for misleading customers about its services and for failing to safeguard client money.

18. UK and New Zealand sign trade deal

On 28 February 2022, the UK and New Zealand signed a new free trade agreement (FTA). This is the second FTA the UK has signed following its departure from the EU.

Chapter 11 and Annex 11a deal with the financial services sections of the FTA. Commitments include: (i) establishing non-discrimination rules that ensure the fair treatment of UK and New Zealand firms when providing services in each other's markets; (ii) facilitating cross-border financial services trade for insurance and portfolio management services; and (iii) ensuring the free flow of financial data across borders.

Both the UK and New Zealand need to finish their own domestic procedures in order for the FTA to come into effect.

The impact assessment can be found here.

The draft explanatory memorandum can be found here.

The Department for International Trade has also published a document outlining its view of the top 10 benefits of the FTA.

19. Dormant Assets Act gains royal assent

On 24 February 2022, royal assent was granted to the Dormant Assets Act 2022. The Act amends the Dormant Bank and Building Society Accounts Act 2008 to increase the scope of the current Dormant Assets Scheme to include additional assets from insurance, pensions, investment and wealth management and securities sectors.

The new measures are expected to release £880 million in dormant assets.

The Government's press release can be accessed here.

20. FSCB and FSSC report on inclusion

On 23 February 2022, the Financial Services Culture Board (FSCB) and Financial Services Skills Commission (FSSC) published a report on "Inclusion across financial services: Piloting a common approach to measurement report". The report presents the largest sector survey to date carried out in the UK on inclusion.

The main findings of the report are:

• 89 per cent of employees responded positively regarding their managers' efforts to promote an inclusive workplace;
• 33 per cent of participating firms do not currently discuss inclusion metrics at Board level;
• 19 per cent of employee respondents expressed concerns of being judged based on their identity and / or background;
• 17 per cent of employee respondents expressed concerns that they would not speak up out of the fear of the consequences; and
• 72 per cent of employee respondents said they felt they had fair access to opportunities within the workplace but 13 per cent said they did not.

The report suggests that employers can act upon these findings by:

• understanding and measuring inclusion as well as diversity within firms;
• developing and demonstrating a culture of listening and learning;
• maintaining and demonstrating fair and transparent processes and systems; and
• demonstrating strong leadership on inclusion.

The webpage can be accessed here and the press release can be accessed here.

21. UK and Singapore sign new innovative digital trade deal

On 22 February 2022, following the announcement of an agreement in principle in December 2021, the UK and Singapore signed a Digital Economy Agreement (the "DEA"). The DEA has been described by the UK Government as "the world’s most innovative trade agreement, covering the digitised trade in services and goods across the whole economy".

In relation to financial services, the DEA seeks to permit the continued free flow of financial data without unjustified data localisation (e.g. UK financial services firms would not be obligated to store financial data in Singapore). The UK and Singapore will also promote transparency for accessing electronic payments and co-operate on innovative financial services (e.g. fintech and regtech). There is also a commitment for both parties to revitalise the existing UK-Singapore FinTech Bridge.