Financial Services Speedread: 13 April 2021
Welcome to the latest edition of the Financial Services SpeedRead, a collection of bite-sized updates designed to help you keep on top of key regulatory developments in financial services over the preceding fortnight. Please get in touch if you want to explore any of the topics covered in this fortnight's edition of Financial Services SpeedRead.
IN THIS EDITION OF THE FINANCIAL SERVICES SPEEDREAD WE COVER THE FOLLOWING 10 UPDATES: |
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Brexit 1. ESMA clarifies corporate disclosure obligations for UK issuers after Brexit 2. ESMA updates Q&As on the Benchmark Regulation Transitional Provisions |
Financial Markets 3. ESMA publishes MiFIR review report on the obligations to report transactions and reference data 4. ESMA makes recommendations for Organised Trading Facilities under MiFID II/MiFIR 5. ESMA publishes final report on SME Growth Markets 6. FCA Executive Director of Enforcement and Market Oversight highlights importance of purposeful anti-money laundering controls 7. Russell David Edwards Adams v Options UK Personal Pensions LLP: Court of Appeal decision on COBS 2.1.1R and section 27 of FSMA |
Fund Management 8. ESMA updates AIFMD Q&As |
Financial Crime 9. FCA policy statement on the extension of annual financial crime reporting obligation |
Other 10. ESMA fines Moody's €3.7 million for conflicts of interest failures |
Brexit |
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1. ESMA clarifies corporate disclosure obligations for UK issuers after BrexitOn 31 March 2021, ESMA published a public statement concerning the application of transparency requirements by UK issuers with securities admitted to trading on regulated markets in the EU, now third country issuers, under the Transparency Directive. The aim of the statement is to ensure a common supervisory approach by all National Competent Authorities (NCAs) concerning the application of the accounting frameworks used by UK issuers, in relation to consolidated and individual financial statements of single and group entities. Amongst other things, the statement highlights that, from 1 January 2021, UK issuers may use the International Financial Reporting Standards, as endorsed by the EU, or as issued by the International Accounting Standards Board, amongst other accounting standards, when complying with their Transparency Directive obligations for consolidated financial statements and individual financial statements of single entities. ESMA states NCAs will monitor the compliance of UK issuers with this statement. 2. ESMA updates Q&As on the Benchmark Regulation Transitional ProvisionsAs covered in our previous FSS update, as a result of Brexit, UK-based administrators are now treated as third-country administrators under the EU Benchmark Regulation (EU BMR). However, as a result of the recent amendment to article 51(5) of the EU BMR, extending the transition period to 31 December 2023, ESMA confirmed that EU supervised entities can, for the duration of the transition period, use third-country benchmarks if the benchmark is already used in the EU as a reference for financial instruments, financial contracts, or for measuring the performance of an investment fund, even if the benchmark is not included on the ESMA register. On 31 March 2021, ESMA updated its Q&As on the EU BMR. The updated Q&As further clarify the application of the transitional provisions for third-country administrators under the EU BMR. ESMA has clarified that the meaning of the term "where the benchmark is already used in the Union" in article 51(5) of the EU BMR means "where the benchmark is already used in the Union on or before 31 December 2023". |
Financial Markets |
3. ESMA publishes MiFIR review report on the obligations to report transactions and reference dataOn 23 March 2021, ESMA published its final MiFIR review report on the obligation to report transactions and reference data. The report was prepared in accordance with the obligation under article 26(10) of MiFIR which requires ESMA to submit a report to the EU Commission assessing the functioning of the transaction reporting regime under article 26 of MiFIR. The key contents of the report are summarised below.
4. ESMA makes recommendations for Organised Trading Facilities under MiFID II/MiFIROn 23 March 2021, ESMA published its final report on the functioning of Organised Trading Facilities (OTFs). The report contains recommendations and possible amendments to MiFID II/MiFIR with a view to reducing the level of complexity for market participants and making the legal framework more effective. The main focus of the report was to analyse the definition of OTFs, in particular, the definition of a multilateral system and the trading venue perimeter. The report also looks at the number of OTFs authorised in the EU and their market share, examines how OTFs apply discretion, and reviews their use of matched principal trading (MPT). While some proposals can be implemented by ESMA directly by publishing ESMA guidance, other recommendations are addressed to the EU Commission. In this context, ESMA puts forward a two-step approach aiming at clarifying the trading venue perimeter. More specifically, ESMA proposes to move article 1(7) from MiFID II to MiFIR, and that ESMA publishes an Opinion clarifying the boundaries of a trading venue's authorisation (i.e. what would be viewed as outside the scope of a regulated market, MTF or OTF's authorisation). In addition, the report also includes a recommendation to the EU Commission to add a definition of bulletin boards to MiFID II, and to align the provisions regarding the prohibition of the use of MPT by MTFs and regulated markets. The report has been submitted to the EU Commission and is expected to be taken into consideration for further legislative proposals on the MiFID II regime. For more information, see our detailed briefing here. 5. ESMA publishes final report on SME Growth MarketsOn 25 March 2021, ESMA published its final report on the functioning of the regime for SME Growth Markets (GMs) under MiFID II/MiFIR. It contains recommendations and possible amendments to the MiFID II framework to the SME GMs regime, which ESMA considers are needed to improve the attractiveness of the regime. Among the proposed measures, the report includes recommendations to help promote the concentration of liquidity on SME GMs, to improve standardisation and access to information for investors, and suggestions on how to develop homogeneous admission requirements. The report was submitted to the EU Commission and is expected to be taken into consideration for further legislative proposals on the MiFID II SME GMs regime. 6. FCA Executive Director of Enforcement and Market Oversight highlights importance of purposeful anti-money laundering controlsIn a speech delivered at the AML & ABC Forum 2021 on 24 March 2021, Mark Steward, FCA Executive Director of Enforcement and Market Oversight, emphasised the importance of purposeful anti-money laundering controls. Mr Steward drew particular attention to the following:
7. Russell David Edwards Adams v Options UK Personal Pensions LLP: Court of Appeal decision on COBS 2.1.1R and section 27 of FSMAIn Russell David Edwards Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474 (on appeal from the High Court), the claimant, Mr Adams, successfully appealed (in part) against the dismissal of his claim against a pension fund operator for the recovery of his investment pursuant to section 27 of the Financial Services and Markets Act 2000 (FSMA). Background Under section 27 of FSMA, where an authorised person makes an agreement in the course of carrying on a regulated activity, but the agreement is made in consequence of a third party's breach of the general prohibition, the other party is entitled to recover money or other property paid or transferred. Section 28(3) of FSMA gives the court a discretion to allow an agreement to be enforced and money and property to be retained, notwithstanding a breach of the general prohibition. The defendant operated as a self-invested personal pensions (SIPP) provider and administrator, acting on an execution only basis. It offered two types of SIPPs and later began to invest in "storepods" (i.e. investments comprising of long leases of units in storage facilities). Most of the clients who invested in storepods were introduced to it by CLP Brokers Socieded Limitada (CLP). CLP was not authorised by the FCA. The claimant approached CLP with the intention of releasing funds from his pension. He claimed that CLP had referred to the storepods as a suitable alternative investment and recommended the defendant as a pension manager. The claimant signed a letter of authority permitting CLP to liaise with the defendant, and a form to apply for membership of defendant's pension scheme. His pension fund was transferred to the defendant and invested in the storepods. The storepods proved unsuccessful as an investment. The defendant subsequently ended its relationship with CLP after learning that CLP was receiving a commission from the company which granted the storepods leases. High Court decision The High Court held that CLP had not been carrying on the regulated activity of "arranging deals in investments" under article 25(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 544/2001) (RAO), as this required a causal link between the act of arranging and the actual transaction itself. The Court rejected the argument that this requirement was satisfied if the transaction would not have taken place "but for" the arranging. Furthermore, the Court found that rights under the SIPP were not specified investments for the purposes of RAO, as members of the pension scheme enjoyed their right pursuant to the declaration of trusts, but did not "convert", "dispose of" or "sell" rights merely by altering the underlying investments. The High Court also held that the there was no duty for the defendant under COBS 2 to consider the suitability/appropriateness of the SIPP. Court of Appeal decision The appeal was allowed in part, with the Court of Appeal dismissing the COBS claim, but allowing the appeal in respect of the section 27 of FSMA claim:
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Banking and Prudential |
No updates included for this fortnight's edition of the FSS. |
Fund Management |
8. ESMA updates AIFMD Q&AsOn 30 March 2021, ESMA updated its Q&As on the application of AIFMDs. The purpose of the updated Q&A document is to promote common supervisory approaches and practices in the application of ESMA's guidelines on performance fees in UCITS and certain types of AIFs (Guidelines). The updated Q&As provide clarification on the crystallisation of performance fees, on the timeline of the application of the performance reference period, and the scope of the Guidelines in respect of European Long-Term Investment Funds. Amongst other things, the updates Q&As clarify that the Guidelines do not prevent the payment of performance fees during the performance reference period of five years and/or in the first years of a fund's existence, in case the fund has not existed for five years. |
Senior Managers and Governance |
No updates included for this fortnight's edition of the FSS. |
Financial Crime |
9. FCA policy statement on the extension of annual financial crime reporting obligationIn July 2016, the FCA introduced an annual financial crime reporting obligation for certain firms (REP-CRIM). In August 2020, it consulted on increasing the number of firms that were required to submit a REP-CRIM return. The FCA proposed that crypto-asset businesses, and many firms that were not previously included, be brought into scope of the REP-CRIM return based on their business activities and the potential money laundering risks. Following consultation, the FCA has published its final policy and requirements (PS 21/4). Extension of REP-CRIM annual returns In the policy statement, the FCA stated that it is extending the scope of firms which are required to submit the REP-CRIM annual return from approximately 2,500 to approximately 7,000 firms. The FCA has based its assessment of which firms this extension will apply to on its understanding of the potential money laundering risks. In summary, the following additional firms will be required to provide a REP-CRIM return irrespective of their total annual revenue:
However, the FCA has removed two activities from the REP-CRIM reporting obligation which it considers are outside of the scope of the MLRs: "home finance mediation activity" and "making arrangements with a view to transactions in investments", each as defined in the FCA Handbook Glossary. Crypto-asset firms' REP-CRIM reporting obligations In the policy statement, the FCA also sought to clarify that a crypto-asset business is not required to submit sanctions-specific information, but may choose to do so voluntarily. Fraud questions remain voluntary, as they do for all firms submitting REP-CRIM. |
Retail Investments |
No updates for this fortnight's edition of the FSS. |
Payments |
No updates included for this fortnight's edition of the FSS. |
Fintech |
No updates included for this fortnight's edition of the FSS. |
Others |
10. ESMA fines Moody's €3.7 million for conflicts of interest failuresOn 23 March 2021, ESMA fined five entities in the Moody's Group, based in France, Germany, Italy, Spain and the UK, a total of €3,703,000 and issued public notices for breaches of the Credit Ratings Agencies Regulation in connection with the obligation to ensure independence and the avoidance of shareholder conflicts of interest. The breaches related to:
All breaches were found to have resulted from negligence on the part of Moody's. The five entities subject to the action are Moody's Investors Service Ltd (Moody's UK), Moody's France S.A.S. (Moody's France), Moody's Deutschland GmbH (Moody's Germany), Moody's Italia S.r.l. (Moody's Italy), and Moody's Investors Service España S.A. (Moody's Spain). They were each fined the following amounts:
ESMA emphasised that it was crucial, to ensure independent good quality ratings and to protect investors, that credit rating agencies carefully identified, and subsequently eliminated or managed and disclosed conflicts of interest to avoid interference by shareholders with the rating process. See: ESMA decisions in respect of Moody's UK, Moody's France, Moody's Germany, Moody's Italy, and Moody's Spain. |
Authors: Emma Tran & Vidhi Mahajan
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