Financial Services Speedread: 13 April 2021

1. ESMA clarifies corporate disclosure obligations for UK issuers after Brexit

On 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 Provisions

As 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".

3. ESMA publishes MiFIR review report on the obligations to report transactions and reference data

On 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.

• The scope of the transaction reporting and reference data obligations both in terms of entities subject to the transaction reporting obligation and in terms of instruments to be reported under both obligations - The report includes a recommendation to extend the scope of reporting requirements under article 26 of MiFIR to UCITS and AIFMs when they provide at least one MiFID service to third parties. With respect to the scope of financial instruments to be reported, the report includes proposals for a simplification of the traded on a trading venue concept, and to further align the transaction reporting obligation with existing concepts under the Benchmark Regulation (in particular, the definition of "index").
• The specific data elements that should be reported under the transaction reporting obligation that are explicitly mentioned in the Level 1 provision under article 26(3) of MiFIR - ESMA has assessed each of these data elements and for each of them has included proposals as to whether the data element should be maintained, removed, replaced or further clarified. In particular, the report recommends simplifying reporting with the removal of the short sale indicator. Furthermore, the report contains proposals for four additional elements to be included in the set of details to be reported in order to maximise the usage of transaction reporting data. Notably, these proposals concern the inclusion of information on client categories and buyback programmes as well as the proposal for a specific empowerment to ESMA to specify the conditions for linking specific transactions and for identifying aggregated orders resulting in the execution of a transaction.
• The order transmission regime and the delegation of the reporting obligation to Authorised Reporting mechanisms - The report considers the interaction with reporting obligations under EMIR and includes proposals to ensure further alignment between the two reporting regimes. The report also covers the use of LEIs for reference data reporting purposes and potential changes to the rules concerning the use of LEIs.

4. ESMA makes recommendations for Organised Trading Facilities under MiFID II/MiFIR

On 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 Markets

On 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 controls

In 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:

• two of the FCA's biggest sanctions in the last 12 months related to failures to address financial crime and anti-money laundering (AML) risks;
• the FCA currently has 42 ongoing investigations into firms and individuals involving, for example, systems and controls over politically exposed persons, customers with significant cash intensive operations, correspondent banking and trade finance, and transaction monitoring;
• in the last 12 months, the FCA has increased its surveillance of online investment promotions, targeting offers from unauthorised firms, potential investment scams and other "too good to be true promotions", including lead generation sites; and
• the FCA's new role as the AML supervisor of cryptocurrency firms since 10 January 2021 and that the FCA has developed an "Unregistered Cryptocurrency Businesses List". The list is designed to help consumers and FCA authorised firms identify cryptocurrency firms that appear to be carrying on business in the UK but are not registered with the FCA or sought such registration.

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

In 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:

• the letter of authority and the completion of the application form entailed CLP making "arrangements" to transfer into the defendant's SIPP. The steps taken by CLP were such as to "bring about" the transfers, even though they did not necessarily result in any transaction. As a result, CLP had contravened the general prohibition;
• for the purposes of article 53 of RAO, simply providing information without any comment would not normally amount to "advice". However, providing information "which was itself the product of a selection process involving a value judgement, so that the information would tend to influence the recipient's decision, was capable of being advice"; and
• it was not just and equitable to grant relief under section 28(3) of FSMA. The fact that the defendant was not to be taken as having actual knowledge of CLP's breaches did not mean that the section 28(3) discretion had to be exercised in its favour. A key aim of FSMA was consumer protection. The defendant had had the choice to decline to continue to permit the claimant (and other clients) to invest in storepods or at least to explore the position with him, but had not done not do so notwithstanding that by then it had had concerns.

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

8. ESMA updates AIFMD Q&As

On 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.

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

9. FCA policy statement on the extension of annual financial crime reporting obligation

In 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:

• certain firms authorised under the Financial Services and Markets Act 2000 which fall within the scope of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2007/2157) (MLRs) and which: (i) hold client money or assets; or (ii) carry on an activity that the FCA considers to pose a higher money laundering risk (e.g. dealings in investments as agents and managing investments);
• all payments institutions except for payment institutions that only carry on at least one of the following payment services:
• money remittance, as these firms are supervised by HMRC for anti-money laundering (AML) purposes;
• account information services and/or payment initiation services, as these firms do not receive or hold clients' money and do not carry out payment transactions, and so pose a lower AML risk; or
• persons with temporary payment institutions authorisation that immediately before IP completion day were providing payment services other than through a branch in the UK or a UK-based agent;
• all electronic money institutions;
• all Multilateral Trading Facilities;
• all Organised Trading Facilities (OTFs). OTFs are a type of firm introduced by MiFID II, and therefore the FCA is bringing them with the scope of the REP-CRIM obligations; and
• all crypto-asset exchange providers and custodian wallet providers.

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.
The consultation proposed that crypto-asset firms would have to submit their first REP-CRIM return from their next accounting reference date after 10 January 2022. However, on 16 December 2020, the FCA established a Temporary Registration Regime to allow existing crypto-asset firms, who had applied to be registered with the FCA, to continue trading. The FCA has therefore aligned the coming into force date of the new rules for all firms to 30 March 2022. This still allows crypt-asset firms at least 12 months from the date they had been registered by the FCA (i.e. by 10 January 2021). The new requirements do not affect the reporting timelines for firms that are already required to submit REP-CRIM on an annual basis.

See: FCA: Handbook Instrument: Supervision Manual (Financial Crime Report) (Amendment No 2) Instrument 201 (2021/13); FCA: Direction: Annual Financial Crime Reporting Requirements for Cryptoasset Businesses Registered under the Money Laundering Regulations.

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

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

10. ESMA fines Moody's €3.7 million for conflicts of interest failures

On 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:

• the issuance of credit ratings in violation of the ban on issuing new ratings on entities where a credit rating agency shareholder exceeds the 10% ownership threshold and/or is a board member of the rated entity;
• failure to disclose conflicts of interests related to the 5% ownership threshold; and
• inadequate internal policies and procedures to manage shareholder conflicts of interest.

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:

• Moody's UK: €2,735,000;
• Moody's France: €280,000;
• Moody's Germany: €340,000; and
• Moody's Italy and Moody's Spain: €174,000 each.

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.