Financial Services Speedread 15 July

1. IOSCO publishes final report on key lessons learned regarding the operational resilience of trading venues and market intermediaries during COVID-19

On 11 July 2022, IOSCO published its final report on the operational resilience of trading venues and market intermediaries during the COVID-19 pandemic & lessons for future disruptions (FR06/22).

In summary, the key lessons learned are:

• Operational resilience means more than just technological solutions, it also depends on the regulated entity’s processes, premises and personnel, when faced with a significant disruption.
• Full business processes and all dependencies and interconnectivity to be considered before and after a disruption in order to adequately assess potential risks and changes to controls. The role of service providers and off-shore services, whether intragroup or third parties, are critical.
• It is important to review, update and test business continuity plans (BCP), including scenario planning, and consider whether updates to reflect lessons learned from COVID-19 are required.
• An entity’s governance framework should facilitate and support operational resilience. Due to novel and fast-paced situations or changes made during COVID-19, such decisions (which were made under pressure) may need to be revisited and tested.
• Compliance and supervisory processes should accommodate a remote workforce through greater automation and less dependence on physical documents and manual processes. As such, a review of monitoring and supervision arrangements by regulated entities may be appropriate to help ensure continued effectiveness in a remote or hybrid environment.
• Decentralized and remote work may increase the importance of monitoring processes to help ensure information security, and in particular, to prevent cyber-attacks.

2. ESMA publishes consultation paper on clearing and derivative trading obligations

On 11 July 2022, the European Securities and Markets Authority (ESMA) published its consultation paper on the clearing and derivative trading obligations in view of the 2022 status of the benchmark transition.

This consultation paper presents draft regulatory technical standards (RTS) further amending the RTS on the clearing obligation (CO) and the derivative trading obligation (DTO).

The first set of draft RTS were submitted by ESMA to the European Commission in November 2021. The second set of RTS included in Annex III of the consultation paper complements the first set of RTS. It is proposed to add single currency OIS contracts referencing TONA with maturities up to 30Y to the CO and to expand the obligation to centrally clear OIS classes referencing SOFR to additional maturities. For the DTO, it is suggested to add single currency OIS contracts referencing €STR with certain standard characteristics.

The public consultation will run until 30 September 2022.

3. ESMA publishes report on sanctions and measures imposed under MiFID II in 2021

On 8 July 2022, the European Securities and Markets Authority (ESMA) published a report on the sanctions issued by national competent authorities (NCAs) under the MiFID II framework in 2021.

The report identified an overall decrease in sanctions issued compared to the previous year, despite an increase in the number of Member States where sanctions and measures were applied and in the total amount of imposed administrative fines. Overall, in 24 out of 30 Member States NCAs imposed 411 sanctions with an aggregated value of EUR 12,203,139.

A review of the sanctions issued shows that although there is spread throughout the MiFID II framework, they tended to have higher concentration in certain areas, for example, Article 16 (Organisational Requirements), Article 24 (General principles and information to clients), Article 25 (Assessment of suitability and appropriateness and reporting to clients) and Article 50 (Synchronisation of business clocks).

4. ESMA consults on guidelines on MiFID II product governance requirements and publishes results of common supervisory action on product governance requirements

On 8 July 2022, the European Securities and Markets Authority (ESMA) published a consultation paper reviewing guidelines on MiFID II product governance requirements.

The consultation is a result of a common supervisory action (CSA) with national competent authorities on the same. On 8 July 2022, ESMA published a public statement on the results of the CSA.

Accordingly, ESMA's main proposals in the consultation relate to:

• the specification of any sustainability-related objectives a product is compatible with
• identifying a target market per cluster of products instead of per individual product (referred to as the 'clustering approach');
• determining a compatible distribution strategy where a distributor considers that a more complex product can be distributed under non-advised sales; and
• periodic review of products, including the application of the proportionality principle.

The consultation paper also includes practical examples to help firms comply with applicable product governance requirements in Annex IV and V.

The consultation closes on 7 October 2022.

5. The Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022 published in draft

On 6 July 2022, the Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022 were published in draft. The Regulations make a number of changes to allow retained EU law to operate effectively following Brexit.

In summary, the Regulations amend the:

• Payment Services Regulations 2017 (Conditions for registration as a small payment institution) in relation to requirements concerning applicant firms and "close links";
• Central Counterparties (Amendment, etc, and Transitional Provision) (EU Exit) Regulations 2018 (SI 2018/1184) to permit overseas CCPs that are in the Temporary Permissions Regime to offer clearing products in classes of financial instrument that the overseas CCPs are permitted to offer in the country in which they are established, provided that they have notified the Bank of England of their intention to offer these products in the UK (this is in addition to any products that an overseas CCP is currently permitted to offer whilst in the TRR); and
• Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019 (SI 2019/632) to extend to the end of 2024 the periods during which the FCA may give a transitional direction modifying the share trading obligation and derivatives trading obligation.

6. EU Commission issues Delegated Regulation (EU) amending regulatory technical standards concerning the date of application of buy-in regime

On 6 July 2022, the European Commission issued a Delegated Regulation containing regulated technical standards amending the date of application of provisions in the CSDR concerning the buy-in regime. The draft Delegated Regulation is based on the draft RTS that ESMA submitted to the European Commission in June 2022 (see entry 2 in Ashurst FSS Speedread 16 June 2022 edition).

The settlement discipline regime entered into force on 1 February 2022 after being deferred a number of time by delegated acts. Market participants have, however, expressed concerns about difficulties in implementing the mandatory buy-in regime.

In March 2022, the European Commission published its legislative proposal which included changes to the settlement discipline regime and, in particular, to the buy-in process. Following the publication of the Regulation for a pilot regime for market infrastructures based on distributed ledger technology (this allows the setting of different dates of application for the various settlement discipline measures), ESMA issued a final report containing a proposal for the amendment of the RTS on settlement discipline in order to formally suspend the application of the provisions on the buy-in regime for three years. It argued that this would give the European Commission and the co-legislators additional time to determine the best way forward to improve settlement efficiency while avoiding potential duplicative implementation costs for market participants.

The draft Delegated Regulation will now be scrutinised by EU co-legislators.

7. FCA consults on improving equity secondary markets (CP 22/12)

On 5 July 2022, the FCA issued a consultation paper on "Improving Equity Secondary Markets" (CP 22/12). This follows on from the Wholesale Markets Review response published in March 2022 (see Ashurst Speedread 9 March 2022 edition) and the Queen's speech in April 2022, which contained details of the Financial Services and Markets Bill.

The changes that the FCA is focusing on are:

• improving the content and consistency of post-trade transparency reports;
• establishing a new designated reporter status for OTC trades;
• allowing UK trading venues to use reference prices from overseas markets where those prices are robust, reliable, and transparent; and
• permitting the use of the tick size regime from overseas primary markets.

There are also general proposals in relation to outages.

The deadline for comments is 16 September 2022.

8. FCA issues guidance on FCA's approach to compromises for regulated firms

On 5 July 2022, the FCA issued its finalised guidance to FCA regulated firms on their approach to compromises with their creditors or shareholders (FG22/4).

Compromises are arrangements between a firm and its creditors and/or shareholders that can be used to reorganise a company or group structure, including restructuring debts.

FG22/4 aims to help firms understand what information the FCA needs and how the FCA approaches compromises in line with its statutory objectives to secure an appropriate degree of protection for consumers and protect and enhance the integrity of UK markets.

9. Bank of England policy statement on EMIR 2.2 implementation and on fees for non-UK FMIs

On 30 June 2022, the Bank of England (BoE) published its policy statement setting out its approach to 'tiering' non-UK central counterparts based on an assessment of risk they could pose to financial stability. The BoE stated close international cooperation among authorities would be key to ensuring that conflicting requirements do not themselves create a financial stability risk. The incoming tiering system is designed to facilitate deference to the home authorities of non-UK central-counterparties, where the BoE judges that there is effective regulatory and supervisory cooperation.

The implementation date for the final policy of tiering and compliance is 1 December 2022.

10. FMSB issues statement of good practice on trading platform disclosures

On 28 June 2022, the Financial Markets Standards Board released its final Statement of Good Practice on Trading Platform Disclosures. The paper covers all areas of the fixed income, currencies and commodities markets. The guidance addresses platforms through which clients are offered electronic execution through a central limit order book, request for stream, request for quote or similar electronic matching process and platforms on which prices and trades are delivered electronically.

The key principles outlined were:

• Firms operating a trading platform should make available to all participants clear information relating to the operation of their trading platform;
• Platform arrangements should outline how trading data is disclosed; outline the circumstances in which it is permissible for a trade to be cancelled, amended or how a dispute or discrepancy is handled; disclose the obligations that participants are subject to on the trading platform and the consequences of obligations not being met; disclose to participants the types of circumstances in which a trading platform may temporarily cease to trade; and
• Participants should not be incentivised to transact on the platform in a way which contributes to disorderly trading conditions or market abuse.

11. High Court finds in favour of CMC regarding its duty to comply with COBS and the Braganza duty

On 1 July 2022, the High Court published its decision regarding CMC Spreadbet Plc v Tchenguiz [2022] EWHC 1640 (Comm).

The High Court had to consider whether the claimant, a spread betting firm (CMC), had complied with the FCA's Conduct of Business sourcebook (COBS) and whether it had observed the Braganza duty in relation to a claim it pursued to recover £1.31 million as a debt, and alternatively as a sum due under contract, from the defendant. The debt was incurred as a result of losses made under a spread betting account in respect of which positions were taken.

The Braganza duty as outlined in Braganza v BP Shipping Ltd [2015] UKSC 17) implies a contractual obligation, in the absence of clear language to the contrary, to act rationally when exercising a contractual discretion in good faith and not arbitrarily or capriciously.

The defendant (an individual) was an experienced spread betting client and had spread bet positions with a number of spread betting firms. These firms, including CMC, sought to classify him as an elective professional client. With respect to CMC, the defendant was initially classified as a retail client, and then reclassified. The CMC terms of business was provided to the defendant, together with a risk warning notice and an order execution policy.

The defendant argued that:

• CMC breached COBS due to a failure to give due warnings in accordance with the COBS about the loss of protections concomitant with reclassifying him as an elective professional client, particularly negative balance protection;
• The effect of the breach was that the debt did not arise since he should have still enjoyed negative balance protection, which would have meant that, whilst his investment might be lost, he could not be liable for losses over and above the amount invested, such as those claimed; and
• If CMC was entitled to reclassify him as an elective professional client then CMC breached either COBS 2.1.1R or acted in a Braganza irrational manner in exercising its discretion, with the result that the defendant had a claim for damages under section 138D of the Financial Services and Markets Act 2000 (which gave a rise to an equitable set-off which extinguishes the claim).

The High Court found in favour of CMC and held that:

• The defendant was lawfully categorised as a professional client and CMC did not fail to comply with the duty in COBS to give appropriate warnings;
• The defendant's contentions that in closing out his account CMC breached the Braganza duty or failed to comply with COBS 2.1.1R and the duty to act in the best interests of its client did not hold; and
• The defendant was indebted to CMC in the sum of £1.31 million together with interest due.

12. FCA consults on winding down 'synthetic' sterling LIBOR and US dollar LIBOR

On 30 June 2022, the FCA published its consultation paper on winding down synthetic LIBOR. The FCA consultation is aimed at assessing whether it continues to be appropriate to compel the publication of synthetic 1, 3 and 6-month sterling LIBOR settings. This is to be judged by whether outstanding contracts referencing a particular LIBOR setting had had appropriate time to transition to an alternative benchmark. The FCA is also seeking opinions on whether any barriers exist to delay transition from US dollar LIBOR and whether as a result it would be appropriate to compel the publication of a synthetic US dollar LIBOR rate.

13. ECB publishes opinion supporting proposed amendments to supervisory powers, third-country branches, environmental, social and governance risk under the CRD

On 30 June 2022, the European Central Bank published its opinion of 27 April 2022 on proposed amendments to the Capital Requirements Directive 2013/36/EU (CRD) regarding supervisory powers, third-country branches, environmental, social and governance risk.

The ECB strongly supports the proposed amendments (as set out in the Commission's banking reform package) and makes the following observations, amongst others:

• Enhancing the way that environmental, social and governance risks as assessed by imposing stricter requirements and by broadening the supervisory toolkit in this area will help ensure that institutions proactively develop enhanced risk management frameworks and therefore reduce the build-up of excessive risk in the financial system as a whole;
• Harmonised provisions for the assessment of banks' directors and key staff (fit and proper assessments) will facilitate supervisory effectiveness and enhance sound governance;
• A common set of rules for branches of third-country banking groups will replace heterogenous national approaches;
• Harmonisation of national powers relating to the acquisition of qualifying holdings, transfers of assets or liabilities, mergers or divisions and the sanctioning regime will ensure consistency; and
• Allowing supervisors to withdraw the authorisation of credit institutions declared failing or likely to fail which do not qualify for resolution because the public interest criterion is not met will facilitate the orderly exit of these banks from the market.

14. ESMA reports on penalties and Measures imposed under AIFMD and UCITS Directive in 2021

On 8 July 2022, ESMA published a report on the penalties and measures imposed under the AIFMD and UCITS Directive in 2021.

The report found that over the course of the year:

• AIFMD: 10 national competent authorities (NCAs) imposed a total of 78 penalties with the total aggregated financial value amounting to EUR 42,902,420, of which EUR 38,070,000 was imposed by one NCA. 18 NCAs did not impose any sanctions; and
• UCITS Directive: 12 NCAs imposed a total of 61 penalties. The total aggregated value of financial penalties imposed amounted to approximately EUR38,784,536. Eight NCAs imposed a total of 64 measures, with a single NCA using 35 measures. 15 NCAs did not impose any sanctions.

ESMA's analysis of the data was that NCAs are not equally utilising sanctioning powers, and that (besides the few NCAs who are issuing the majority of the sanctions) the overall amount of sanctions issued remains low. Consequently, ESMA emphasised that they will continue to work in the future to promote further convergence of sanctioning powers by NCAs across the EU.

15. FCA Policy statement on protecting investors in authorised funds following he Russian invasion of Ukraine

On 6 July 2022, the FCA issued a policy statement on protecting investors in authorised funds following the Russian invasion of Ukraine.

Due to the financial sanctions imposed by the UK and other jurisdictions, some securities have become illiquid or untradeable and normal mechanisms for determining valuation of some securities has stopped operating.

The FCA consulted on creating a new class of asset known as 'side-pockets' to allow for authorised fund managers who hold investments affected by sanctions to separate these investments from the fund's other investments. Side pockets would allow new investors to enter the fund without being exposed to affected investments while existing investors could sell the unit which relate to unaffected investments. It is intended that the fund manager would manage the side pocket with the aim of terminating it as soon as it is in the investors' best interests.

No updates for this edition of the FSS.

16. HM Treasury updates list of high risk third countries, removing Malta

On 4 July 2022, HM Treasury issued an update to its guidance in relation to the notice of High Risk Countries as well as publishing the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations 2022.

This follows the publication in June 2022 of two statements by FATF identifying jurisdictions with strategic deficiencies in their AML/CTF regimes.

The advisory notice sets out which jurisdictions will be included in forthcoming amendment to Schedule 3ZA of the Money Laundering Regulations and replicates those countries listed by the FATF as high risk, or under increased monitoring.

17. FATF issues update on implementation of FATF standards on virtual assets and virtual asset service providers

On 30 June 2022, the Financial Action Task Force (FATF) published a report on the implementation of FATF standards on virtual assets and virtual asset service providers. The report found implementation of FATF's Travel Rule which requires the private sector to obtain/exchange beneficiary and originator information for virtual asset transfers, needed urgent acceleration by jurisdictions and private sector entities. FATF concluded that it should continue to monitor market trends for material developments that may necessitate further FATF work, including how the FATF Standards apply to Decentralised Finance and Non-Fungible Tokens.

18. New statutory instrument implemented which amends the RAO in relation to regulated credit agreements entered into by high-net worth individuals

On 30 June, a new statutory instrument was implemented which amends the FSMA Regulated Activities Order (RAO) in relation to regulated credit agreements entered into by high-net worth individuals. Previously, there were limitations on the availability of an exemption such that credit agreements with high-net worth individuals which had the purpose of acquiring or retaining property rights in land or in an existing/projected building could not benefit form the exemption and would therefore amount to a regulated credit agreement. Now the exemption applies and such credit agreements will not be regulated.

19. PSR publishes provision decision regard its consultation on card-acquiring market review remedies

On 29 June 2022, the Payment Services Regulator (PSR) published it provisional decision on remedies for the card-acquiring market review. The decision follows the PSR's January 2022 consultation on Card-acquiring market remedies (CP22/3).

The PSR in CP22/3 found that the supply of card-acquiring services does not work well for merchants. These merchants could make savings by shopping around or negotiating with their current supplier, but many do not. As such, the PSR consulted on four potential remedies to address these concerns in CP22/3.

Following industry feedback the PSR set out the below remedies in its provision decision:

• Summary boxes containing bespoke key price and non-price information to be sent individually to each merchant and shown prominently in their online account which can be used alongside new online quotation tools to help merchants compare prices and other service features more efficiently;
• Trigger messages to prompt merchants to shop around and/or switch to be sent by providers of card-acquiring services to their merchant customers and shown prominently in their online account; and
• A maximum duration of 18 months for Point of Sale terminal lease and rental contracts, and maximum 30 days’ notice after any renewal.

The deadline for responses to this document is 5 pm on 3 August 2022.

20. ESMA publishes consultation paper on guidelines on standard forms, formats and templates to apply for permission to operate a DLT market infrastructure

On 11 July 2022, the European Securities and Markets Authority (ESMA) published its consultation paper on guidelines on standard forms, formats and templates to apply for permission to operate a distributed ledger technology (DLT)market infrastructure, under (EU) Regulation 2022/858 on a pilot regime for market infrastructures based on DLT (DLTR).

Two sets of guidelines are submitted to consultation: the first ones specify the minimum instructions that NCAs should provide to market participants for submitting their applications to them and the second specifies how applicants should provide the requested information and documents to their competent authorities.

ESMA will consider the feedback it will receive to this consultation with a view to finalising the guidelines ahead of the application date of DLTR which is 23 March 2023.

21. MICA: Provisional agreement reached between the European Parliament and the Council of the EU

On 30 June 2022, it was announced that the Council of EU and the European Parliament had reached a provisional agreement in relation to Markets in Cryptoassets (MICA) Regulation.

The provisional agreement will now need to be approved by Council of the EU and the European Parliament before formal adoption. We will provide a comprehensive review of MICA when it is formally adopted and published in the Official Journal.

22. The Platform on Sustainable Finance publishes its draft report on minimum safeguards

On 11 July 2022, the Platform on Sustainable Finance published its first draft report on minimum safeguards.

The minimum safeguards set out in Article 18 of the Taxonomy Regulation require that companies implement procedures to comply with OECD Guidelines for multinational enterprises and the UN guiding principles on business and human rights. The report on minimum safeguards aims to provide advice on how compliance with minimum safeguards could be assessed. The Platform’s advice will feed into Commission work on the usability of the EU taxonomy.

The report recommends the following as signs of non-compliance with minimum safeguards:

• inadequate or non-existent corporate due diligence processes on human rights, including labour rights, bribery, taxation, and fair competition;
• final conviction of companies in court in respect of any of these topics;
• a lack of collaboration with a National Contact Point (NCP) and non-compliance with OECD guidelines by an OECD NCP; and
• non-response to allegations by the Business and Human Rights Resource Centre.

The Platform invites feedback on the draft report until 22 August 2022. The Platform will submit a final report with their advice to the Commission in September 2022.

23. European Parliament press release: MEPs do not object to inclusion of gas and nuclear activities

On 6 July 2022, the European Parliament rejected a motion to oppose the inclusion of nuclear and gas as environmentally sustainable economic activities as proposed by the Commission's Taxonomy Delegated Act. The Commission believes there is a role for private investment in gas and nuclear activities as transitional activities contributing to climate change mitigation. The inclusion of these activities is time-limited and dependant on meeting specific conditions.

The Act will enter into force on 1 January 2023 if the not objection is offered by Parliament or the Council by 11 July 2022.

24. FCA delays its consultation on sustainability disclosure requirements and investment labels for asset managers

On 4 July 2022, the FCA updated its website to announce that its consultation on sustainability disclosure requirements for asset managers, FCA-regulated asset owners and classification of sustainable investment products will be delayed until the autumn.

25. EBA publishes guidelines on the remuneration and gender pay gap benchmarking under CRD and IFD

On 28 June 2022, the European Banking Authority published its final Guidelines on the remuneration benchmarking exercise under the Capital Requirements Directive (CRD), and its final Guidelines on the same under the Investment Firm's Directive.

The benchmarking of the gender pay gap will allow competent authorities to monitor the implementation of such measures and their development at different levels of pay. The first benchmarking exercise regarding the gender pay pap should cover the financial year 2023.

26. FCA feedback on ESG integration in UK capital markets

On 29 June 2022, the FCA issued a feedback statement on its consultation paper CP21/18 on issues relating to ESG-linked debt instruments. The FCA stated there is a clear rationale for regulatory oversight of certain ESG data and rating providers and for a globally consistent regulatory approach informed by the recommendations on ESG data and ratings developed by the International Organization of Securities Commission in 2021. The FCA has set out further details of their approach to ESG-labelled debt instruments in Primary Market Bulletin 41.

No updates for this edition of the FSS.

No updates for this edition of the FSS.