Financial Services SpeedRead: 19 January 2021 

1. FCA updates webpage on information about Brexit from EEA regulators

On 15 January 2021, the FCA updated its webpage containing information from EEA regulators about Brexit to include links to the recently introduced Cypriot and Swedish transitional regimes for UK firms.

2. Implications of the end of the Brexit transition period on the JMLSG Guidance

On 14 January 2021, the Joint Money Laundering Steering Group (JMLSG) issued a press release concerning the implications of the end of the Brexit transition period on the JMLSG Guidance. The statement flags some consequential amendments which will be made to the guidance in due course, and notes, importantly, that although EU countries are now third countries, the end of the Brexit transition period has not itself increased the inherent AML / CTF risks of customers or correspondents from the EU.

3. UK STO equivalence for Swiss Trading Venues

As previously announced by the Government, on 13 January 2021 the Markets in Financial Instruments (Switzerland Equivalence) Regulations 2021 were published. From 3 February 2021, the regulations will enable firms subject to the UK share trading obligation (UK STO) to trade shares that fall within scope of the UK STO on Swiss trading venues that have been recognised as equivalent by the UK. The Swiss trading venues which have been recognised as equivalent are BX Swiss AG and SIX Swiss Exchange AG.

4. ESMA publishes reminder to firms on MiFID II rules on reverse solicitation

On 13 January 2021, ESMA issued a public statement on reverse solicitation. ESMA has reiterated the following principles:

• "Questionable practices": The statement refers to "some questionable practices by firms around reverse solicitation" following the end of the Brexit transition period, such as pop-up "I agree" boxes whereby clients 'agree' that any transaction is executed on the exclusive initiative of the client. ESMA reminds firms of recital 111 of MiFID II, which provides that where a third country firm solicits clients or potential clients in the EU, or promotes or advertises investment services or activities in the EU, these services should not automatically be deemed to have been provided at the own exclusive initiative of the client, regardless of any contractual clauses or disclaimer to the contrary.
• Means of solicitation: ESMA clarifies that every means of communication used (including press releases, internet advertisings, brochures, phone calls) should be considered to determine whether the client or potential client has been subject to solicitation, promotion or advertising in the EU. Such activities should be considered regardless of the person through whom it is issued, whether by the firm itself, an entity acting on its behalf or having close links with the firm.
• Breaching the regime: Firms are reminded that the provision of investment services in the EU without proper authorisation exposes service providers to the risk of administrative or criminal proceedings, and that investors may lose protections if they use unauthorised service providers.

You can read more about ESMA's reminder in our Brexit briefing here.

5. FCA statement regarding Memoranda of Understanding with EU authorities

On 4 January 2021, the FCA issued a statement regarding the coming into effect of several memoranda of understanding (MoUs) with ESMA and EU regulators, covering cooperation and exchange of information. On 14 January 2020, the FCA updated its MoU webpage to provide links to each of the now applicable MoUs:

• A multilateral MoU with EU and EEA National Competent Authorities (NCAs) covering supervisory cooperation, enforcement and information exchange;
• An MoU with ESMA covering supervision of credit rating agencies and trade repositories;
• A multilateral MoU with EU and EEA NCAs covering supervisory cooperation, enforcement and information exchange between UK and EU/EEA national supervisors in the field of insurance regulation and supervision;
• An MoU with EIOPA covering information exchange and mutual assistance between the UK authorities and EIOPA in the field of insurance regulation and supervision;
• A MoU with the EBA covering information exchange and mutual assistance between the UK authorities and the EBA in the field of banking; and
• Individual MoUs with EU and EEA NCAs covering supervisory cooperation and information-sharing arrangements in the field of banking.

6. FCA and PRA publish new webpages regarding Gibraltar passporting arrangements

The FCA and PRA have published webpages (on 31 December 2020 and 4 January 2021 respectively) regarding the transitional arrangements established for Gibraltar, which enables passporting between the UK and Gibraltar to continue after the end of the transition period. At present, it is anticipated that this arrangement will continue until 31 December 2021.

7. FCA press release on regulatory changes for firms after IPCD

On 31 December 2020, the FCA issued a press release outlining the key regulatory changes for firms following the end of the transition period on 31 December 2020 (IPCD). Those changes include:

• the end of passporting between the UK and EEA and the coming into effect of the Temporary Permissions Regime (TPR) for EEA firms, allowing them to continue to provide services into the UK for a limited period while seeking full authorisation;
• the coming into effect of the Financial Services Contracts Regime (FSCR), which allows EEA firms to continue to service UK contracts entered into prior to IPCD so they can be wound down in an orderly manner; and
• UK firms relying on local law in EEA states to continue providing services to customers in the EEA.

On 1 January 2021, the FCA also published a webpage outlining considerations for firms following the end of the transition period. The webpage sets out a number of points firms should have considered to understand the impact of the end of the transition period, including with respect to the end of passporting, the converting of EU legislation into UK law, the Temporary Transitional Power (TTP), and others.

8. FCA updates webpage on third country exemptions under the DTRs

On 5 January 2021, the FCA published an update to its webpage on third country exemptions under certain aspects of the Disclosure Guidance and Transparency Rules (DTRs) in relation to financial reporting, major shareholding notifications and other general information. Amendments include:

• an exemption providing that, in respect of a financial year beginning after 31 December 2020, issuers of securities admitted to trading on a UK regulated market with a registered office in a third country reporting their annual and half-yearly consolidated financial statements in accordance EU-adopted IFRS are exempt from DTR 4.1.6R(1) (Audited financial statements) and DTR 4.2.4R(1) (Preparation and content of condensed set of financial statements);
• clarification on the scope of existing exemptions granted in relation to issuers of securities admitted to trading on a UK regulated market with a registered office in a third country that are subject disclosure requirements in Section 13(a) of the Securities Exchange Act of 1934, and the rules governing financial reporting for issuers of securities in the United States; and
• clarification that exemptions under DTR 5 only relate to DTR 5.5.1R, DTR 5.6.1R and DTR 5.8.12R(2), rather than DTR 5 generally.

9. FCA applies temporary traditional power to the UK DTO

On 31 December 2020, the FCA issued a statement advising that it had used its TTP to modify the UK derivatives trading obligation (UK DTO). Alongside the statement, the FCA also published its transitional direction and related explanatory note.

From 1 January 2021, where firms that are subject to the UK DTO (i.e. UK firms, EU firms using the TPR, and UK branches of an overseas firms) trade with, or on behalf of, EU clients that are subject to the EU DTO, they will be able to transact or execute those trades on EU venues providing that:

• firms take reasonable steps to be satisfied the client does not have arrangements in place to execute the trade on a trading venue to which both the UK and EU have granted equivalence; and
• the EU venue has the necessary regulatory status to do business in the UK – such venues include those that are a Recognised Overseas Investment Exchanges, have been granted the relevant temporary permission, or are certain that they benefit from the Overseas Person Exclusion. 

The relief under the TTP applies only to a firm's trades with EU clients (and therefore does not apply to trades with non-EU clients).

The FCA will review its approach to the UK DTO by 31 March 2021.

10. PRA publishes final version of TTP transitional direction

On 28 December 2020, the PRA published policy statement 30/20 which contains the PRA's final Transitional Direction made under its TTP and final versions of the related guidance notes. The PRA transitional direction came into force on 1 January 2021.

The PRA also published its updated PRA Rulebook (EU Exit) Instrument in final form. The instrument contains changes to the PRA's Rulebook, most of which took effect on 1 January 2021, although a small number of provisions take effect at different times, as explained within the instrument.

11. UK and EU sign Trade and Cooperation Agreement

On 24 December 2020, the EU and UK agreed on a new framework governing EU and UK relations after the transition period. The package of measures include a Trade and Cooperation Agreement (TCA), together with a Political Declaration covering a number of areas (including financial services). The TCA applies from 1 January 2021 onwards.

Broadly, the TCA does not include substantive provisions across financial services. In particular, it does not allow UK investment firms to provide services into the EU. UK firms will therefore continue to have to rely upon individual member state exemptions, or where relevant, reverse solicitation. There is an agreement in the Political Declaration for both the EU and UK to work towards "regulatory cooperation on financial services by March 2021", however there is no binding commitment by the EU to issue an equivalence decision.

You can read more about the implications of the TCA for financial services in our Brexit briefing here.

12. FCA reminds firms to regularly review regulatory permissions

On 18 January 2021, the FCA issued a statement reminding firms to regularly review their regulatory permissions to ensure they are up to date and removed where they are not needed. The FCA reiterates its expectation that firms notify it of material changes and apply to make any necessary alterations to their permissions in a timely way, and reminds firms of its power to unilaterally cancel a firm's permissions if it has not carried on a regulated activity for at least 12 months.

13. ESA letter to the EU Commission on SFDR application

On 17 January 2021, ESMA published a letter that was sent by the European Supervisory Authorities (ESAs) to the EU Commission on 7 January 2021 regarding "several important areas of uncertainty" in the interpretation of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR). These areas, which the ESAs say would benefit from "a more urgent clarification to facilitate an orderly application of SFDR from 10 March 2021", include:

• The application of SFDR to non-EU Alternative Investment Fund Managers (AIFMs) and registered AIFMs;
• Application of the 500-employee threshold for principal adverse impact reporting on parent undertakings of a large group;
• The meaning of "promotion" in the context of products promoting environmental or social characteristics;
• The application of Article 9 of SFDR; and
• The application of SFDR product rules to portfolios and dedicated funds.

You can read more about the ESA letter in our briefing here.

14. FCA Market Watch 66

On 11 January 2021, the FCA published Issue 66 of Market Watch in which it sets out its expectations for firms in relation to telephone conversations and electronic communications while alternative working arrangements are in place.

The FCA states that it is not restricting the technologies / apps firms can use for communication, but warns firms to understand recording obligations and have effective policies, controls and oversight in place.

• Recording telephone conversations and electronic communications: Obligations under SYSC 10A remain the same. The use of apps such as Whatsapp for sharing work sensitive information can cause compliance issues as firms are less able to monitor activity. Where such apps are used for "in-scope activities" on business devices, firms will need to ensure that they are recorded and auditable. Firms are advised to review their recording policies and procedures every time there are changes in operation conditions.
• Communications that must be recorded: Firms are expected to take reasonable steps to record telephone conversations and keep a copy of electronic communications of activities falling within scope of the recording rules. Recording policies must identify calls and communications that directly relate to the performance of in-scope activities.
• Robust policies: Firms must be able to demonstrate to the FCA on request that their policies, procedures and management oversight meet the recording rules. This includes policies and procedures adopted for home working arrangements. These policies should identify which telephone conversations and electronic communications are subject to recording requirements.

15. FCA publishes list of exempted shares for the purposes of UK Short Selling Regulation

On 7 January 2021, the FCA published its list of exempted shares for the purposes of the UK Short Selling Regulation (UK SSR). The list includes:

• the FCA's list of exempted shares, containing all shares admitted to trading on UK venues where the principal venue for trading is outside of the UK; and
• ESMA's list of exempted shares as at 31 December 2020 (the shares on this list will be exempt from certain notification requirements under UK SSR for 2 years).

Where a share appears on this list, no notification will be required. The FCA’s list of exempted shares will be updated periodically.

16. Short Selling (Notification Thresholds) Regulations published dropping UK SSR notification threshold to 0.1% from 1 February 2021

On 6 January 2021, the Short Selling (Notification Thresholds) Regulations 2021 (SI 2021/5) were published (along with an explanatory memorandum). The regulations lower the initial notification threshold for the reporting of net short positions to the FCA from 0.2% to 0.1%, with the new threshold to take from 1 February 2021. In December 2020, ESMA further extended its temporary decision to apply a threshold of 0.1% for shares admitted to trading on regulated markets. In the UK, the 0.1% threshold will apply in respect of shares admitted to UK multilateral trading facilities in addition to shares admitted to trading on UK regulated markets.

You can read more about the EU and UK's approach to the net short position notification threshold in the previous edition of our Financial Services SpeedRead.

17. PRA publishes consultation paper on approach to supervising UK branches and subsidiaries of third country firms

On 11 January 2020, the PRA published a consultation paper (CP2/21) setting out proposals for its approach to supervising the UK activities of PRA-authorised banks and designated investment firms that are headquartered outside of the UK or are part of a group based outside the UK (referred to as "international banks"). The purpose of the proposals is to clarify the implications for international banks regarding the different options for structuring their operations, and to explain how the PRA would assess such firms against its threshold conditions, particularly the condition relating to the effective supervision of firms. The consultation includes a draft supervisory statement which will supersede SS1/18 'International banks: the Prudential Regulation Authority's approach to branch authorisation and supervision'.

18. HM Treasury response to consultation on expanding the Dormant Assets Scheme

On 9 January 2021, HM Treasury published a response to its February 2020 consultation on expanding the Dormant Assets Scheme (DAS). The DAS enables banks and building societies to transfer money held in dormant accounts to a reclaim fund. The DAS is currently narrower than in other jurisdictions, covering only banking and building society accounts.

The Government has proposed expanding the DAS to include assets in the insurance and pensions, investment and wealth management sectors, and has confirmed in this response that it intends to proceed with these changes – although no specific timeframe has been given. The proposed changes will mean that the DAS is expanded to include shares or units in collective investments and certain investment asset distributions and proceedings.

19. PRA statement on CRD V

On 28 December 2020, the PRA issued a policy statement on the Capital Requirements Directive V (CRD V), providing the final policy to CP22/20 regarding the designation of firms within certain consolidation groups. The policy statement also contains the final PRA Rulebook instruments, Statements of Policy, Supervisory Statements and templates.

20. Deadline for cryptoassets AML / CTF registration passes for existing cryptoasset businesses

On 11 January 2021, the FCA updated its cryptoassets AML / CTF webpage to advise that the 9 January 2021 deadline for registration with the FCA has now passed. As a result, only firms which are registered with the FCA or included on the FCA's list of firms with temporary registration can continue carrying on cryptoasset activity – all other firms must have ceased trading from 10 January 2021.

21. FCA statement on financial crime systems and controls during coronavirus to cease being applicable

On 8 January 2021, the FCA updated its webpage on financial crime systems and controls during coronavirus to indicate that the statement will no longer apply from 7 February 2021. The statement sets out circumstances where certain controls / processes may be delayed in light of the challenges posed by the pandemic – for example, reasonable delays to ongoing customer due diligence reviews or reviews of transaction monitoring alerts.

22. FCA publishes portfolio letter regarding debt purchasers, debt collectors and debt administrators

On 18 January 2021, the FCA published a portfolio letter to directors concerning the FCA's:

• view of the key risks debt purchase, debt collection and debt administration firms pose to their customers or the markets in which they operate;
• expectations of debt purchase, debt collection and debt administration firms, including how firms should be mitigating these key risks; and
• supervisory strategy and programme of work to ensure that firms are meeting our expectations, and harms are being remedied.

In the letter, the FCA reiterates firms' obligation to conduct their activities in a way that treats customers fairly, provides clear communications to consumers, resolves disputes and complaints fairly, and that complies with FCA Principles and FCA Handbook rules and guidance.

23. FCA publishes first report on consumer investment harm 

On 18 January 2021, the FCA published its first report on consumer harms, highlighting the ways in which it has worked to protect consumers from investment harm by stopping and disrupting potentially harmful firms and activities. This report follows the FCA's September 2020 Call for Input on Consumer Investments, and is part of the FCA's package of investigations and publications on the consumer investment market, a market that the FCA considers is not working well, with consumers receiving lower returns than expected due to high fees, or because the product is unsuitable for them.

You can read more about the FCA's Call for Input in our briefing here.

24. Financial Ombudsmen Service updates Brexit webpage

On 13 January 2021, the Financial Ombudsmen Service (FOS) updated its webpage regarding the implications of Brexit for consumers. In summary:

• customers of UK firms continue to have the same access to the FOS;
• customers of EU firms operating in the UK under the TPR or supervised run-off (SRO) part of the FSCR are still able to complain to the FOS; however
• customers of EU firms which did not apply for the TPR or SRO are not able to complain to the FOS.

25. FCA updates SMCR and Financial Services Register webpages

On 8 January 2021, the FCA updated its SMCR and Financial Services Register webpages to indicate that Directory Persons data for firms regulated by both the FCA and PRA is now available on the Financial Services Register.
Solo-regulated firms must submit their Directory Persons data via Connect by 31 March 2021, and the FCA will incrementally display data from solo-regulated firms as it is submitted from 14 December 2020. If firms are submitting data for 10 or more Directory Persons, they should use the multiple add template or multiple amend template available on the FCA website between 11 January and 18 March 2021. For submissions using single add or amend forms on Connect, this can continue until the deadline of 31 March 2021.

26. HM Treasury publishes consultation and call for evidence on UK regulatory approach to cryptoassets

On 7 January 2021, HM Treasury published a consultation paper and call for evidence on the regulation of stablecoins. The proposals do not set out detail on the precise requirements that issuers and service providers will be expected to meet. Instead, they are concerned with the expansion of the scope of the regulatory perimeter to include first stablecoins and, in the future, other unregulated cryptoassets.

The paper seeks views on extending the UK authorisation regime to asset-backed stablecoins (i.e. tokens which stabilise their value by referencing one or more assets, such as a single fiat currency or multi-currency, gold. a commodity etc.).

The authorisation requirement will be applicable to entities engaged in transmission of funds, custody and administration of stablecoins for third parties, executing transactions, exchanging stablecoins for fiat money, validating payment transactions, and facilitation access to stablecoin networks or underlying infrastructures by participants.

In September 2020 the EU Commission published its proposed regulation on markets in crypto assets (MiCA), which will bring all cryptoassets not currently in scope of EU regulation within the EU's regulatory perimeter. HM Treasury's proposals, however, are substantially different in scope and focus from those in MiCA.

You can read more about the HM Treasury's consultation in our briefing here, and the EU MiCA regulation in our briefing here.