Financial Services Speedread 3 October 2022 edition

1. ESMA publishes report on revised guidelines on certain aspects of MiFID II suitability requirements

On 23 September, ESMA published its Final Report on certain aspects of the suitability requirements under MiFID II.

The changes introduced are in relation to sustainability preferences and organisational requirements, specifically:

• information to clients on sustainability preferences;
• collection and updating of information from clients on sustainability preferences;
• assessment of sustainability preferences; and
• organisational requirements, including appropriate training and record-keeping.

With regards to next steps, the guidelines will be translated into the official languages of the EU and published on ESMA's website. The Guidelines will apply six months after the date of the publication on ESMA’s website.

2. ESMA: Updated Questions and Answers regarding MiFID II and MiFIR markets structure topics

On 23 September 2022, ESMA updated its Q&A on MiFID II and MiFIR market structures topics to include one additional question and answer:

• Question - Can trading venues set specific trading hours which are applicable only to a sub-set of financial instruments (or to a specific financial instrument)?
• Answer – ESMA confirmed that a trading venue may set instrument-level trading hours for a specific sub-set of financial instruments, provided that such specific trading hours are made public and communicated by the venue to market participants.

3. ESMA responds to the EU Commission regarding recent developments in the energy derivatives markets

On 22 September 2022, ESMA published its response to the EU Commission in relation to the energy derivatives markets regarding the current level of margins and excessive volatility (the Response).

In the Response, ESMA proposes measures to avoid the transfer of risk from the energy sector into the financial services sector. Among other things, the Response covers:

measures to limit excessive volatility (circuit breakers);

• CCP margins and collateral eligibility;
• adoption of the June 2022 ESMA proposals to increase commodity clearing thresholds;
• improving regulatory reporting on commodity derivatives trading; and
• regulating and supervising commodity traders acting like investment firms.

With regards to next steps, ESMA stands ready to provide further input, including possibilities for enhanced supervision of commodity derivatives markets going forwards.

4. FCA Consultation Paper: Guidance on the Trading Venue Perimeter

On 22 September 2022, the FCA published a consultation paper which set out new guidance proposals on the regulatory perimeter for trading venues.

The FCA intends to provide additional guidance regarding the key concept of a multilateral system and how this applies to different types of arrangements in financial markets. The FCA expects to receive any comments or responses to the consultation paper by 11 November 2022.

The consultation paper will be of interest to the following stakeholders:

• trading venues;
• service companies;
• investment-based crowdfunding platforms operating in primary and/or secondary markets;
• interdealer brokers;
• broker-dealers;
• portfolio managers;
• technology firms offering platforms and systems for trading;
• firms providing communications systems or bulletin board services; and
• appointed representatives providing or using communications systems or bulletin board services, and their principals.

The consultation paper forms part of the Wholesale Markets Review which the FCA have been conducting with the Treasury (we covered this item in entry 7 of the Ashurst FSS dated 6 July 2021).

5. FCA Portfolio Letter regarding supervision strategy for benchmark administrators

On 8 September 2022, the FCA published a portfolio letter which set out the FCA's supervisory priorities for benchmark administrators.

This letter was prepared following the FCA's review of areas where compliance with relevant regulations may be most at risk of falling below the FCA's expectations. This includes the new Consumer Duty, where firms in distribution chains for products in which benchmarks are used may not meet the higher standards of consumer protection.

The main supervisory priorities and risks covered in the letter include:

• Disclosure - The FCA expects benchmark administrators to promote transparency by reviewing benchmark statements and methodologies to ensure they contain key disclosures and remain accurate. Particular concerns are expressed in connection with ESG benchmarks (as regards quality) and Credit Sensitive Rates (which the FCA does not want to see emerge as successors to LIBOR).The FCA will continue to monitor the quality of disclosures made by benchmark administers and further scrutinise the construction and labelling of ESG benchmarks.
• Quality of data and data controls – The FCA expects benchmark administrators to establish processes to monitor both input data and the correct implementation of the methodology. In addition, firms are expected to notify the FCA of their intention to administer cryptoasset benchmarks before these are made available. Following the FCA's observations of poor data quality and controls, the FCA plans to conduct multi-firm work on quality of data.
• Operational resilience - The FCA expects benchmark administrators to be operationally resilient to different types of disruption that could impact the reliability of benchmarks, such as cyber-attacks. The FCA also expects firms to have appropriate oversight of third-party firms and intra-group service providers to ensure appropriate business continuity arrangements.
• Oversight and governance – The FCA expects benchmark administrators to: (i) have robust governance arrangements in place; and (ii) implement and adhere to applicable Senior Managers Regime (SMR) and Conduct Rules requirements.
• Competition - The FCA aims to launch a Wholesale Data market study in November 2022. The market study will discuss how competition works between benchmark administrators.

6. ESMA: Updated Q&A: On MiFID II and MiFIR commodity derivatives topic

On 23 September 2022, ESMA published revised Q&As on MiFID II and MiFIR commodity derivatives topics to reflect amendments following the recovery package for commodity derivatives, including the introduction of the most recent technical standards. The newest version of the Q&As shows, in track changes, the amendments relating to position limits, position reporting, ancillary activity and third country issues.

7. BoE: Consultation paper: Fees regime for financial market infrastructure supervision 2022/23

On 20 September 2022, the Bank of England published information about a consultation on FMI fees. If you are an FMI this may be of interest. Responses are required by 3 November 2022.

8. PRA publishes Discussion Paper (DP4/22) on its future approach to policy

On 8 September 2022, the PRA released a Discussion Paper, entitled "The Prudential Regulation Authority's Approach To Policy" (the DP). The PRA has clarified that the DP applies to all PRA regulated firms.

The DP sets out the PRA's proposed framework and objectives under the Financial Services and Markets Bill (the FSM Bill) which will broaden the PRA's responsibilities in areas currently regulated by retained EU law and set to be repealed by the Bill.

The DP sets out three key updates to the framework of objectives and regulatory principles under which the PRA operates. These include:

(a) the PRA's approach to its objectives, including the new secondary objective introduced by the FSM Bill of facilitating the international competitiveness of the UK economy and its growth in the medium to long-term;

(b) the PRA's plans for engagement with international standards and integration with the global financial system;

(c) the PRA's commitment to taking on wider responsibility, with appropriate accountability to Parliament, transparency and communication with HM treasury;

(d) the PRA's approach, when making policy or amending the PRA Rulebook, to responding to changes in the characteristics of regulated firms and the UK financial system (for example by seeking stakeholder feedback);

(e) the PRA's proposals to adapt its policy-making approach, including as part of the process for the repeal and replacement of retained EU law, so that the PRA Rulebook and its policies are more streamlined, accessible and clear.

The PRA aims to implement the processes set out in the DP following HMT's decision-making process to repeal and retain any relevant EU law.

In terms of next steps, the PRA intends to publish a consultation paper informed by responses to the DP, followed by a final publication on the PRA's policy approach. Responses to the DP can be made until Thursday 8 December 2022.

9. BoE (PRA) publishes Consultation paper (CP9/22) on Depositor Protection

On 23 September 2022, the PRA published a consultation paper in relation to amending the Depositor Protection Part (DP) of the PRA Rulebook and related policy statements (the Consultation).

Among other things, the Consultation confirms that the PRA intends to:

• revoke the rules in the Depositor Protection Part of the PRA Rulebook in relation to continuity of access;
• delete the Dormant Account Scheme Part and amend other rules accordingly, such as the removal of references to the dormant account scheme; and
• amend the Temporary High Balance (THB) regime to confirm that a trust can hold monies that fall within the scope of the THB regime.

The consultation for the continuity of access and dormant account scheme proposals close on 21 October 2022. The consultation period for all other proposals closes on 16 December 2022.

10. FCA Change in Control Decision: Conditions on takeover of Link Group

On 12 September 2022, the FCA published a decision notice imposing conditions on the proposed acquisition of the Link Group, including a 100% shareholding and voting rights in Link Fund Solutions (LFS) by Link Acquisition Australia Pty Ltd, Link Acquisitions Holdings Australia Pty Ltd, Dye and Durham Corporation and Dye and Durham Limited (D&D).

Link Fund Solutions managed the LF Woodford Equity Income Fund (WEIF). The FCA has investigated the circumstances leading to the suspension of the WEIF and is likely to seek to require LFS to pay a financial penalty and/or consumer redress. The FCA’s current view is that the redress payment LFS could be required to pay may be up to £306 million, although this is not a final decision. The redress proposal reflects the FCA's current view of LFS's failings in managing the liquidity of the WEIF. The FCA decided to approve the acquisition and allow D&D to take control of the seven UK-authorised firms, subject to a condition to commit to make funds available to meet any shortfall within LFS to cover any redress payments LFS may be required to make.

11. FCA: New webpage: Side pockets

On 8 September 2022, the FCA set up a new webpage for investors discussing side pockets. Side pockets have the potential to impact anyone who invests in funds with exposure to Russian, Ukrainian or Belarusian assets. They are measures which can be used in emergencies, which allow fund managers to temporarily separate affected assets from the rest of the fund. Investors will receive a written notification of the creation of a side pocket, explaining the reasoning behind the decision. The notification will cover practical information about the changes, benefits and costs, implications for the investor's rights, and the risks associated.

This follows on from the FCA's policy statement issued in July 2022 on the use of side pockets to mitigate possible harm resulting from exposure to Russia, Belarus and Ukraine. "Sanctioned investment" has been widely defined and relates to any investment or asset under a sanctions regime, which is held in a retail authorised fund. The FCA has added guidance relating to a number of issues, for instance on the ways in which voting rights regarding side pocket units may be exercised, how AFMs should assess the value of a fund with side pockets, and redeeming and transferring side pocket units.

12. FCA: Previous coronavirus (Covid-19) governance arrangements

On 22 September 2022, the FCA updated its webpage with a new section regarding previous coronavirus (Covid-19) governance arrangements. The new section demonstrates that covid-related guidance in relation to the following arrangements are no longer current:

• Workplace arrangements and work-related travel (March 2020).
• Senior Managers and Certification Regime in relation to the FCA's expectations of dual regulated firms (April 2020).
• Senior Managers and Certification Regime in relation to the FCA's expectations of solo-regulated firms (April 2020).

13. House of Commons: Economic Crime and Corporate Transparency Bill

On 22 September 2022, the House of Commons published the Economic Crime and Corporate Transparency Bill (the ECTB) as part of the legislative package seeking to prevent the abuse of UK corporate structures, strengthen the UK's response to economic crime, and enable Companies House to deliver better services for UK companies.

The ECTB follows the Economic Crime (Transparency and Enforcement) Act 2022, which seeks to crack down on foreign criminals who use UK property for money laundering purposes by introducing a Register of Overseas Entities.

Among other amendments, the ECTB:

• enhances identity verification requirements for company directors, people with significant control, and those delivering documents to the Registrar;
• broadens the Registrar's (i.e. the Registrars of Companies in the UK) investigation and enforcement powers, and control over information submitted to the Register;
• increases transparency requirements for limited partnerships and provides for their deregistration;
• provides for the ability to quickly and easily seize and recover crypto assets;
• allows the Solicitors Regulation Authority to set its own limits on financial penalties for economic crime disciplinary purposes;
• introduces new exemptions for money laundering offences to minimise unnecessary reporting by businesses; and
• introduces new powers for law enforcement to obtain information to tackle money laundering and terrorist financing.

14. JMLSG Consultation paper regarding proposed amendments to Part 1 of its Guidance

On 16 September 2022 the Joint Money Laundering Steering Group (JMLSG) published proposed amendments to Part 1 of its Guidance. The JMLSG expects to receive any comments on the proposed revisions by 17 October 2022.

The following paragraphs in Part 1 of the JMLSG Guidance will be affected. Marked up versions of the affected text are available under the consultations tab:

• Paragraph 5.5.11 and Annex 5-IV – as regards the EDD measures which apply to high-risk third countries.
• Paragraph 5.3129A and paragraphs 5.3.258-5.3.282– as regards trusts.
• Chapter 4 –as regards the steps firms can take in order to manage and mitigate proliferation financing risks.
• Chapter 7 – as regards the importance of staff training and awareness regarding proliferation financing.

15. ESMA: Updated Q&A on the Market Abuse Regulation ("MAR")

On 20 September 2022, ESMA published an update to its Q&A on the Market Abuse Regulation (MAR), answering two new questions in relation to the disclosure of inside information under Article 7 of MAR.

Financial expectations, yearly, and half-yearly reports must be published by the issuer following the schedule established in the Transparency Directive (TD) and corresponding national legislation. ESMA clarified that inside information under Article 7 can be identified while preparing such financial guidance and reports and that such information must be immediately published unless delayed disclosure is permitted under Article 17. The disclosure requirement arises irrespective of the date of publication of the relevant guidance or report.

ESMA also clarified that the consensus of market analysts' expectations should be taken into account when considering whether items in a financial report or guidance constitute 'inside information' under Article 7, given that such consensus can impact investor sentiment and decision-making, as described in Article 7(4) of MAR.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

No updates for this edition of the FSS.

16. ESAs [SFDR]: Document: List of SFDR queries requiring the interpretation of Union law

On 9 September 2022, the European Supervisory Authorities published queries about the interpretation of Union law, namely in relation to Articles 2(17) and 9(3) SFDR, PAI consideration, the 500 employee PAI threshold, and periodic disclosure frequency for portfolio management services. The queries illustrate that the scope of SFDR remains unclear.

Question 8, on the periodic disclosure frequency for portfolio management services, is of particular relevance to fund managers. There is inconsistency between Article 60 of Commission Delegated Regulation (EU) 2017/565, the text of which suggests that unless an exception applies, reporting should occur quarterly. In contrast, according to Recital 21 of SFDR, "Those disclosures by means of periodic reports should be carried out annually". There is confusion as to whether FMPs should provide quarterly periodic reports or whether they are permitted to use one of the quarterly reports as a yearly report.

No updates for this edition of the FSS.

17. FSSC Insight Paper: Best Practice – Collecting Socioeconomic Background Data

On 21 September 2022, the Financial Services Skills Commission (FSSC) released an Insight Paper entitled "Collecting Socioeconomic Background Data – Best Practice for Financial Services Firms" (the Paper). The Paper sets out key ways in which firms can approach the measurement of employees' socio-economic background. This data can assist with firms' obligations under the FCA D&I requirements, and tackle the issue of socio-economic diversity at senior levels of financial services in the UK.

The Paper sets out additional products and guides devised by the FSSC which seek to aide firms in fulfilling their D&I requirements through data collection.