Financial Services SpeedRead: 31 March 2021

1. HM Treasury confirms technical negotiations on UK-EU Memorandum of Understanding have concluded

On 26 March 2021, HM Treasury issued a short statement confirming that technical discussions on the text of the Memorandum of Understanding (MoU) on Financial Services have concluded.

According to the statement, formal steps need to be undertaken on both sides before the MoU can be signed; HM Treasury expects this can be done expeditiously. Once signed, the MoU will create the framework for voluntary regulatory cooperation in financial services between the UK and the EU. The MoU will establish the Joint UK-EU Financial Regulatory Forum.

We covered the early draft of the MoU in a previous edition of the FSS, which can be accessed here.

2. ESMA updates statement on impact of Brexit on the Benchmark Regulation (BMR)

On 24 March 2021, ESMA updated its statement on the application of key provisions of the Benchmark Regulation (BMR). The latest update sets out ESMA's approach towards UK-based third country benchmarks as well as UK endorsed and recognised benchmarks.

ESMA stated that UK-based administrators now qualify as third-country administrators and therefore their benchmarks third country benchmarks. However, due to the extension to the Article 51(5) BMR transitional 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.
In the absence of an equivalence decision by the European Commission, UK-based administrators have until the end of December 2023 to seek recognition or endorsement in order for benchmarks provided by such administrators to be included in the ESMA register again.

3. FCA confirms it will continue to apply temporary transitional power to the UK's derivatives trading obligation

On 24 March 2021, the FCA published a statement on its use of the Temporary Transitional Power (TTP) to modify the application of the UK derivatives trading obligation (DTO). The FCA has confirmed that it will continue to use the TTP to modify the application of the DTO as previously set out its statement of 31 December 2020.

The FCA stated it had not observed market or regulatory developments in the first quarter of 2021 which justified a change in approach. However, the FCA will continue to monitor market and will provide sufficient notice to market participants should a new approach be appropriate in the future.

The FCA also re-confirmed that it expect firms and other regulated persons to be able to demonstrate compliance with the UK DTO (as specified in its December statement). 

4. BoE / PRA respond to Treasury Committee's call for evidence on the Future of Financial Services

On 23 March 2021, the House of Commons Treasury Committee published the written evidence response of the BoE and PRA to the Committee's call for evidence on the Future of Financial Services.

The response is structured in three parts. Part 1 covers responses to questions relating the future regulatory framework for the UK, Part 2 covers questions relating to the UK's position as a global financial centre and its relationships with other jurisdictions, and Part 3 discusses how the UK regulatory regime can support innovation, competition and proportionality.

Key points covered by the response include:

• The UK's withdrawal from the EU provides opportunity for the UK to tailor financial services policy and regulation for the UK. The BoE confirmed that onshoring was never intended as a permanent solution to UK regulations.
• The BoE supports a regulatory framework in which the high-level objectives, responsibilities and powers of regulators are set out by Parliament and Government, while the technical requirements to achieve those objectives are designed and maintained by operationally independent regulators (who hold the relevant specialist and technical knowledge) and are accountable to Parliament.
• The PRA confirms it will pursue whatever objectives Parliament sets for it although regulatory independence and regulators retaining authority to take decisions without a political 'veto' is important. Consultation and coordination between Parliament and Regulators is also vital.
• The PRA supports a safe and open approach to firms from other jurisdictions who are seeking to access the UK market and that 'safe openness' should be at the core of the UK's global approach.
• With respect to market access, the BoE touched on HMT's outcomes-based model for equivalence, which provides that overseas jurisdictions can be equivalent without the need for identical rules or supervisory practices. Any new recognition or trade agreements should not cut across the UK's ability to regulate and supervise effectively, to cooperate independently with overseas regulators, or to engage in international standard-setting and implementation.
• The PRA also states that HMT's proposal to transfer most onshored prudential standards into the regulators' rulebooks gives the PRA the opportunity to move towards a more coherent prudential regime and make the rules more accessible.

5. Single Resolution Board publishes its approach to eligibility of UK law instruments without bail-in clauses after Brexit

On 22 March 2021, the Single Resolution Board (SRB) published a communication on its approach to liabilities governed by UK law without a contractual bail-in recognition clause, following Brexit.

In the communication the SRB confirmed it will consider liabilities governed by UK law without a contractual bail-in recognition clause as eligible for minimum requirement for own funds and liabilities (MREL), if they (i) otherwise satisfy applicable MREL criteria and (ii) were issued on or before 15 November 2018. This exemption shall apply until 28 June 2025.

The SRB's states that any liability governed by UK law issued or materially amended after 15 November 2018 must include a contractual bail-in recognition clause to be eligible for MREL. The SRB will continue to monitor the industry and may review its position if necessary.

6. FCA issues Primary Market Bulletin 33

On 29 March 2021, the FCA issued Edition 33 of its Primary Market Bulletin. Areas covered include:

• New online portal for major shareholding notifications. The FCA refers to its new online portal, which allows holders of shares with voting rights attached and certain financial instruments to submit TR-1 Forms via its Electronic Submission System (ESS). ESS went live on 22 March 2021 and the FCA confirms that only notifications sent via the new portal will be considered for the purpose of monitoring compliance with the reporting requirements under DTR 5. Notifications for the market making exemption (TR-2 Form) and other exemptions available to certain investors under DTR 5 which are submitted to majorshareholdings@fca.org.uk will still be accepted.
• Complying with the UK Short Selling Regulation. The FCA refers to the UK Short Selling Regulation and reiterates the importance of market participants meeting their obligations to provide appropriate transparency on short selling activities to the market and the importance of timely and accurate disclosure of net short selling positions. The FCA also reminds firms of the recent Short Selling (Notification Thresholds) Regulations 2021 which reduced the notification threshold under Article 5(2) of the UK SSR from 0.2% to 0.1%. Accordingly, a net short position is reportable to the FCA when the position reaches 0.1% of the issued share capital of a company that has shares admitted to trading on a UK trading venue and at every 0.1% increment thereafter. The FCA also reiterates others rules under the UK SSR, including in relation to short positions and scope of instruments; restrictions on uncovered short sales in shares; notification timings; and method for submitting Net Short Position Notifications to the FCA.
• FCA Review of net changes to share capital: total voting rights and major shareholding disclosures. In 2020, the FCA conducted a review of the way that UK issuers announced changes to total voting rights and the effect on major shareholding notifications. The FCA identified several issues to highlight for market participants. In particular, the FCA identified a number of examples where major shareholders had not disclosed their new positions after the change to the total voting rights. It argues that this may be contributing to the level of missing notifications by major shareholders. Accordingly, the FCA reminds position holders of their responsibility under the DTRs to assess whether their position has changed and reminds issuers of their obligations to report changes to total voting rights clearly and on time as required by the DTR.
• Further feedback following Review of Delayed Disclosure of Inside Information. The FCA refers to its review of delayed disclosure of inside information contained in edition 31 of its Primary Market Bulletin. In this bulletin the FCA sets out its response to several queries it received following publication of its Delayed Disclosure Of Inside Information Review. The FCA's responses cover periodic financial information, board changes and share price movements.

7. PRA and FCA: Joint Covering Document on operational resilience

On 29 March 2021, the UK regulators (PRA, the FCA, and the Bank of England in its capacity of supervising financial market infrastructures) issued a joint covering document on operational resilience (Operational Resilience: Impact tolerances for important business services). This follows a joint 2018 Discussion Paper on operational resilience as well as consultation papers issued in 2019 (PRA CP29/19 and FCA CP19/32). The document outlines policy decisions taken in relation to important business services; impact tolerances; and delivering operational resilience. The regulators note that COVID-19 has underscored the importance operational resilience for firms and note that most firms and FMIs have been able to maintain continuity of service during the period and that they had a good degree of resilience to the pandemic.

See also our separate entries below covering the FCA and PRA's respective Policy Statements and associated documents on Operational Resilience.

8. FCA publishes Policy Statement – "Building operational resilience: Feedback to CP19/32 and final rules" (PS21/3)

On 29 March 2021, the FCA published its Policy Statement (PS21/3) on operational resilience rules. The Policy Statement follows the FCA's 2019 consultation paper (CP19/32). It has also published a Handbook Instrument which implements the changes. The changes primarily consists of amendments to SYSC and SUP sections of the FCA Handbook.

The rules in relation to operational resilience apply to banks, building societies, PRA-designated investment firms, insurers, Recognised Investment Exchanges, Enhanced scope Senior Managers and Certification Regime firms, and entities authorised and registered under the Payment Services Regulations 2017 and Electronic Money Regulations 2011. The FCA is proposing a proportionate approach.

Under the regime, firms within scope will be required to:

• identify important business services (factors firms should consider when identifying importance business services include the nature of the client base, the ability of clients to obtain the service from other providers) that, if disrupted, could cause intolerable harm to consumers of the firm or risk to market integrity, threaten the viability of firms or cause instability in the financial system;
• set impact tolerances for the maximum tolerable disruption to important business services (in the case of dual regulated firms, there would be two impact tolerances - where there is intolerable harm to consumers; and where financial stability at risk);
• carry out mapping and testing to identify important business services, set impact tolerances and identify any vulnerabilities in their operational resilience;
• conduct lessons learnt exercises to identify, prioritise, and invest in their ability to respond to and recover from disruptions as effectively as possible;
• develop internal and external communication strategies and plans for when important business services are disrupted; and
• prepare self-assessment documentation.

The final rules and guidance come into force on 31 March 2022 and firms must be able to remain within their impact tolerances as soon as reasonably practicably but no later than March 2025.

9. PRA publishes Policy Statement - "Operational resilience: Impact tolerances for important business services" (PS6/21)

On 29 March 201, the PRA published Policy Statement PS6/21 on "Operational Resilience: Impact
tolerances for important business services." This follows its 2019 consultation paper (CP29/19).

The PRA also published the following as appendices to PS6/21:

• The PRA Rulebook: CRR Firms, Solvency II Firms: Operational Resilience Instrument 2021 (PRA2021/5)
• Supervisory statement (SS1/21): Operational resilience: Impact tolerances for important business services

• Statement of Policy: Operational Resilience

The rules require that firms identify their important business services by considering how disruption to the business services they provide can have an impact on PRA objectives; set an impact tolerance for disruption for each important business service; and ensure they can continue to deliver their important business services and are able to remain within their impact tolerances during severe but plausible scenarios. Firms are required to have identified their important business services and set impact tolerances by 31 March 2022.

In the Policy Statement, the PRA outlines some changes that have been made to its policy in light of feedback received from the consultation. These include:

• changes to further align definitions and requirements with FCA definitions and requirements;

•  amendments to specify the firms that are required to consider the stability of the UK financial system when setting their impact tolerances;
• introducing an expectation for firms to review their important business services annually at minimum; and
• introducing an expectation for firms to consider the impact of the failure of other related important business services when setting impact tolerances for individual important business services.

10. Bank of England (PRA)/FMI: Bank of England policy on operational resilience of FMIs

On 26 March 2021, the Bank of England (BoE) issued a raft of documents in relation to operational resilience for financial market infrastructures. The risk management frameworks for FMIs cover both minimising the likelihood of an operational disruption occurring and mitigating and recovering from an operational disruption once such disruption crystallises.

Central Counterparties

• Policy Statement. This document outlines feedback received in relation to the BoE's December 2019 consultation.
• Supervisory Statement This contains a set of actions the BoE expects CCPs to undertake in order to achieve a sufficient level of operational resilience. The operational resilience framework has been created with some of the requirements of UK EMIR and associated regulatory technical standards in mind.

Central Securities Depositories

• Policy Statement This document outlines feedback received in relation to the BoE's December 2019 consultation.

• Supervisory Statement This document sets out the BoE's expectations for the operational resilience framework for CSDs and has been created with requirements of the UK CSDR as well as associated regulatory technical standards (in particular, the requirement in RTS 2017/392 that a CSD should have in place a well-documented framework for the management of operational risk with clearly assigned roles and responsibilities) in mind.

Recognised Payment System Operators and Specified Service Providers

• Policy Statement This document outlines feedback received in relation to the December 2019 consultation. The BoE will add an operational resilience part to add to the Code of Practice published in June 2017.

• Supervisory Statement This document outlines the BoE's expectations for the operational resilience framework for recognised payment systems and specified service providers and how to meet the obligations under the Code of Practice. The BoE confirms that the Operational Resilience part of the Code of Practice will not apply to a recognised payment system that is operated by a CCP or CSD.

11. ESMA updates Q&As on MiFID II and MiFIR in relation to inducements

On 29 March 2021, ESMA published an updated set of Q&As on MiFID II and MiFIR investor protection and intermediaries topics. The new Q&A is Section 12, Question 8 and concerns the condition to be met for inducements to be considered to enhance the quality of services to clients, as referred to in Article 11(2)(a) of the MiFID II Delegated Directive. ESMA has provided guidance on each element of the condition:

• Additional or higher-level service: ESMA considers that the quality enhancement provided is required to go beyond aspects of the firm's organisation or services that are legally required or that can be considered as essential for its functioning. For instance, provision of regulatory documents such as a prospectus or a KID is not considered as additional or higher-level because these are required by law. The responses gives examples of activities may, depending on the specific circumstances, constitute 'additional'; or 'higher level' services (such as the provision of educational materials).
• Provided to the relevant client: the Q&A indicates that services that can be considered as additional or higher-level in theory, could still not be a quality enhancement for the client in question. The services must also not be an abstract offer made to all clients However, ESMA considers that the quality enhancement can be provided to a relevant segment of clients, provided that this segment is sufficiently homogeneous i.e. the quality enhancements provided should be relevant for all clients that belong to this segment.
• Proportional to the level of inducements: ESMA emphasises that it is the level of inducements received by the firm that is of relevance, not the client's investment amount. ESMA expects firms to be able to demonstrate that the quality enhancements provided to the client are proportional to the level of inducements received

12. Joint FCA and Bank of England statement encouraging market participants in a switch to SONIA in the sterling non-linear derivatives market from 11 May

On 29 March 2021, the FCA and the Bank of England issued a joint statement, encouraging liquidity providers in the sterling non-linear derivatives market to adopt new quoting conventions for inter-dealer trading based on SONIA instead of LIBOR from 11 May this year. The joint statement explains that this is to facilitate a further shift in market liquidity toward SONIA, bringing benefits for a wide range of users as they move away from LIBOR.

13. ESMA publishes Final Report on its technical advice to the European Commission on the application of administrative and criminal sanctions under MiFID II/MiFIR

On 29 March 2021, ESMA published Final Report: ESMA's Technical Advice to the Commission on the application of administrative and criminal sanctions under MiFID II/MiFIR. The technical advice addresses, in particular, the need to further harmonise the administrative sanctions set out for infringements of MiFID II/MiFIR requirements.

ESMA's technical advice includes proposals to:

• amend the MiFID II requirements for National Competent Authorities (NCAs) to disclose and report information on sanctions and measures;
• amend the MiFID II requirement for NCAs to liaise with judicial authorities to gather information on criminal sanctions;
• include settlement powers among the range of sanctions and measures of Member States' national NCAs to increase the efficiency of their enforcement proceedings; and
• amend the current requirements on MiFID II precautionary measures.

14. Joint PRA and FCA Dear CEO letter on transition from LIBOR to risk free rates

In our previous FSS update, we covered the FCA's announcement made on 5 March 2021, confirming the dates that the panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available.

Following on from this, on 26 March 2021, the PRA and FCA published a joint Dear CEO letter in relation to transition from LIBOR to risk free rates. The letter sets out a list of priority areas where further actions by firms is necessary to prepare for the cessation of LIBOR. The regulators stressed that the list is not exhaustive and the onus is on firms and responsible Senior Manager Function (SMF) holder(s) to determine the specific actions necessary to mitigate the risks arising from their firm's exposures to LIBOR, to ensure good client outcomes and to preserve market integrity. The responsible SMFs should also satisfy themselves that all appropriate actions are being taken to ensure an orderly transition. As a key regulatory priority, the regulators expect that this transition forms part of the performance criteria for determining SMFs' variable remuneration. All firms are also expected to meet milestones of the Working Group on Sterling Risk Free Reference Rates and the targets of other working groups and relevant supervisory authorities as appropriate.

The letter sets out the following priority areas:

• Cessation of new sterling LIBOR business milestones
• Systems readiness for LIBOR cessation
• Active transition of legacy LIBOR exposures
• Conduct risk mitigation
• Development of Risk Free Rates markets
• Model changes
• Selection of appropriate alternatives to LIBOR

15. Governor Andrew Bailey unveils the design of the new £50 note

On 25 March 2021, Governor Andrew Bailey unveiled the design of the new £50 note featuring the scientist Alan Turing. Turing was a mathematician and a pioneer of early computers. His critical work on codebreaking saved the lives of many people in World War Two. He was also a gay at a time when this was considered a crime. In his speech, Governor Andrew Bailey stated: "By placing him on this new £50 banknote, we celebrate him for his achievements, and the values he symbolises, for which we can all be very proud". The polymer £50 note will join the Churchill £5, the Austen £10 and the Turner £20, meaning all Bank of England banknotes are now available in polymer.

The polymer £50 will enter circulation on Wednesday 23 June 2021, which coincides with Alan Turing's birthday. The public can continue to use paper £50 notes as usual. Notice will be given at least six months ahead of the date when the old paper £50 is withdrawn.

16. ESMA issues a public statement regarding its supervisory approach to position limits

On 19 March 2021, ESMA issued a public statement on supervisory approach to position limits in light of the MiFID Quick Fix package. ESMA noted that the measures under the MiFID Quick Fix package are expected to be in application in February 2022 and reduce the scope of commodity derivatives subject to position limits.

As a result, ESMA confirms that it expects supervisors not to prioritise:

• supervisory actions towards entities holding positions in commodity derivatives, other than agricultural commodity derivatives, with a net open interest below 300,000 lots; and
• supervisory actions towards positions that are objectively measurable as resulting from transactions entered into to fulfil obligations to provide liquidity on a trading venue as per MiFID II.

17. FCA publishes statement regarding supervisory flexibility on RTS 27 reports and 10% depreciation notification

On 19 March 2021, the FCA published a statement regarding temporary measures with respect to RTS 27 reports and 10% depreciation notifications.

RTS 27 best execution reports

The FCA confirmed, it is currently preparing a consultation looking at the RTS 27 reporting obligation, with a view to abolishing it, given concerns that have been expressed around the value these reports bring to the market and to consumers, and the burdens involved in producing them.

Considering the upcoming consultation, the FCA states it will not take action against firms who do not produce RTS 27 reports for the rest of 2021. The FCA expect that by end of 2021 it will have concluded its policy consideration of the future of these reports.

10% depreciation notifications

For the past twelve months the FCA has adopted temporary coronavirus measures in relation to the requirement for firms to issue 10% depreciation notifications to investors (per COBS 16A.4.3 UK).

However, the FCA has now announced that they will no longer take action for breach of COBS 16A.4.3 for services offered to retail investors provided that the firm meets the criteria set out in the FCA's statement (including having issued at least one notification in the current reporting period and informing clients they may not receive similar notifications in the current reporting period).

For services offered to professional investors, the FCA noted that it will not take action for breach of COBS 16A.4.3 provided that firms have allowed professional clients to opt-in to receiving notifications.

The FCA reiterated that firms must still pay due regards to the interests of their customers and treat them fairly (Principle 6), pay due regard to the information needs of their clients, and communicate information to them in a way which is clear, fair and not misleading (Principle 7).

18. ESMA publishes consultation paper on taxonomy-related sustainability disclosures - draft regulatory technical standards with regard to the content and presentation of sustainability disclosures pursuant to the SFDR

On 17 March 2021, the European Supervisory Authorities (ESAs) issued a consultation paper on draft Regulatory Technical Standards (RTS) in relation to disclosures of financial products investing in economic activities that contribute to an environmental investment objective. These economic activities are defined by the EU Taxonomy Regulation which amends the Regulation on sustainability-related disclosures in the financial services sector (SFDR).

The consultation paper aims to contribute to establishing a single rulebook for sustainability disclosures under the SFDR and the Taxonomy Regulation by creating one set of RTS for all the environmental taxonomy-related disclosures and by amending already published draft RTS concerning disclosures under the SFDR so as to remove duplications in requirements (the final report on RTS concerning the content, methodologies and presentation of disclosures pursuant to the SFDR was published in February 2021).

The draft RTS in the consultation paper concerning how and to what extent investments underlying a financial product are involved economic activities that qualify as environmentally sustainable consist of two elements: a graphical representation of the taxonomy-alignment of investments of the financial product and a key performance indicator calculation for that alignment; and a statement that the activities funded by the product that qualify as environmentally sustainable are compliant with criteria found in Taxonomy Regulation.

The closing date for responses to the consultation is 12 May 2021. The ESAs plan to publish a final report with final draft RTS, for submission to the Commission, by late June or early July 2021.

19. PRA publishes its supervisory statement on outsourcing and third party risk management and related policy statement

On 29 March 2021, the PRA published its Supervisory Statement (SS2/21) (and associated Policy Statement (PS2/21)) on outsourcing and third party risk management. SS2/21 applies to UK Banks, building societies, PRA-designated investment firms, insurers and reinsurers in scope of Solvency II and UK branches of overseas banks and insurers. SS2/21 comes into effect on 31 March 2022, and for agreements entered into on or after 31 March 2021, firms need to be compliant by 31 March 2022. However, for outsourcing and other in-scope third party agreements entered into prior to 31 March 2021 there is no need to comply until the next appropriate renewal date or revision point of the agreement, even where that falls post-31 March 2022.

SS2/21 broadly keeps to the same obligations that are applicable to firms under the EBA Guidelines on Outsourcing. However, the PRA has specifically stated that it expects "material" non-outsourcing third-party agreements be subject to controls which are as robust as the controls that would apply to outsourcing arrangements with an equivalent level of materiality.

Additionally, SS2/21 brings some much needed clarification on actions firms can take where a service provider cannot (for legitimate reasons) practically agree to the penetration testing and unlimited access and audit rights which have long been required of firms under the EBA's Outsourcing Guidelines. Whilst firms still need to include these requirements, there is some scope to agree less onerous obligations, depending on the circumstances.

20. Bank of England Financial Policy Summary and Record of the Financial Policy Committee Meeting on 11 March 2021

On 26 March 2021, the Bank of England published the summary and record of the meeting of its Financial Policy Committee held on 11 March 2021.

Areas covered include:

• The resilience of the UK banking system. Major UK banks' and building societies' liquidity positions remained strong. The increase in capital ratios over the quarter had been driven largely by revised EU rules exempting software assets from capital deduction requirements. UK banks had buffers of capital larger than required by past stress tests.
• The resilience of financial markets and non-bank financial intermediation. The market stress period that occurred between March 2020 and April 2020 showed the functioning of debt markets to be vulnerable to economic shocks and subsequent sharp moves in asset prices. These vulnerabilities still remain and global reform is needed to make market-based finance more resilient, particularly in the following areas: demands of non-bank financial intermediaries for liquidity in stress; and mismatch between the liquidity of assets held in open-ended funds and the redemption terms offered by those funds.
• Productive finance to support economic recovery. Long term asset funds can hold illiquid assets like unlisted equities safely and sustainably and avoid some of financial stability risks that otherwise arise when illiquid assets are held in open-ended fund structures. The Bank of England, HM Treasury and the FCA have set up an industry working group on promoting productive finance via the launch of a Long-Term Asset Fund (LTAF) structure.
• Open-ended funds. Following the findings of the open-ended fund survey carried out jointly by the Bank of England and the FCA (see our entry below), the next Financial Stability Report will outline its views on liquidity classification and swing pricing.
• UK Countercyclical Capital Buffer (CCyB) Rate. The FPC is to maintain the UK CCyB rate at 0 per cent in 2021 Q1 and expects to maintain a UK CCyB rate of 0% until at least December 2021.
• 2022 Cyber Stress Test. The 2022 Cyber Stress Test will test firms' abilities to withstand cyber incidents should involve a scenario where data integrity had been compromised.

21. Bank of England/FCA: Report: Liquidity management in UK open-ended funds

On 26 March 2021, the Bank of England and the FCA released the findings of their joint survey on UK-authorised open-ended funds. The survey was launched in the summer of 2020 and covers a reporting period covering Q4 2019 to Q2 2020 (including the market stress period that occurred in the wake of COVID-19 in March 2020 and April 2020).

The survey found that the COVID-19-related market stress led to large net outflows across all funds, with UK corporate bond funds particularly affected.

Other findings contained in the survey include the following:

funds have a wide range of liquidity tools available to them, but predominantly use swing pricing. Almost all surveyed funds had liquidity management tools in place and used them more intensively during the stress period. However, tool selection and trigger points for their usage, and some pricing adjustment calculations, tended not to be fund-specific, but often set for fund families or at fund manager level;

• fund managers vary in how often they carry out liquidity analysis and their level of sophistication;
• fund managers use external data sources for valuation of less liquid assets;
• corporate bond funds may be overestimating the liquidity of their holdings, despite market conditions indicating otherwise; and
• funds also manage liquidity by holding liquidity buffers in the form of cash and non-cash liquid assets (the two most common non-cash assets held for liquidity purposes were units in money market funds and UK government bonds).

22. ESMA Consultation paper on EU Money Market Fund Regulation - Legislative review

On 26 March 2021, ESMA issued a consultation paper on legislative review of the EU Money Market Funds (MMF) Regulation. The MMF requires the European Commission to review, following consultations with ESMA, the EU MMF regime by 21 July 2022. ESMA is consulting on potential reforms of the EU MMF regulatory framework, in light the difficulties faced by MMFs in March 2020.

Areas of potential reforms for MMFs:

• reforms targeting the liability side of MMFs (e.g. decoupling regulatory thresholds from suspensions/gates to limit liquidity stress);
• reforms targeting the asset side of MMFs (e.g. reviewing requirements around liquidity buffers);
• reforms targeting both the liability and asset side of MMFs by reviewing the status of certain types of MMFs; and
• reforms external to MMFs themselves (e.g. assessing the role of sponsor support).

The deadline for responses is 30 June 2021. ESMA will consider the feedback it received to the consultation in Q2 2021.

23. FCA publishes Decision Notice against SMF for non-financial misconduct

On 29 March 2021, the FCA published a Decision Notice against Jon Frensham, an independent financial adviser and the sole director at Frensham Wealth Limited. The FCA considers that Mr Frensham is not a fit and proper person and has made orders to:

• withdraw Mr Frensham's approval to perform his current senior management functions (SMF), including SMF 3 (Executive Director), SMF 16 (Compliance Oversight) and SMF 17 (MLRO); and
• prohibit Mr Frensham from performing any function in relation to any regulated activity.

According to the FCA, in March 2017 Mr Frensham was convicted of attempting to meet a child following sexual grooming. He committed this offence whilst he was an approved person. Mr Frensham was sentenced to 22 months' imprisonment, suspended for 18 months. Given the nature and circumstances of his offence, the FCA determined that Mr Frensham is not a fit and proper person to perform any function in relation to any regulated activity as he lacks the necessary integrity and reputation.

As Mr Frensham has exercised his right to refer the matter to the Tribunal, the FCA's Decision Notice is provisional and subject to the Tribunal's determination. At this stage, the facts and matters stated in the Decision Notice therefore reflect the FCA's belief as to what happened and how Mr Frensham's behaviour is to be characterised.

24. FCA CEO Nikhil Rathi delivers speech on "why diversity and inclusion are regulatory issues"

On 17 March 2021, HM Treasury hosted the 'Launch of the HM Treasury Women in Finance Charter Annual Review'. At the event, FCA CEO Nikhil Rathi delivered a speech on 'why diversity and inclusion are regulatory issues'. According to Mr Rathi:

• diversity will be crucial in the FCA's consideration of vulnerability, particularly as we come out of a pandemic that has disproportionately affected women and people of colour;
• the FCA is working with the PRA on a joint and formalised approach to diversity and inclusion (D&I) for all financial services firms and will make its expectations clear;
• the FCA will increasingly be asking tough questions firms about representation across grades and whether their culture is open and inclusive and provides a safe space for colleagues at all levels of the organisation; and
• as part of the FCA's regulatory work on D&I and the listings framework, the FCA will be exploring whether it should make diversity requirements part of its premium listing rules.

With respect to vulnerable customers Mr Rathi stated "I would question if any firm can adequately respond to the needs of these consumers if they do not have the diversity of background and experience required to overcome biases and blind spots. Ultimately, improving diversity and inclusion is both a matter of fairness and a crucial way to strengthen consumer outcomes."

With respect to conduct and accountability, Mr Rathi reflected on the FCA's introduction of 5 conduct questions to help focus minds of senior managers on conduct risk in the wholesale banking market. Mr Rathi stated he would like to see this expanded, with a sixth question added asking all firms "is your management team diverse enough to provide adequate challenge and do you create the right environment in which people of all backgrounds can speak up?"

Mr Rathi also touched on how the FCA may monitor or intervene in this space in the future. In particular, Mr Rathi noted that if the FCA doesn't see improvements in diversity at senior levels and better answers, the FCA will consider how to best use its powers. Mr Rathi noted that were supervisory tools the FCA could draw on, and floated the idea of whether the diversity of management teams could form part of the FCA's consideration of senior manager applications.

Mr Rathi closed his speech by reiterating that the FCA cares about diversity "because diversity reduces conduct risk and those firms that fail to reflect society run the risk of poorly serving diverse communities. And, at that point, diversity and inclusion become regulatory issues."

Mr Rathi's speech follows FCA Senior Advisor Georgina Philippou's speech of On 16 March 2021 at the 'Building Ethnic Diversity and Inclusion in Investment Management - Report Launch'. The speech highlighted the FCA's approach to firm culture, and the need to ensure that cultures are purposeful and safe, and support environments which are diverse and inclusive. Ms. Philippou highlighted D&I is relevant to much of what the FCA does and noted that although there is no rule in the FCA Handbook which says regulated firms have to be diverse or even have a diversity policy, it does not mean the FCA is silent or powerless. Ms. Philippou stated that the FCA has a range of tools at its disposal, from formal to informal, including a unique power to influence and convene.

25. HM Treasury updates advisory notice on money laundering controls in higher risk jurisdictions and new Money Laundering Statutory Instrument

On 24 March 2021, HM Treasury updated its advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions. This notice replaces all previously notices issued by HM Treasury on the subject. On the same day HM Treasury made The Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021 (SI 2021/392), which amends the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).

The effect of the statutory instrument (SI) is to replace references to the European Commission's list of high-risk third countries (in respect of which extra customer due diligence measures must be taken by relevant persons under the MLRs) with a list of such countries identified instead in a new Schedule 3ZA to the MLRs. The new list of high-risk third countries replicates FATF's list of 'Jurisdictions under Increased Monitoring' and the list of 'High-Risk Jurisdictions subject to a Call for Action'. The SI came into force on 26 March 2021.

The schedule will be periodically updated by way of further regulations, for example to reflect changes made by FATF to their relevant lists after each Plenary. The new Schedule 3ZA lists the following High-Risk Third Countries: Albania, Barbados, Botswana, Burkina Faso, Cambodia, The Cayman Islands, Democratic People's Republic of Korea (DPRK), Ghana, Iran, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Senegal, Syria, Uganda, Yemen and Zimbabwe.

26. FATF publishes draft guidance on a risk-based approach to virtual asset service providers

On 19 March 2021, FATF published its Guidance on the risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs). The FATF originally issued Guidance in June 2019 when the FATF finalised changes to its standards to place anti-money laundering and countering the financing of terrorism (AML/CFT) obligations on VAs and VASPs.

The FATF noted that the new revised Guidance aims to:

clarify the definitions of VA and VASP to make clear that these definitions are expansive and there should not be a case where a relevant financial asset is not covered by the FATF Standards (either as a VA or as a traditional financial asset);

• provide guidance on how the FATF Standards apply to so-called stablecoins;
• provide additional guidance on the risks and potential risk mitigants for peer-to-peer transactions;
• provide updated guidance on the licensing and registration of VASPs;
• provide additional guidance for the public and private sectors on the implementation of the 'travel rule'; and
• include Principles of Information-Sharing and Co-operation Amongst VASP Supervisors. FATF mentioned that the Guidance has also been updated to reflect the passage of time and the publication of other relevant FATF reports.

The FATF clarified that these changes to the pre-existing Guidance aim to maintain a level playing field for VASPs, based on the financial services they provide in line with existing standards applicable to financial institutions and other AML/CFT obliged entities, as well as minimizing the opportunity for regulatory arbitrage between sectors and countries.

The FATF confirmed that it will consult private sector stakeholders before finalising the revisions to the Guidance.

27. FCA publishes feedback statement on Open Finance (FS21/7)

On 26 March 2021, the FCA published its feedback statement on open finance (FS21/7).

Open Finance refers to the extension of open banking-like data sharing to a wider range of financial products, such as savings, investments, pensions and insurance. In its 2019/20 business plan, the FCA committed to exploring the issue in greater detail, and in December 2019, published a Call for Input.

For a detailed over of the main issues raised in FS21/7, please see our briefing.

28. Financial Conduct Authority v 24Hr Trading Limited, Mohammed Maricar - High Court finds that 24HR Trading Academy unlawfully advised on investments and unlawfully promoted CFD trading

On 25 March 2021, the High Court delivered a summary judgement in proceedings initiated by the FCA against 24HR Trading Academy Limited (Company) a firm run by Mohammed Maricar.

As part of its business, the Company provided "signals" containing details of transactions in CFDs and other instruments to customers, together with other services. This started with a "trading signals service", whereby customers would obtain access to signals and would also be sent educational material on FX trading created by third parties. The Company also later began sending signals to customers via social media containing references to "buy" and "sell". Customers were also given access to a document entitled "24HR Trading Academy – How to Read Signals & Execute Trades on MT4". That manual explained how signals could be interpreted and the electronic instructions that needed to be given to an FX trading platform in order to generate CFDs.

A customer wishing to effect FX transactions dealt with in the educational materials and referred to in the signals would be referred to FX trading platforms (AvaTrade and VantageFX) via links to its website. Although the Company's clients were not contractually obliged to have accounts with either AvaTrade or VantageFX, the Company offered some inducements such as free trial of the services of the Company services and discounted fees to those who opened accounts with the trading platforms. Mr Maricar received sign-up and other commissions from these brokers.

A "disclaimer" had also been sent to customers stating that any information provided to customers was as "general market information for educational and entertainment purposes and did not constitute investment advice". Customers were told to engage in "extensive independent market research" before making trading decisions.

Issues for the Court to consider:

• Whether the signals constituted "advice" on "investments".
• Whether activities of the Company and Mr Maricar (or either of them) in encouraging, inducing or inviting consumers to open trading accounts with brokers AvaTrade and Vantage FX constituted arranging deals in investments for the purpose of article 25 of the RAO in contravention of the general prohibition; and contravened the restriction on financial promotion contained in section 21 of FSMA.

Judgement:

• Judge Jonathan Richards, sitting as a Deputy High Court Judge, concluded that, interpreted objectively, the signals were "advice". A reasonable recipient of them would conclude that they constituted a recommendation to effect the specific transactions in CFDs referenced in the signals. The Judge Richards also stated that the disclaimer did not alter his conclusions.
• Judge Richards was not prepared on summary judgement to find that arrangements had been made under article 25(1) of the RAO but was willing to conclude that the Company engaged in activities falling within article 25(2). Article 25(2) is not concerned with a causative relationship between an "arrangement" and a particular transaction. Rather it is enough that the arrangement be "with a view" to a party to that arrangement acquiring investments (i.e. the CFDs or FX options). The activity relates to something more inchoate form of activity "which is not necessarily causative of the transaction in the sense that it brings it about but which nonetheless helps it to happen". As long as the arrangement was made "with a view to" the customer acquiring CFDs or FX options, it would not matter whether the customer made any actual acquisitions.

29. FCA warns that young investors are taking on big financial risks

On 23 March 2021, the FCA published research findings into better understanding self-directed investors who engage in high-risk investments like cryptocurrencies and foreign exchange. According to the FCA, there is a new, younger, more diverse group of consumers getting involved in higher risk investments, potentially prompted in part by the accessibility offered by new investment apps.

The FCA's research found that higher risk products may not be suitable for these consumers' needs as 59% claim that a significant investment loss would have a fundamental impact on their current or future lifestyle. Moreover, some investors are being tempted - often through online adverts or high-pressure sales tactics - into buying higher-risk products that are very unlikely to be suitable for them. In addition, this newer audience has a more diverse set of characteristics than traditional investors. According to the FCA data, these investors tend to skew more towards being female, under 40 and from a BAME background. This newer group of self-investors are more reliant on contemporary media (e.g. YouTube, social media) for tips and news. This trend appears to be prompted by the accessibility offered by new investment apps.

The FCA advises consumers to consider five important questions before they invest:

1. Am I comfortable with the level of risk?
2. Do I fully understand the investment being offered to me?
3. Am I protected if things go wrong?
4. Are my investments regulated?
5. Should I get financial advice?

30. Advertising Standards Authority (ASA) publishes its report tracking the number of influencers who abide by social media ad disclosure requirements

On 18 March 2021, ASA published its 'influencer Ad Disclosure on Social Media' report. The report reveals that the proportion of influencers sticking to the rules is far below what the ASA would expect.

Last year September, the ASA undertook a three week monitoring exercise to review the Instagram accounts of 122 UK-based influencers to assess whether advertising content was being properly disclosed. That involved assessing over 24,000 Instagram "Stories" including posts, "IGTV" and "Reels" to check compliance rates. The advertising rules apply across all platforms and non-broadcast media but this monitoring exercise focused on posts on Instagram because complaints to the ASA about Influencer ad disclosure tend to relate to this particular platform.

Extensive advice, training and easy-to-understand resources have been provided to help the influencer marketing community and brands understand their responsibilities under the ad rules. ASA found that nearly one in four of the Stories it assessed was advertising, but only 35% of them were clearly labelled and obviously identifiable as such. The level of non-compliance is unacceptable.

In summary, the ASA found:

• Inconsistent disclosure across Stories - when a piece of ad content spans a number of consecutive Stories, unless it's absolutely clear that this is part of the same posting, each Story must be disclosed as an ad.
• Inconsistent disclosure across Stories, IGTV, Reels, posts – we noted instances where a post would be accurately disclosed as an ad but a corresponding Story was not.
• Visibility of ad labels – where Stories were labelled as ads, we noted labels were sometimes in a small font, obscured by the platform architecture or otherwise difficult to spot; mainly due to being in a very similar colour to the background of the Story where it was placed
• Affiliate content is still an ad – we noted the use of #affiliate or #aff with no additional upfront disclosure; those labels are not likely to be enough on their own to disclose to users the advertising nature of the content.
• Own-brand ads – Influencers should not rely on bios or past posts to make it clear to consumers that they are connected to a product.

31. UK Finance publishes Fraud – the Facts 2021 report

On 25 March 2021, UK Finance published its Fraud – the Facts 2021 report, highlighting that criminals used the Covid-19 pandemic to target victims online, through impersonation scams, romance fraud and investment scams. Digital platforms were used to target victims and trick them into giving away money, thereby evading banks' advanced security measures. UK Finance is calling for new legislation to make online platforms responsible for taking down fraudulent content and better protect consumers from these scams.

32. FMLC responds to HM Treasury's Call for Evidence: Regulatory Approach to Cryptoassets and Stablecoins

On 19 March 2021, the FMLC raised a number of legal uncertainties presented in HM Treasury's consultation published in January 2021. According to HM Treasury, the January consultation aimed to create a balance between challenges posed by new technologies, including risks to consumers and stability, while also supporting innovation, competition and providing a sound regulatory environment for stablecoins.

According to the FMLC the legal uncertainties include definitional questions, such as identifying what a "token" is, as well as the difficulties arising from interpreting definitions under existing financial regulation in the context of token arrangements. The FMLC has also drawn attention to the possible overlap of the new regime for stablecoins with the existing regime under the E-Money Regulations.

The FMLC notes the difficulties arising from the application of concepts present in financial services regulation which reflect the traditional market infrastructure of intermediated securities, most, if not all, of which cannot readily be applied to a DLT context.

33. HM Treasury announces climate considerations now fully embedded across UK principal regulators

On 24 March 2021, HM Treasury announced that had fully embedded climate considerations by requiring its principal financial regulators to consider climate change. In its announcement, HM Treasury stated that building on their existing body of climate change-related work, the FCA and Prudential Regulation Committee (PRC) should now take into account the Government's legally binding commitment to transaction to a net zero economy by 2020.

On the same date, the Chancellor released remit letters issued to the FCA and PRC, updating their respective remits. The remit letters set out the Government's ambition to deliver a financial system which supports and enables a net zero economy, and mobilises private finance behind sustainable and resilient growth. These follow the publication of the updated remits for the Bank of England's Monetary Policy Committee (MPC) and Financial Policy Committee (FPC) at Budget 2021.

For further information see: the remit letter for the FPC; the remit letter for the MPC; the remit letter for the PRC; and the remit letter for the FCA.