Financial Services SpeedRead 9 December edition

1. FCA Quarterly Consultation 34: Changes to Securities Financing Transactions

On 3 December 2021, the FCA released its 34th quarterly consultation paper (CP 21/35).

Amongst other proposed changes, the FCA proposes to extend the existing exclusion of Securities Financing Transactions ("SFTs") from reporting under the UK Markets in Financial Instruments regulation ("UK MiFIR") to also include SFTs where the counterparty is a member of the European System of Central Banks ("ESCB") or Bank of England, effective from 31 March 2022. Therefore, under the proposed changes, there would be no reporting requirements on SFTs under UK MiFIR. This proposal intends to reduce the reporting burden and associated costs on firms by not having to report the same transaction twice under the different reporting regimes (UK MiFIR and UK SFTR).

SFTs would still be reportable under UK SFTR, which includes where a member of ESCB is a counterparty, but not where the Bank of England is a counterparty.

Appendix 4 of CP 21/35 sets out the proposed handbook text in the draft Technical Standards (Markets in Financial Instruments) (Transaction Reporting) Instrument 2022. The FCA can receive comments on the proposed changes to SFTs until 17 January 2022.

2. Primary Market Effectiveness Review: Final changes to listing rules

On 2 December 2021, the FCA issued a policy statement outlining its final proposed changes to the Listing Rules, as well as minor changes to the Disclosure Guidance, Transparency Rules ("DTRs") and the Prospectus Regulation Rules ("PRRs"). The policy statement follows the FCA's consultation (CP 21/21) in July 2021 on the "effectiveness of our financial markets".

The FCA has decided to make the following final changes:

• Minimum market capitalisation ("MMC") – lower the market capitalisation threshold for shares from £50m to £30m and introduce transitional provisions allowing applications based on the current £700,000 MMC for applicants that (i) have made a complete submission by 4 pm on 2 December 2021 providing that they apply to list by 2 June 2023; or (ii) are shell companies (including SPACs) that have already existing listed shares, providing that they complete submissions for an eligibility review for listing and a prospectus review on or before 1 December 2023.
• Minimum number of shares in public hands ("free float") – set a revised 10% level for the minimum value of publicly held shares and remove of FCA's discretion to accept lower levels;
• Track record obligation – proposal to conduct a wider review and implement wider reforms of the track record obligation when the FCA reviews structure of the listing regime in 2022;
• Minor changes to Listing Rules, Disclosure Guidance and Transparency Rules and the Prospectus Regulation Rules – provide some clarity to the new rules and make them consistent with other aspects of the listing framework – e.g. aligning provisions relating to the copies of documents held in electronic form.

The new rules came into force on 3 December 2021, however the Reform and Modernisation Instrument will enter into force on 10 January 2022.

The FCA plans to provide further feedback and outlined next steps regarding its wider review of the listing regime in the first half of 2022.

3. FCA publishes policy statement removing RTS 27 and RTS 28 and exempting SME research from inducement rules

On the 30 November 2021, the FCA published a policy statement (PS21/20) following its Consultation Paper 21/9 on "Changes to UK MIFID's conduct and organisational requirements" which included proposed changes to the inducement rules on research and the removal of the requirement to produce reports linked to best execution.

The policy statement sets out the FCA's final changes to the Conduct of Business Sourcebook (COBS) as follows:

• the FCA have revoked RTS 27 and RTS 28, thereby removing the requirement to provide best execution reports under RTS 27 (for execution venues) and RTS 28 (for investment firms). This came into force on 1 December 2021; and
• the FCA will be amending COBS 2.3A in order to extend the list of categories exempt from the inducement rules relating to research to include SMEs with a market cap below £200 million, FICC research, and independent research providers who do not provide execution services and are not part of a group offering execution services. The amendments also confirm that openly available written research does not fall within the scope of the inducement rules. These amendments will come into force on 1 March 2022.

For more insights, see our briefing: 'The MiFID II rollback: Research and best execution'.

4. One year on: update by European Commission on progress of second CMU action plan

On 25 November 2021, the European Commission published a communication in which it provided an update on the progress of the second action plan on the Capital Markets Union ("CMU").

The Communication outlines the Commission's adoption of the following four legislative proposals:

• establishment of the European Single Access Point ("ESAP") – the ESAP will provide a single access point for public financial and sustainability-related information about EU companies and EU investment products;
• review of the European Long-Term Investment Funds ("ELTIFs") Regulation – the removal of minimum investment thresholds (amongst other amendments) will make ELTIFs more attractive to investors;
• review of the Alternative Investment Fund Managers Directive ("AIFMD") – the harmonisation of the rules related to funds that provide loans to companies will improve the efficiency and integration of the Alternative Investment Funds market and ensure financial stability and better investor protection. Further clarification of the delegation rules will ensure fund managers who delegate their functions adhere to the "same high standards" across the EU (please see entry 11 for more detail of the proposed amendments); and
• review of the Markets in Financial Instruments Regulation ("MiFIR") – the introduction of a "European consolidated tape" will provide investors with access to near real-time trading data for stocks, bonds and derivatives across all EU trading venues, which had only previously been available to a small handful of professional investors.

5. European Commission: Legislative proposal to amend MiFID and MiFIR

On 25 November 2021, the European Commission published proposals to amend MiFIR and MiFID. This forms part of a package of measures introduced by the European Commission as it takes stock one year on from the 2020 Capital Markets Union Action Plan. The measures to amend the existing MiFiR/MiFID regime include the following:

• moving provisions concerning the demarcation between multilateral and bilateral systems from MiFID II to MiFIR;
• prohibiting systematic internalisers from offering payment for retail order flow (and potentially also professional, based on draft legislation);
• replacing the double volume cap with a single volume cap set at 7 per cent of trades that are executed under the reference price waiver or the negotiated trade waiver;
• introducing an obligation for trading venues to contribute harmonised market data directly and exclusively to the entities appointed by ESMA as the consolidated tape provider for each asset class;
• clarifying the parameters of the EU Share Trading Obligation and requiring ESMA to publish and maintain a list of all shares subject to the STO;
• giving ESMA power to specify the content, format and terminology of the reasonable commercial basis concept; and
• introduce sanctions for infringements aspects of MiFIR relating to: the volume cap mechanism; mandatory contributions to CTPs; the quality of data reported to CTPs; and PFOF.

The proposals will now be considered by EU legislators.

For more insights on these developments, please see our newsflash: 'EC MiFID II proposals pull rug out of non-lit trading and diverge from UK proposals'.

6. Wholesale Markets Review: Update by HM Treasury

On 23 November 2021, in a speech to the Treasury, John Glen (Economic Secretary to the Treasury) provided an update on the government's Wholesale Markets Review.

Mr Glen noted the "broad consensus" on the issues highlighted in the consultation document. The Government will publish a summary of responses and the Government's proposals in early 2022.

Mr Glen confirmed that the Government intends to legislate as early as parliamentary time permits to implement the followings changes identified in the consultation:

• revoke the share trading obligation and the double volume cap;
• recalibrate the transparency regime for fixed income and derivatives;
• reduce the scope of the position limits regime for commodity derivatives; and
• transfer the setting of position limit controls from the FCA to trading venues.

As some of the reforms will require changes to regulators' rules and/or guidance. HMT will work closely with the FCA and noted the FCA's commitment to begin this process in the New Year.

7. Improving the Appointed Representatives regime: FCA and HM Treasury consult on changes

On 3 December 2021, the FCA issued a consultation paper CP21/34 outlining proposed changes to the appointed representatives ("AR") regime and on the same day, HM Treasury also issued a Call for Evidence on the appointed representatives regime (together, the "consultations").

The FCA's proposed changes include:

• requiring principals to provide additional details on the business each of their ARs will conduct when an AR is appointed and on an ongoing basis (including the primary reason for appointing the AR, the nature of the regulated and non-regulated activities the AR will undertake);
• requiring less information for introducer appointed representatives ("IAR") (e.g. the nature of the regulated activities the IAR will undertake, information about the nature of the financial arrangements between the principal and the IAR and revenue from regulated activity during the first year of appointment);
• requiring principals to provide details on the AR activities the principal takes responsibility for on the FS Register and a requirement for the principal to verify the accuracy of their AR's details on the FS Register on an annual basis;
• introducing guidance on the considerations principals should have in assessing the competence and capability of individuals at ARs; and
• introducing guidance on the practical considerations that senior management at principals should use to conduct assessments of individuals at ARs effectively.

The deadline for comments on the call for evidence and FCA consultation is 3 March 2022.

8. BoE Policy Statement: The Bank of England's review of its approach to setting a minimum requirement for own funds and eligible liabilities (MREL)

On 3 December 2021, the Bank of England issued a Policy Statement in its approach to setting a minimum requirement for own funds and eligible liabilities including the Bank’s review of its approach to setting a minimum requirement for own funds and eligible liabilities (MREL), accompanied by a revised MREL Statement of Policy.

This follows on from the publication of a consultation paper in July 2021 and finalises proposals in relation to resolution strategy thresholds, the calibration of MREL, instrument eligibility, and the application of MRELs within banking groups.

The BoE confirms the following:

•  the BoE is not changing the basic calibration framework for MREL;
• from 1 January 2022, non-CET1 own funds instruments issued from non-resolution entity UK subsidiaries to holders outside the group will, in general, no longer be eligible to count towards external or internal MREL and BoE will leave its policy on intragroup MREL distribution unchanged; and
• the BoE will make a case-by-case judgement when setting the resolution strategy for firms that exceed, or expect to exceed, the threshold of more than 40,000 to 80,000 transactional accounts.

The BoE confirms that the revised Statement of Policy will apply from 1 January 2022.

It also published a statement seeking ideas to support its work to improve depositor outcomes in the event of bank or building society insolvency.

9. Call for evidence on EU banking sector's macro-prudential framework

On 1 December 2021, the European Commission published a call for evidence for an evaluation and impact assessment on how the EU banking sector's macroprudential rules are functioning and how they could be improved. The macroprudential review's general aim is to ensure the EU banking sector remains resilient against new and emerging systematic risks. The consultation will also help the Commission prepare the legislative review, and where appropriate legislative proposal, as required under Article 513 of the CRR (Regulation (EU) No 575/2013).

The review will also consider the following policy options:

• streamlined and more transparent current provisions;
• an upgraded framework; and/or
• a macroprudential framework for the whole financial sector.

The consultation closes on 18 March 2022.

10. IFPR: Implementation of Investment Firms Prudential Regime – Policy Statement (PS 21/17)

On 26 November 2021, the FCA published the third Policy Statement (PS21/17) on the investment firms prudential regime. This follows its earlier consultation paper issued in August (CP21/26). The Policy Statement covers disclosures, remuneration, own funds, partner drawings, depositaries.

The FCA confirms the following:

• disclosures are to be made on an individual entity basis only rather than on a consolidated basis (unless a firm has been granted an exemption from individual disclosure requirement by the FCA);
• disclosures under MiFIDPRU 8 are to be made annually, either on the date of publication of annual financial statements of the firm or on the date of the annual solvency statements submitted to the FCA;
• disclosure will be required in respect of compliance with MIFIDPRU own funds requirement and these include details on K-factor requirements;
• remuneration disclosures will consist of a summary on approach to remuneration of all staff; objectives of financial incentives, decision making procedures and governance around the development of remuneration policies and procedures;
• an FCA investment firm that is a partnership or LLP will be required to deduct from own funds drawings from the business made by its partners or members that exceed the profits of the firm;
• the FCA considers carried interest to be variable remuneration;
• FCA 730k investment firms will no longer be subject to the UK resolution regime once changes have taken effect but firms should note MIFIDPRU 7 includes a requirement for all FCA investment firms to consider recovery planning as an integrated feature of their risk management, as part of their ICARA process; and
• MIFIDPRU Remuneration Code applies to any form of remuneration given to a firm's MRTs, regardless of whether any or all of the remuneration is paid by an entity other than an FCA investment firm.

11. BoE (PRA): Consultation paper: Operational Resilience and Operational Continuity in Resolution: CRR firms, Solvency II firms, and Financial Holding Companies (for Operational Resilience) (CP 21/21)

On 25 November 2021, the PRA issued a consultation paper on operational resilience and operational continuity in resolution.

The PRA is consulting on amending Chapter 8 of the Operational Resilience Part of the PRA Rule Book so that it no longer imposes certain obligations on firms which are part of a group and/or consolidated group and, instead, to impose these obligations onto the holding company. The PRA considers that these proposals would support the initial policy intention of promoting a group level view of operational resilience, as well as align the Rule Book with the PRA’s approach to consolidated prudential requirements, as set out in its Policy Statement PS20/21 "Financial holding companies: Further Implementation".

The PRA comments that the costs of transferring responsibility for identifying important group business services, and setting impact tolerances for important group business services, to the holding company would not be material.

The deadline for responses is 14 January 2022.

12. New legislative proposal to amend AIFMD and UCITS Directive

On 25 November 2021, the European Commission adopted a legislative proposal for a directive to amend the Alternative Investment Fund Managers Directive (2011/61/EU) ("AIFMD") and the UCITS Directive (2009/65/EC).

The Directive includes amendments to the following provisions of AIFMD:

• delegation arrangements – amendments to (i) article 7 to ensure ESMA is notified of delegation agreements if more risk or portfolio management is delegated to third country entities than is retained; and (ii) article 8(1) to ensure there are two persons resident in the EU who are committed to conducting the AIFM's business full-time;
• liquidity risk management – new paragraphs (2b) and (2c) in article 16 provide AIFMs who manage open-ended AIFs with access to liquidity management tools in exceptional circumstances;
• supervisory reporting – amendments to article 24 to ensure there are no limitations on the data AIFMs provide to competent authorities on their managed AIFs;
• depositary and custody services – amendments to (i) article 21(11) to include central securities depositaries who provide competing custody services in the custody chain and (ii) article 61(5) to allow competent authorities to permit depositary services to be obtained from other member states (as a precursor to a potential depositary passport); and
• loan origination by AIFs – (i) new article 15(4e) requiring AIFs to retain, on an ongoing basis, a 5% economic interest of the notional value of loans they have granted and sold on the secondary market; and (ii) a new article 16(2e) requiring AIFs to adopt a closed-ended structure if they are involved in loan origination in a significant manner.

The proposed changes to the UCITS Directive mirror the delegation arrangements, liquidity risk management, data reporting and the custody services amendments to the AIFMD.

13. European Parliament approves 'quick fixes' for PRIIPs and UCITS

On 23 November 2021, the European Parliament announced its adoption of the following positions on amendments regarding the use of key information documents ("KIDs") under Regulation (EU) No 1286/2014 (the "PRIIPS Regulation") and Directive 2009/65/EC (the "UCITS Directive") at first reading:

• extending the temporary exemption for UCITS funds under article 32 for to produce a KID by 12 months, until 31 December 2022. Up until this date, the UCITS Directive requires UCITS to produce a Key Investor Information Document ("KIID") rather than a KID. The full text of the position can be found here.
• removing the requirement to produce a KIID where a PRIIP KID is prepared. This change will apply from 1 January 2023. The full text of the position can be found here.

Once the Council of the EU adopts the above proposals, the PRIIPS Regulation and UCITS Directive will come into force the day after they are published in the Official Journal of the European Union.

No updates for this edition of the FSS.

14. Anti-money laundering: new EU negotiating mandate on transparency of crypto-asset transfers

On 2 December 2021, the Council of the EU issued a press release confirming it had agreed on a negotiating mandate with the European Parliament on a proposal to update the current rules on the information accompanying transfers of funds to include certain crypto-assets within its scope. The proposal is part of a wider package of legislative proposals aimed at strengthening the EU's anti-money laundering and countering terrorism financing rules (AML/CFT), put forward by the Commission on 20 July 2021.

To ensure the traceability of crypto-asset transfers, the aim of the legislative proposal is to require crypto-asset service providers to collect and provide full information about the sender and beneficiary of the transfers of virtual or crypto assets they run. The Counsel's proposed updates seeks to "streamline and clarify" the Commission's proposal by (i) establishing requirements for crypto-asset transfers between crypto-asset service providers and un-hosted wallets and (ii) requiring a full set of originator information for each crypto-asset transfer (for any transaction amount).

Given the urgency of ensuring the traceability of crypto-asset transfers, the Council aims to synchronise the above proposal on the transfer of funds and the market in crypto-assets regulation ("MiCA").

15. FCA publishes second consultation paper on consumer duty

On 7 December 2021, the FCA published its second consultation paper (CP21/36) on a new consumer duty.

This second consultation follows the first consultation paper (CP21/13) published earlier in the year which outlined the FCA's proposals to implement the new consumer duty. For more information on the initial consultation paper, please see our briefing here.

Following on from the first consultation paper, the second paper sets out the feedback received to CP21/13; the FCA's revised proposals and the cost benefit analysis. The proposed handbook text is set out at Appendix 1 and Appendix 2 sets out the draft non-Handbook Guidance for firms on the Consumer Duty.

Key points arising from the consultation paper include:

• The Consumer Principle - following feedback received to CP21/13, the FCA have expressed that they intend to follow the wording of option 1 for the new Principle, "A firm must act to deliver good outcomes for retail clients";

• Relationship with existing Principles - the FCA propose to disapply apply Principle 6 (A firm must pay due regard to the interests of its customers and treat them fairly) and Principle 7 (A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading) in instances where the Consumer Duty Principle applies;
• Cross-cutting rules - the FCA have set out a draft non-Handbook guidance in Appendix 2 to the Consultation Paper which clarifies their proposed cross-cutting rules;
• Amendments to SM&CR - the FCA propose to amend SM&CR conduct rules in COCON to reflect the new higher standard of the Consumer Duty Principle;
• Private Right of Action - the FCA is not proposing to provide a private right of action for breaches of part of the Consumer Duty Principle at this time;

The consultation period is now open and responses can be sent to the FCA up until 15 February 2022. The FCA aim to publish their next policy statement summarising responses and amending their proposals in response to feedback (to the extent necessary) by 31 July 2022.

16. FCA set out final rules for SCA-RTS and amendments to PERG guidance and the Payment Services and Electronic Money approach document

On 29 November 2021, the FCA issued a policy statement (PS21/19) outlining the final rules for the Regulatory Technical Standards on Strong Customer Authentication and Secure Communication ("SCA-RTS"), alongside amendments to the 'Payment Services and Electronic Money – Our Approach' ("Approach Document") and the Perimeter Guidance Manual ("PERG"). The policy statement summarises the feedback the FCA received on its consultation paper CP21/3 and outlines the FCA's response and the final rules and guidance.

The changes to the SCA-RTS include:

• The creation of a new SCA exemption under Article 10A, meaning customers are not required to reauthenticate with their account servicing payment service provider ("ASPSP") every 90 days when accessing their information through a third-party provider ("TTP") (however TPPs would be required to reconfirm customer consent every 90 days). This exemption will be monitored by the FCA; and
• Requiring certain ASPSPs to offer dedicated interfaces to allow TPP access to customer account information for retail and SME payment accounts no later than 18 months after the rules enter into force (26 May 2023).

The changes to the Approach Document include:

• Expanding the scope of inherence for SCA purposes (wider than the EBA's existing guidance). The FCA defines inherence as a characteristic attributable to a person, including behavioural analytics, such as spending patterns. We have added this clarification in our updated guidance.
• Removing references to trusts including from e-money safeguarding template acknowledgement letter given the High Court judgment in the case of the case of Ipagoo which held that the Electronic Money Regulations do not create a trust over money received by an electronic money institution from its customers. The FCA notes it is appealing the High Court’s decision and that it may issue further guidance on this in the future.

17. Law Commission publishes advice to Government on smart contracts

On 25 November 2021, the Law Commission published "Smart legal contracts: advice to Government". This advice follows the UK Jurisdiction Taskforce's Legal Statement on the Status of Cryptoassets and Smart contracts published in November 2019.

Since November 2019, the Law Commission have been considering whether any additional legislation is required to facilitate the use of smart contracts within England and Wales. Their advice to Government has concluded that the current legal framework is able to support the use of smart contracts and therefore no further legislation is needed. For more information see our briefing here.

The Law Commission have also provided an update on two other emerging technology projects. Firstly, on 24 November the Law Commission published an interim update on its digital assets project. The project was put in place as a response to a call for evidence published on 30 April 2021. The update paper sets out the widening scope of the project that has been put in place as a response to stakeholder feedback, in particular relating to the definition of digital asset, the indicia set out in the call for evidence and consideration of a protection regime. As such, the deadline for the project has been extended to the middle of 2022.

The Law Commission have also stated that they will be starting a new project focussing on conflicts between the application of the current law to emerging technology as they have identified issues with applying conflict of law rules to the virtual world that such technologies exist in. The Law Commission aim to start this work in mid-2022. For updates on this project, enquiries can be sent to: commercialandcommon@lawcommission.gov.uk.

18. EU co-legislators announce political agreement reached

On 24 November 2021, the European Parliament announced that a political agreement had been reached between it and the Council of the European Union on the proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology.

The Commission adopted the proposed Regulation in September 2020 as part of its Digital Finance Strategy.

Points to note in respect of the agreement:

• financial instruments services provided using the DLT market should be limited and subject to value thresholds for shares (EUR500 million), bonds (EUR1 billion), corporate bonds (EUR200 million) and units of collective investment undertakings (EUR500 million);
• there are currently no authorised financial market infrastructures using DLT to provide trading or settlement services for crypto-assets that qualify as financial instruments and so a DLT settlement system and DLT trading and settlement system able to test innovative solutions based on DLT should be introduced; and
• new entrants should be able to access the pilot regime, as long as they comply with the same requirements as authorised investment firms or market operators.

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

19. FCA's new approach to decision-making

On 26 November 2021, the FCA published a policy statement (PS21/16) setting out its new approach to decision-making and issuing statutory notices.

To ensure a faster and more effective decision-making process, the FCA confirmed that it would make the changes to the Enforcement Guide ("EG") and Decisions Procedure and Penalties Manual ("DEPP") as set out in its consultation paper (CP 21/5) from July 2021, namely moving decision-making on statutory notices from its Regulatory Decisions Committee ("RDC") to Executive Procedures so that the RDC could focus on contentious enforcement cases. The Executive Procedures would be in charge of certain authorisations, interventions, straightforward cancellation cases and decisions as to whether to start civil and criminal proceedings.

The FCA will carry out a 6 month post-implementation review assessing the effectiveness of the changes.

20. EU Parliament Think Tank discusses UK's possible re-joining of Lugano Convention

On 18 November 2021, the European Parliament's Think Tank published a briefing on the possibility of the United Kingdom re-joining the 2007 Lugano Convention.

The main points covered by the briefing include:

• the European Commission's view is that third countries that are not part of the internal market (including the UK) should not be able to accede to the Lugano Convention;
• for now, national law and the 2005 Hague choice of Court Convention will govern the judicial co-operation between the UK and the EU;
• if both the UK and the EU accede to the Hague Judgments Convention in the future, this would enable the "free movement of judgments" in civil cases between the UK and the EU; and
• the Hague Judgments Convention offers a lower degree of legal integration than that provided by the Lugano Convention.