The following posts provide a snapshot of the principal U.S., European and global financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
European Securities and Markets Authority Publishes Recommendations on Crypto-Assets and Initial Coin Offerings
The European Securities and Markets Authority has published a report on the application and suitability of the EU securities regulatory framework to crypto-assets, including Initial Coin Offerings. The report is in response to the European Commission's request in its FinTech Action Plan 2018. Like the European Banking Authority, which published a report on the same day in relation to banking sector issues, ESMA found that EU activities related to crypto-assets are fairly low and do not present any financial stability risks.
ESMA's report focuses on the legal qualification of crypto-assets under EU financial securities laws and highlights that this may differ across EU member states because it will be subject to the national laws implementing EU legislation. ESMA notes that there is currently no legal definition of crypto-assets and that a key consideration is whether a crypto-asset qualifies as a financial instrument under the revised Markets in Financial Instruments package. Where a crypto-asset qualifies as a MiFID financial instrument, the full requirements under various securities legislation may apply, subject to any applicable exemptions. According to ESMA, the rules in the Prospectus Directive would apply to an issue of crypto-assets offered to the public, including through an ICO, where the instruments are transferable securities.
UK Draft Directions for EEA Funds and Fund Managers Wanting to Continue to Market in the UK Post-Brexit
The U.K. Financial Conduct Authority has published two draft Directives relating to Brexit under the: (1) draft Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019; and (2) Alternative Investment Fund Managers Regulations 2013, as amended by the draft Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2019. These draft regulations will establish a Temporary Permissions Regime enabling EEA funds that currently market in the U.K. under an EEA passport to continue to do so for three years after the U.K. exits the EU.
UK Legislation Published to Onshore the European Long-Term Investment Funds Regulation For Brexit
HM Treasury has published a draft version of the Long-term Investment Funds (Amendment) (EU Exit) Regulations 2018. The draft Regulations correct deficiencies in the directly applicable European Long-term Investment Funds Regulation to be retained on Brexit, which governs funds that invest into infrastructure and other long-term projects. The draft Regulations will primarily affect fund managers operating ELTIFs registered in the UK.
International Body Proposes Framework for Assessing Fund Leverage
The International Organization of Securities Commissions has launched a consultation on a proposed framework to help assess leverage used by investment funds. The consultation follows a recommendation to IOSCO from the Financial Stability Board in its January 2017 report, "Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities." The FSB recommended, among other things, that IOSCO should identify and/or develop consistent measures of leverage in funds to facilitate more meaningful monitoring of leverage for financial stability purposes and help enable direct comparisons across funds and at a global level.
EU Supervisory Authority Consults on Proposed Guidelines on Money Market Fund Reporting Requirements
The European Securities and Markets Authority has launched a consultation on proposed Guidelines for Money Market Fund Managers, to assist them in complying with their obligations, under the Money Market Funds Regulation, to report information to the relevant national regulator of each MMF they manage. The reporting obligation applies on at least a quarterly basis (or annually for MMFs with total assets under management not exceeding Euro 100 million). The European Commission adopted Implementing Technical Standards in April 2018, which specify the content of a reporting template that will be developed for the information. The ITS have applied since July 21, 2018 and MMF managers must begin submitting reports under the MMF Regulation in the first quarter of 2020.
EU Proposals Aim to Avoid Duplicative Information Requirements on Investment Managers
The Joint Committee of the European Supervisory Authorities have launched a consultation on amendments to the Key Information Document for Packaged Retail and Insurance-based Investment Products.
Since January 1, 2018, the EU PRIIPs Regulation has required manufacturers of PRIIPs to prepare and publish a stand-alone, standardized Key Information Document for each of their PRIIPs. Those advising retail investors on PRIIPs, or selling PRIIPs to retail investors, must provide retail investors with a KID in good time before the transaction is concluded. The PRIIPs Regulation exempts until December 31, 2019 management and investment companies and persons advising on or selling Undertakings for Collective Investment in Transferable Securities from the obligation to produce and provide a PRIIPs KID. The UCITS Directive requires these entities to provide investors with a Key Investor Information Document. As a result, if there were no changes made to the EU legislation, UCITS would be subject to duplicative information requirements from January 1, 2020. To address this situation, the ESAs are proposing to amend the Regulatory Technical Standards under the PRIIPs Regulation by moving the UCITS KIID requirements to the PRIIPs RTS.
UK Legislation Published to Onshore the EU Venture Capital Funds and Social Entrepreneurship Funds Regulations for Brexit
HM Treasury has published the draft Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 and the draft Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018, along with explanatory information. HM Treasury is also preparing draft Long-term Investment Funds (Amendment) (EU Exit) Regulations 2018 and will publish these in due course.
These draft "onshoring" statutory instruments will amend deficiencies in the retained versions of the following directly applicable EU Regulations:
- the European Venture Capital Funds (EuVECA) Regulation, which governs funds that invest into small and medium-sized enterprises;
- the European Social Entrepreneurship Funds (EuSEF) Regulation, which governs funds that invest into social investments; and
- the European Long-term Investment Funds (ELTIF) Regulation, which governs funds that invest into infrastructure and other long-term projects.
EU Amending Legislation Published on Duties of Third-Party Custodians Safe-Keeping Fund Assets
Amending Delegated Regulations on the safe-keeping duties of depositaries, supplementing the Alternative Investment Fund Managers Directive and the Undertakings for Collective Investment in Transferable Securities Directive, have been published in the Official Journal of the European Union.
The amending Delegated Regulations were adopted by the European Commission in July 2018. They amend existing delegated regulations under AIFMD and UCITS relating to the safekeeping of AIF and UCITS clients' assets respectively, to ensure a more uniform approach is adopted across the EU. The amendments clarify that where a depositary for an AIF or UCITS delegates safe-keeping functions to a third party custodian, the clients' assets must be segregated at the level of the delegate (i.e. from the delegate's own assets but not from those of its other clients). This should prevent interpretation of the segregation obligations as requiring separate accounts per depositary and per type of fund at each level of the custody chain. The respective Delegated Regulations set out how that obligation should be fulfilled to ensure a clear identification of assets belonging to a particular AIF or UCITS and the protection of assets in the event of the depositary or custodian entering insolvency.
The amending Delegated Regulations enter into force on November 19, 2018 and will apply directly across the EU from April 1, 2020.
View the amending Delegated Regulation under AIFMD ((EU) 2018/1618).
View the amending Delegated Regulation under UCITS ((EU) 2018/1619).
European Commission Announces Work Plan for 2019
The European Commission has published a Communication, outlining its work plan for 2019. The Communication is addressed to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. The Communication discusses the ongoing challenges for the EU in the run-up to the European Parliamentary elections and the post-Brexit Summit in Sibiu at which a new multi-annual framework for the EU27 will be finalized.
Separately published Annexes to the Communication relating to: (i) new initiatives; (ii) REFIT initiatives; (iii) priority pending proposals; (iv) legislative initiatives that have been withdrawn; and (v) a list of envisaged repeals. Priority pending proposals of particular relevance to financial institutions include legislative proposals relating to the forthcoming sustainable finance package, cross-border distribution of collective investment schemes, crowdfunding, amendments to the European Market Infrastructure Regulation, prudential regulation and supervision of investment firms and a proposed amending regulation relating to minimum loss coverage for non-performing exposures.
UK Conduct Regulator Consults on Brexit-Related Changes to Its Rulebook and Binding Technical Standards
The U.K. Financial Conduct Authority has published its first consultation on proposed changes to the FCA Handbook to ensure a functioning legal and regulatory framework for financial services in the event of a "no-deal" scenario whereby the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement in place and there is consequently no transitional period for firms. The proposed amendments will not take effect if the U.K. enters into a transitional period after exit day.
The consultation includes the FCA's proposals in relation to the Binding Technical Standards it has been empowered by HM Treasury to amend prior to Brexit and to maintain afterward. These are the retained EU "Level 2" delegated and implementing regulations that set out regulatory technical standards and implementing technical standards. The consultation also sets out the FCA's proposed approach to non-legislative "Level 3" materials such as guidelines, recommendations and opinions that will also be onshored.
The FCA states in the consultation that the majority of the proposed changes are consequential in nature and follow the amendments to retained EU law that HM Treasury is proposing, as set out in the series of financial services-related statutory instruments being made under the European Union (Withdrawal) Act 2018.
UK Conduct Regulator Consults on Post-Brexit Temporary Permissions Regime for EEA Firms and Funds
The U.K. Financial Conduct Authority has published a consultation on its proposed approach to a Temporary Permissions Regime for EEA firms and investment funds that currently provide services in the U.K. - either via a branch or cross-border - pursuant to a single market passport. The proposed TPR is designed to minimize the potential harm caused by an abrupt loss of the passport in a "no-deal" scenario, in which the U.K. exits the EU without a ratified Withdrawal Agreement, which would mean that there would be no transitional period following Brexit and that the U.K. would be treated as a third-country after exit day. The TPR will enable EEA firms and investment funds to continue to provide services in the U.K. for a limited period following exit day.
The proposed TPR will take effect on March 29, 2019 in the event of no deal. Should the U.K. and EU negotiations lead to ratification of the Withdrawal Agreement, the TPR will not enter into force. Instead, during the transitional period, firms and investment funds would continue to have access to the same passporting arrangements as they do now.
UK Conduct Regulator Consults on Illiquid Assets and Open-Ended Funds
The U.K. Financial Conduct Authority has launched a consultation on illiquid assets and open-ended funds, following responses from stakeholders to a discussion paper it issued early in 2017. After observing the impact of certain temporary fund suspensions following the U.K.'s 2016 referendum on exiting the EU, the FCA considers that open ended funds investing in illiquid assets have a potential structural liquidity mismatch which, under stress, can create a "first mover" advantage that may lead to runs on funds and sales of fund assets at reduced prices.
The FCA is consulting on a number of proposals to alleviate the risk of poor outcomes to retail investors in open ended funds, specifically non-UCITS retail schemes (NURSs), that invest in illiquid assets. The consultation includes a proposed approach to defining "inherently illiquid assets," examples of which include property or infrastructure investments.
In addition to the responses received to its discussion paper, the FCA's consultation proposals are also informed by its supervisory work and by the revised version of the Recommendations on Liquidity Risk Management for Collective Investment Schemes published in February 2018 by the International Organization of Securities Commissions.
Draft UK Post-Brexit Legislation to Onshore Alternative Investment Fund Managers Directive Published
HM Treasury has published a draft of the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018, along with explanatory information. The draft Regulations will onshore the Alternative Investment Fund Managers Directive for Brexit.
The draft Regulations are primarily relevant for Alternative Investment Fund Managers that are already regulated in the U.K. under the Alternative Investment Fund Managers Regulations 2013 and AIFMs currently marketing EEA AIFs in the U.K. They are also relevant for fund managers that market EEA Undertakings for Collective Investment in Transferable Securities (UCITS) into the U.K. HM Treasury has published separately the draft U.K. legislation to onshore EU legislation for UCITS funds for Brexit.
The draft Regulations have been prepared in preparation for a "no-deal" scenario, in which the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement. The no-deal scenario addressed in the draft Regulations involves no transitional period following Brexit and the U.K. being treated as a third-country under EU law after exit day. The changes set out in the draft Regulations will not take effect on exit day if the U.K. enters a transition period.
Draft UK Post-Brexit Legislation to Onshore EU UCITS Directive Published
HM Treasury has published a draft of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018, along with explanatory information. The draft Regulations will onshore the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive for Brexit.
The draft Regulations are primarily relevant for EEA fund managers operating UCITS authorized in the U.K., fund managers marketing EEA UCITS into the U.K. and depositaries that provide services to U.K. authorized funds. HM Treasury has also published separately the draft U.K. legislation to onshore EU legislation for Alternative Investment Funds for Brexit.
The draft Regulations have been prepared in preparation for a "no-deal" scenario, in which the U.K. exits the EU on March 29, 2019 without a ratified Withdrawal Agreement. The no-deal scenario would mean that there would be no transitional period following Brexit and that the U.K. would be treated as a third-country after exit day. The changes set out in the draft Regulations will not take effect on exit day if the U.K. enters a transition period.
European Supervisory Authorities and European Commission Disagree on Retail Fund Investor Disclosures
The Joint Committee of the European Supervisory Authorities (i.e., the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) has published a letter it has sent to the European Commission, in response to a request from the European Commission on August 10, 2018 for the ESAs to develop guidance on facilitating the production and distribution of information on investment funds.
Proposed Revisions to EU Guidelines on Stress Testing of Money Market Funds
The European Securities and Markets Authority has opened a consultation on proposed updates to the Guidelines on stress test scenarios for Money Market Funds under the Money Market Fund Regulation. The MMF Regulation has applied directly across the EU since July 21, 2018. MMFs are fund vehicles that invest in highly liquid short-term debt instruments, such as government bonds and often regarded as a short-term cash management function alternative to bank deposits.
The MMF Regulation tasks ESMA with developing Guidelines on common reference parameters of the stress test scenarios to be included in the stress tests that managers of MMFs are required to conduct. ESMA's original Guidelines, published in March 2018, include specifications for the stress tests, including common parameters and scenarios which take into account certain hypothetical risk factors. The Guidelines must be reviewed at least annually and updated for any market developments.
The consultation paper proposes updating the section in the Guidelines on the establishment of common reference stress test scenarios, the results of which should be included in the reporting template that managers of MMFs are required to use. ESMA is seeking feedback on the methodology, risk factors, data and the calculation of the impact. The calibration of stress test scenarios is not within scope of the consultation. However, feedback on how to calibrate the scenarios would be welcomed by ESMA.
Responses to the consultation should be submitted by December 1, 2018. ESMA intends to finalize the revised Guidelines in Q1 2019.
View the consultation paper.
UK Conduct Regulator Consults on Rule Alignments for EU Securitization Framework
The U.K. Financial Conduct Authority has launched a consultation on proposed changes to its rules to ensure consistency with the provisions of the directly applicable EU Securitization Regulation (also known as the STS Regulation) and related amendments to the Capital Requirements Regulation, which take effect across the EU on January 1, 2019. This forthcoming EU legislation will introduce a new framework for simple, transparent and standardized securitizations, intended to make the EU securitization market function more effectively.
UK Competition Authority Consults on Proposed Remedies to Adverse Competition in the Investment Consultancy and Fiduciary Management Markets
The U.K. Competition and Markets Authority has published a Provisional Decision Report in respect of the Investment Consultants Market Investigation in which it is assessing the supply and acquisition of investment consultancy services and fiduciary management services. The CMA has already published several working papers and an Issues Statement as part of the investigation.
The Provisional Decision Report sets out the CMA's assessment of the investment consultancy and fiduciary management markets, its general conclusions on competition, its provisional decision on competition and provisional remedies to address the identified competition issues. The CMA's provisional finding is that there is an adverse effect on competition which may result in material detriment to customers in both the investment consultancy and fiduciary management markets, although there are more concerns with the fiduciary management market.
UK Conduct Regulator Publishes Interim Report on Investment Platforms Market Study
The U.K. Financial Conduct Authority has published an Interim report as part of its market study to ascertain whether competition between investment platforms is working in the interests of consumers. The FCA launched the investment platforms market study in July 2017 after potential competition issues in the sector were highlighted in the course of its asset management market study, on which it issued its final report in June 2017.
The FCA has been assessing competition in the sector by exploring a range of areas, namely: barriers to entry and expansion; business models; platform profitability; the impact of financial advisers; and consumer preferences and behaviour. Noting the increasing vertical integration in the sector, the FCA has also been examining commercial relationships between platforms, asset managers, discretionary investment managers and financial advisers.
The FCA has found that the market appears largely to be working well for both advised and non-advised consumers and that customer satisfaction is currently high. However, the FCA has found that there are some customers for whom the market is not working as well as it should. The interim report highlights the issues the FCA has identified and consults on proposed remedies. The report is supported by eight annexes covering elements of the FCA's research and findings so far.
EU Secondary Legislation for Money Market Funds Published
A Commission Delegated Regulation amending and supplementing the European Money Market Funds Regulation has been published in the Official Journal of the European Union. The MMF Regulation, which applies directly across the EU from July 21, 2018, allows MMFs to invest in securitizations or asset-backed commercial paper and incentivizes the investment in simple, transparent and standardized securitizations. The Delegated Regulation amends the MMF Regulation (or MMFR) by applying the requirements for STS securitizations provided for in the Securitization Regulation (also known as the STS Regulation).
The MMF Regulation also allows an MMF to enter into a reverse repurchase agreement provided that certain conditions are met. The assets received by the MMF under that agreement must be money market instruments that meet certain requirements. A derogation from those requirements provides that an MMF may also receive instruments that are either: (i) issued or guaranteed by the EU, a central authority or central bank of a Member State, the European Central Bank, the European Investment Bank, the European Stability Mechanism or the European Financial Stability Facility; or (ii) issued or guaranteed by a central authority or central bank of a third country. The Delegated Regulation supplements the MMF Regulation by providing the quantitative and qualitative liquidity requirements for the assets that an MMF receives under a reverse repurchase agreement where the derogation is being used.
European Commission Adopts Regulations Clarifying Duties of Third-Party Custodians Safe-Keeping Fund Assets
The European Commission has adopted revisions to the Delegated Regulations on the safekeeping duties of depositaries under both the Alternative Investment Fund Managers Directive and the Undertakings for Collective Investment in Transferable Securities Directive. The Commission consulted on the proposed changes between May 29 and June 26, 2018. Following feedback received during that consultation the Commission has agreed to defer the date from which the revisions will apply to 18 months after publication in the Official Journal of the European Union. It had been proposed that the revisions would apply from six months of publication. In addition, the Commission has made certain changes to the text to improve the clarity of the requirements without introducing any further substantive changes.
The adopted Delegated Regulations are subject to review by the European Parliament and the Council of the European Union. If there is no objection from either of those bodies, the revised Delegated Regulations should apply directly across the EU from Spring 2020.
View the amending Delegated Regulation under AIFMD.
View the amending Delegated Regulation under UCITS.
View details of the proposed revisions to the Delegated Regulations.
UK Financial Conduct Authority Confirms UK Rule Alignments for the EU Money Market Funds Regulation
The U.K. Financial Conduct Authority has published a Policy Statement outlining the rule changes necessary to align its rulebook with the provisions of the EU Money Market Funds Regulation.
The FCA has made changes to amend, delete or disapply rules in its Handbook to MMFs to ensure those rules do not conflict with the MMFR. The regulator consulted on the proposed changes between January and March 2018. The amended rules apply from July 21, 2018 to new MMFs, including funds with substantially similar objectives to MMFs, once they are authorized as MMFs under the MMFR. Funds already operating as either MMFs or funds falling within the current definition of short-term money market funds in the FCA's rules will benefit from transitional provisions and will have until July 21, 2019 to apply for authorization under the MMFR.
The MMFR takes effect directly across the EU from July 21, 2018. The effect of the MMFR in the U.K. will be that authorized unit trusts, authorized contractual schemes, open-ended investment companies and alternative investment funds can all apply to be authorized as MMFs. As a directly applicable EU regulation, the MMFR does not require transposition into national law. However these changes have been made to ensure the U.K. rules are in line with EU laws and empower the FCA to authorize funds as MMFs, to levy fees and to enforce requirements under the MMFR.
View the Policy Statement (FCA PS 18/17).
View details of the FCA consultation on proposed Handbook changes.
View details of the U.K. implementing regulations for the MMFR.
UK Competition and Markets Authority to Impose Confidentiality Ring for Provisional Decision Report on the Investment Consultants Market Investigation
The U.K. Competition and Markets Authority has published a notice of intention to operate a confidentiality ring, following publication of the Provisional Decision Report on the Investment Consultants Market Investigation. The CMA is assessing the supply and acquisition of investment consultancy services and fiduciary management services. As part of the investigation, the CMA has received information and/or data from a number of parties. This data has been used by the CMA in the investigation, in particular in preparing the Provisional Decision Report, which will be published in mid-July 2018. The notice:
- provides a description of the data that has been used;
- sets the timing of the confidentiality ring - from 9.30 am on the date of publication of the Provisional Decision Report until 5 pm on the date five weeks thereafter; and
- stipulates the access conditions under the confidentiality ring, including completion of an undertaking by those wishing to access the confidentiality ring, the form of which is set out in an annex.
View the CMA's notice.
View the form of undertaking.
UK Implementing Regulations for the Money Market Funds Regulation Published
The Money Market Funds Regulations 2018 have been laid before Parliament and will enter into force partly on June 28, 2018 and fully on July 21, 2018. The EU Money Market Funds Regulation came into force on July 20, 2017 and will apply directly across the EU from July 21, 2018. MMFs are fund vehicles that invest in highly liquid short-term debt instruments, such as government bonds, often used by institutions as a short-term cash management function as an alternative to bank deposits. The effect of the MMFR in the U.K. will be that authorized unit trusts, authorized contractual schemes, open-ended investment companies and alternative investment funds can all apply to be authorized as MMFs.
The MMFR does not require transposition into the national law of EU Member States. However, U.K. legislation must be amended to empower the Financial Conduct Authority to authorize funds as MMFs, to levy fees and to enforce requirements under MMFR.
EU Consultation on Duties of Third-Party Custodians Safe-Keeping Fund Assets
The European Commission is consulting on revisions to the Delegated Regulations on the safekeeping duties of depositaries under both the Alternative Investment Fund Managers Directive and the Undertakings for Collective Investment in Transferable Securities Directive. Both the AIFMD and the UCITS Directive require that where a depositary delegates safekeeping functions to third party custodians, the assets also need to be segregated at the level of the delegate. The respective Delegated Regulations set out how that obligation should be fulfilled to ensure a clear identification of assets belonging to a particular AIF or UCITS and the protection of assets in the event of the depositary or custodian entering insolvency.
The proposed changes follow the European Securities and Markets Authority's Opinion, "Asset segregation and application of depositary delegation rules to CSDs", issued on July 20, 2017. In its Opinion, ESMA identified that the delegation rules are being applied in different ways by EU Member States' national regulators and market participants and invited the Commission to make clarifications to the rules. The Commission concurs that the Delegated Regulations need to be amended to ensure a more uniform approach is adopted across the EU.
Implementing Technical Standards Published For Reporting by Money Market Fund Managers
A Commission Implementing Regulation has been published in the Official Journal of the European Union, setting out Implementing Technical Standards for a standard reporting template to be used by money market fund managers when complying with their reporting requirements under the Money Market Funds Regulation. The Commission Implementing Regulation is based on the final draft ITS submitted by the European Securities and Markets Authority to the European Commission in November 2017.
The MMFR requires MMF managers to report quarterly to the relevant national regulator, supplying information including on the characteristics, portfolio indicators, assets, and liabilities of the MMF. This information is required to enable those national regulators to detect, monitor and respond to risks in the MMF market. The information is also forwarded to ESMA, which maintains a central database of MMFs.
UK Financial Conduct Authority Publishes its 2018/19 Business Plan
The Financial Conduct Authority has published its Business Plan for 2018/19 which sets out its key priorities for the coming year. The FCA confirms that it will continue to focus on issues relating to the U.K.'s withdrawal from the EU by working with the Government, ensuring appropriate transition measures for EEA firms, working towards operational readiness and cooperating at international level.
The FCA divides the remainder of its priorities into cross-sector priorities and sector priorities. There are seven cross-sector priorities: firms' culture and governance; financial crime and anti-money laundering; data security, resilience and outsourcing; innovation, big data, technology and competition; treatment of existing customers; long-term savings, pensions and intergenerational differences; and high-cost credit. There are seven sector priority areas: wholesale financial markets; investment management; retail lending; pensions and retirement income; retail investments; retail banking; and general insurance and protection. The FCA also published Sector Views for each of these sectors which provide an FCA view of how each sector was performing as of mid-2017.
UK Financial Conduct Authority Finalizes Rules Enhancing Governance of Authorized Fund Managers
The Financial Conduct Authority has published a Policy Statement and final rules relating to strengthening the governance arrangements of U.K. authorized fund managers. The need to enhance these arrangements was identified by the FCA in the Asset Management Market Study launched in 2015. The final AMMS report was published in June 2017 and set out remedies the FCA intended to implement to address identified issues. At the same time, the FCA published a consultation paper on the first set of proposals.
The Policy Statement sets out the FCA's response to the feedback on its proposals and the final rules and guidance. The new rules and guidance applies to U.K. AFMs in relation to their management of authorized funds (that is, authorized open-ended collective investment schemes). The rules will apply either on April 1, 2019 or on September 30, 2019, depending on the lead time that the FCA considers the industry needs to implement the required changes.
Read more for a summary of the FCA's decision on the various consultation points.
UK Financial Conduct Authority Consults on Proposals to Improve Disclosure to Fund Investors by Authorized Fund Managers
The Financial Conduct Authority has published a second consultation paper on remedies arising out of the Asset Management Market Study. This consultation concerns improving disclosure by authorized fund managers to their investors and should be read with the Policy Statement, final rules and revised guidance on enhanced governance arrangements for U.K. AFMs, which were published alongside the consultation paper. The FCA is proposing:
- new guidance on how AFMs should make fund objectives and investment policies clear and more useful for investors;
- new rules requiring managers to be clear about why (or why not) a benchmark has been used and how investors should assess the performance of the fund;
- new rules requiring AFMs that use benchmarks to use and reference them consistently across marketing materials;
- new rules requiring that where managers present past performance they must do so in an appropriate and consistent manner; and
- amending the performance fee rules to require that performance fees be calculated on performance net of other fees.
View the second consultation on remedies arising from the AMMS.
View details of the Policy Statement and final rules.
View the AMMS final report and the first consultation paper.
European Regulatory Technical Standards under ELTIF Regulation published
A Commission Delegated Regulation has been published in the Official Journal of the European Union. The Delegated Regulation supplements the Regulation on European Long-Term Investment Funds, setting out Regulatory Technical Standards to specify the criteria for establishing the circumstances in which the use of financial derivative instruments solely serves hedging purposes, the circumstances in which the life of a ELTIF is considered sufficient in length and the criteria to be used for certain elements of the itemized schedule for the orderly disposal of the ELTIF assets and the facilities available to retail investors.
The Delegated Regulation will enter into force on April 12, 2018.
View the Commission Delegated Regulation ((EU) 2018/480).
European Commission Publishes Legislative Package for Cross-Border Distribution of Investment Funds
As part of its work on creating a European Capital Markets Union, the European Commission has published a legislative package of amendments, comprising a proposed Regulation and a proposed Directive.
The proposed Directive amends the Directive on Undertakings for Collective Investment in Transferable Securities Directive and the Alternative Investment Fund Managers Directive by introducing new or amending existing elements of that legislation. This includes deletion or amendment of provisions of the UCITS Directive or AIFMD that are dealt with in the proposed new Regulation. The proposed Directive also inserts a definition of “pre-marketing” in AIFMD, which is designed to allow AIFMs to target investors by testing their appetite for upcoming investment opportunities or strategies through pre-marketing. Pre-marketing is defined as "a direct or indirect provision of information on investment strategies or investment ideas... in order to test [investor] interest" in an AIF that has not yet been established.
The proposed Regulation aims to increase transparency on the rules and procedures applicable to cross-border marketing of investment funds and regulatory fees and charges levied by national competent authorities.
European Systemic Risk Board Issues Recommendation to Mitigate Funds' Liquidity and Leverage Risks
The European Systemic Risk Board has published a Recommendation addressed to the European Securities and Markets Authority and the European Commission, outlining a set of recommended actions designed to address the systemic risks that could arise from liquidity mismatches and the use of leverage by investment funds.
Review of EU AIFMD Launched
The European Commission has announced that KPMG has been appointed to carry out a survey on the functioning of the Alternative Investment Fund Managers Directive, calling for all stakeholders to provide their feedback. The online survey seeks stakeholder views on the requirements of the AIFMD, their experience in applying those requirements and the AIFMD's impact on the market.
View the Commission's announcement.
View the KPMG survey page.
European Securities and Markets Authority Outlines 2018 Plans for EU Supervisory Convergence
In addition to the key priorities, the 2018 programme also sets out ESMA key objectives and main planned outputs in relation to a number of thematic and cross-cutting issues, including: investor protection and intermediaries; secondary markets; investment management; market integrity (including market abuse and benchmarks); post-trading (including CCPs, securities financing and settlement); corporate finance (in particular the new prospectus regime); corporate reporting; market data; financial innovation; IT infrastructure; and peer reviews.
The European Securities and Markets Authority has published its Supervisory Convergence Work Programme for 2018. It highlights a total of five key priorities for its work on supervisory convergence in 2018, comprised of three ongoing priorities (application of the revised Markets in Financial Instruments framework, data quality and investor protection) and two new priorities (Brexit and financial innovation).
European Commission Confirms Reverse Distribution Not Permitted Under Money Market Funds Regulation
The European Commission has published a letter to the European Securities and Markets Authority in response to a query from ESMA on the interpretation of the Money Market Funds Regulation concerning "reverse distribution". Reverse distribution involves the cancellation of fund units in certain market environments, notably where negative interest rates prevail.
ESMA had concluded, in its public consultation on its draft Implementing Technical Standards for the MMFR, that the reverse distribution mechanism (often referred to as "share cancellation" or "share destruction") was not compatible with MMFR. ESMA's final draft ITS therefore did not provide for information on the "destruction" of shares to be included in quarterly reporting to national regulators. ESMA received industry feedback to its consultation to the effect that reverse distribution is a common market practice, accepted by both national regulators and investors. ESMA sought legal advice from the Commission. The Commission's response, dated January 19, 2018, confirms that reverse distribution is not compatible with the MMFR, and invites ESMA to issue guidance to ensure supervisory convergence on this issue.View the letter.
UK Legislation Aligned With New EU Venture Capital and Social Entrepreneurship Regulation
New UK secondary legislation has been laid before Parliament to make the necessary minor technical changes to align UK legislation with recently introduced changes to EU legislation. An EU regulation amending the European Venture Capital Funds Regulation and European Social Entrepreneurship Funds Regulation took effect from November 30, 2017. The amending regulation made various changes to the EuSEF Regulation and EuVECA Regulation to extend the range of eligible managers for EuSEF and EuVECA funds, to extend the range of eligible assets and to prohibit registration fees and simplify the registration process.
This has necessitated new legislation in the form of the Alternative Investment Fund Managers (Amendment) Regulations 2018. These UK amending regulations make minor changes to the Alternative Investment Fund Managers Regulations 2013 in relation to the procedures to be followed when applying to register as a manager of a European social entrepreneurship fund or a European venture capital fund and for the refusal or revocation of such registration. The UK amending regulations also update definitions found in other UK secondary legislation. The changes come into force in part on March 1, 2018 and in part on April 2, 2018.View the explanatory memorandum.
International Standards Body Issues Liquidity Risk Management Recommendations for Funds
The International Organization of Securities Commissions has published its final report and recommendations on liquidity risk management for open-ended collective investment schemes. It has also published a report on good practices and considerations in open-ended fund liquidity and risk management. These reports follow the consultation run last year and constitute IOSCO's final response to the Financial Stability Board Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities, published in January 2017, which called on IOSCO to review and revise its guidance, where appropriate.
The first report, Recommendations for Liquidity Risk Management for Collective Investment Schemes, sets out recommendations for managing the liquidity of CIS to ensure the protection of investor's interests, including in stressed market conditions. The Recommendations are addressed to those responsible for liquidity risk management of CIS and to national regulators. There are 17 recommendations covering the CIS design process, day-to-day liquidity management and contingency planning. The report replaces IOSCO's 2013 report on liquidity risk management for CIS.
UK Government's Strategy for the UK's Asset Management Industry
HM Treasury has published the second UK Investment Management Strategy which sets out the UK Government's long-term strategy for ensuring that the UK remains a globally competitive location for asset management. The Government believes that action should be taken now to respond to the challenges and the opportunities for the asset management industry arising out of Brexit, and that this is the best time to renew the 2013 Strategy, which focused mostly on fund domicile issues.
International Organization of Securities Commissions Publishes Good Practices for the Voluntary Termination of Investment Funds
The International Organization of Securities Commissions has published a final report on good practices for the voluntary termination of investment funds which takes into account investors' interests during the termination process. The good practices do not override any legal or regulatory requirements or insolvency regimes. The report covers open-ended and closed-ended investment funds and retail investment funds as well as funds for professional investors. Additional good practices are included for funds established as commodity funds, real estate funds or hedge funds because illiquid or hard-to-value securities can impact the voluntary termination of a fund. These good practices should be read in conjunction with the IOSCO Objectives and Principles of Securities Regulation.
View the Report.
View the Objectives and Principles of Securities Regulation.
EU Authority Publishes Advice, Technical Standards and Guidelines under EU Money Market Funds Regulation
The European Securities and Markets Authority has published technical standards, technical advice and Guidelines under the Money Market Funds Regulation. These are: final draft Implementing Technical Standards providing a reporting template for managers of MMFs to use in fulfilling their quarterly reporting obligation to the relevant national regulator, which will include information on the characteristics, portfolio indicators, assets, and liabilities of the MMF; Technical Advice to the European Commission on liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement and on credit quality assessments and procedures for those assessments; and Guidelines on common reference parameters of the stress test scenarios to be included in the stress tests that managers of MMFs are required to conduct.
The MMF Regulation will apply from July 21, 2018, with the exception of certain requirements which applied from July 20, 2017, including the obligation on MMF managers to report information about each MMF they manages to the fund's national regulator. The final draft ITS on the reporting template have been submitted to the Commission for endorsement.
View ESMA's final Report.
European Securities and Markets Authority Issues Alerts to Firms and Investors on Initial Coin Offerings
The European Securities and Markets Authority has published a statement alerting investors about the high risks of investment in Initial Coin Offerings, including the risk of total loss of their investment. The statement is accompanied by an alert to EU firms involved in ICOs reminding them of their regulatory obligations.
EU Extends the Scope of the Framework for Collective Investment in Unlisted SMEs
A Regulation amending the European Venture Capital Funds Regulation and European Social Entrepreneurship Fund Regulation has been published in the Official Journal of the European Union. This Amending Regulation makes amendments to the EuVECA Regulation and EuSEF Regulation in order to stimulate further venture capital and social investment. EuVECA and EuSEF funds have, since July 2013, provided a means for cross-border private investment in small and medium sized entities. Funds complying with these regulations receive a marketing passport which allows them to collect capital from investors across the EU, who are able to commit at least €100,000. EuVECA and EuSEF managers do not need to be authorized under the Alternative Investment Fund Managers Directive.
UK Financial Conduct Authority Launches Authorization Hub for Asset Managers
The UK Financial Conduct Authority has launched phase one of its new Asset Management Authorization Hub, which is a new FCA resource designed to assist new firms entering the market and help them better understand the FCA as an organization.
The hub is based on four broad objectives: (i) clarifying the expectations of new entrants by providing updated guidance on regulations and processes; (ii) fostering better engagement between the FCA and new entrants; (iii) making information more accessible by introducing, as part of the FCA's website, a dedicated portal for investment managers; and (iv) providing "end-to-end" support for start-up firms, by supporting the transition from pre-authorization discussions to authorization and ongoing supervision.
The FCA plans to roll out further phases of the hub throughout 2018.
View the FCA press release.
View the Authorization Hub webpage.
G20 Leaders Outline Action Plan Following Hamburg Summit
The G20 Leaders met in Hamburg, Germany on July 7-8, 2017 and have published a Leaders' Declaration and an Action Plan setting out the G20's strategy for achieving strong, sustainable, balanced and inclusive growth. The Action Plan includes ongoing and planned work on financial sector regulation and development.
UK Financial Conduct Authority Publishes Final Asset Management Market Study Report
The Financial Conduct Authority has published the final report of the Asset Management Market Study it launched in November 2015. The object of the AMMS was to investigate three core areas: (i) how asset managers compete to deliver value; (ii) whether asset managers are willing and able to control costs and quality along the value chain; and (iii) how investment consultants affect competition for institutional asset management. Furthermore, the FCA wanted to look at whether there are any barriers to innovation that prevent investors from obtaining better results. The FCA published an interim AMMS report in November 2016 which set out the FCA's provisional assessment of the way competition works for asset management services, the consequences for investors and the FCA's proposed remedies to tackle the issues.
The final AMMS report confirms the FCA's interim findings and proposes a package of remedies. The FCA has divided the remedies into three buckets: (i) remedies on which it has published a consultation alongside the final report; (ii) final remedies; and (iii) remedies on which it intends to consult later.
UK Government Finalizes Amending Limited Partnership Legislation
HM Treasury has published the final Legislative Reform (Private Fund Limited Partnerships) Order 2017. The purpose of the Order is to introduce a new Private Fund Limited Partnership structure, available to private investment funds which are structured as limited partnerships, such as private equity and venture capital funds. The Order was made on March 29, 2017 and is in substantially the same form as the revised draft published in January 2017. The Order came into force on April 6, 2017.
View the Order.
Global Loan Fund Survey Reveals No Regulatory Action Required at Present
The International Organization of Securities Commissions published a report on the findings of the survey on loan funds that was carried out during 2016. The report covers loan funds in the area of investment funds and includes open-ended and close-ended funds, retail and professional investor funds. However, the report does not cover any type of securitization position or securitization special purpose vehicle. IOSCO concludes that further work on loan funds is not required at this stage because the loan fund market is a small, niche market and most jurisdictions consider that the rules already in place for funds are sufficient to address the specificities of loan funds, including the liquidity, credit and systemic risks that loan funds may pose. IOSCO will continue to monitor the loan fund market and will consider whether further work is required as the market develops.
View the report.
UK Financial Conduct Authority Discusses Open-Ended Funds Holding Illiquid Funds
The Financial Conduct Authority published a Discussion Paper on open-ended investment funds investing in illiquid assets. The FCA is seeking feedback on whether its rules and regulatory approach to open-ended funds that hold illiquid assets are appropriate. The paper considers some of the risks that may arise when investors use open-ended investment funds to gain exposure to illiquid assets such as land, buildings, infrastructure and unlisted securities. The FCA is concerned that fund managers that manage funds that hold illiquid assets may face challenges when investors want to withdraw their funds quickly and at short notice. These include achieving realistic valuations of the underlying assets, and whether the need to accept increased redemption requests might lead a manager to favor exiting investors over those that wish to keep their money in the fund, particularly under stressed conditions. The results of the UK's referendum on whether to leave the EU led to uncertainty in the financial markets and open-ended funds had to work out how to value their property portfolios accurately and how to manage a significant increase in redemptions. The FCA paper describes the liquidity management issues experienced by certain UK property funds and how the FCA responded to those issues, describes the current UK regulations that apply to funds investing in illiquid funds and makes suggestions for possible approaches to the regulation of liquidity.
The FCA has requested feedback on the points raised by May 8, 2017. Once it has assessed the responses, the FCA will decide whether it needs to amend its rules or policy approach. If changes are required, the FCA will publish a consultation paper setting out its proposals.
View the Discussion Paper.
European Securities and Markets Authority Opines on Common Principles for the Creations of Share Classes in UCITS
The European Securities and Markets Authority published its Opinion on the extent to which different types of units or shares (share classes) of the same Undertakings in Collective Investment in Transferable Securities fund should differ from one another. There is currently no common framework across the EU for share classes. Some member states prohibit the set-up of different share classes within a single fund while others permit varying degrees of flexibility. Investors in a UCITS fund invest in a common pool of assets, individual share classes or sub-sets of investors can be attributed different rights although there is no legal segregation of assets between the share classes. ESMA sets out four high-level principles in its Opinion which apply when different share classes are set.
Financial Stability Board Publishes Final Recommendations to Address Structural Vulnerabilities from Asset Management Activities
The Financial Stability Board published a report on policy recommendations to address structural vulnerabilities from asset management activities. The FSB recommendations aim to address four structural vulnerabilities from asset management activities that could cause financial stability risks: (i) liquidity mismatch between fund investment assets and redemption terms and conditions for fund units; (ii) leverage within funds; (iii) operational risk and challenges in transferring investment mandates or client accounts in stressed conditions; and (iv) securities lending activities of asset managers and funds. The FSB makes 14 recommendations, some of which have been amended since the proposed recommendations were consulted on in the last half of 2016. The recommendations are addressed to national supervisors of asset management activities and to the International Organization of Securities Commissions. Certain types of data are identified that the FSB considers should be collected by national supervisors and/or IOSCO. Steps are specified that national supervisors should take to address the potential financial stability risks. For example, issuing specific guidance to facilitate the use of exception liquidity management tools and the coordination of system-wide stress testing (albeit this is still in an exploratory stage). Another recommended step included requiring asset managers to establish comprehensive risk management frameworks which also cover risks other than the orderly transfer of client accounts and investment mandates.
View the Report.