The post The Coronavirus (COVID-19) Pandemic: A Summary of FCA Guidance & Regulatory Developments in the EU’s Investment Services and Capital Markets Sectors first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
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The FCA guidance on responding to the Coronavirus (COVID-19) pandemic is summarised below.
The FCA does not require firms to have a single senior manager responsible for their Coronavirus response. Firms should allocate these responsibilities in the way which best enables them to manage the risks they face. There are existing responsibilities specified in the Senior Managers Regime (SMR), for example SMF24 for operational resilience and SMF2 for financial resilience.
The FCA emphasises that firms should pay particular attention to its statement on Key Workers in Financial Services of 20 March 2020 and recommends that the SMF1 (or another most relevant member of the senior management team), should be responsible for the firm’s approach to their key workers.
The FCA is reviewing its work plans so that it can delay or postpone activity which is not critical to protecting consumers and market integrity in the short-term. This will allow firms to focus on supporting their customers during this difficult period.
The FCA has delayed several regulatory initiatives and also scaled back its programme of routine business interactions, so that it will only contact firms on business-critical requests and responses to the current situation.
It will continue with a small number of regulatory changes which support consumers, particularly the most vulnerable, or where major long-term programmes would be disrupted.
The FCA rules already provide flexibility to firms in several areas and the FCA expect this flexibility to be used to support consumers, bearing in mind each consumers’ individual circumstances.
The FCA stated it welcomes firms taking initiatives and going beyond usual business practices to support their customers, especially relating to access to cash. When doing so, firms should notify the FCA so that it can consider the impacts and offer support as appropriate.
The FCA still expects firms to deal with complaints promptly. However, where the pandemic prevents this firms should contact the FCA. The FCA has reminded firms that they should aim to resolve any complaint within 8 weeks (15 days for payments firms). If they cannot, they should write to the customer explaining why they have not met the deadline.
On 19 March 2020, the FCA published an update on expectations for general insurance firms during the pandemic. This sets out the expectations on insurers, brokers and others involved in the service supply chain.
The FCA supports firms making consumers aware of the scope of their cover and what exemptions there may be. Consumers should also be able to find this information on firms’ websites in a clear, concise way and have access to call centres.
The FCA also expects firms to make clear any time period restrictions when consumers take out a new policy, for example if a policy will not pay out from 12 or 18 months of taking out a new policy.
On 20 March 2020, the FCA published new guidance for mortgage lenders, mortgage administrators, home purchase providers and home purchase administrators. Mortgages represent many consumers’ major financial commitment. FCA is encouraging and facilitating the granting of flexibility on mortgage payments as a way of protecting consumers.
The FCA has stated its rules give firms the flexibility to act in the best interests of the customer. The FCA welcomes the steps firms have taken to offer support to customers and to encourage them to contact their bank or lender if they are experiencing financial difficulties.
The FCA wants firms to show greater flexibility to customers in persistent credit card debt. The FCA has indicated that the normal procedure for dealing with low repayments of persistent debt should be relaxed and consumers should be given until 1 October 2020 to respond to firm’s communications regarding resolution. This means that firms would not be obliged by to suspend the cards of non-responders before then.
The FCA is working with the Bank of England and the Payment Systems Regulator to understand problems consumers may have accessing cash, and ensure the UK learns the lessons from other countries’ experience of Coronavirus.
UK banks have taken steps to help ensure consumers have access to cash, including the raising of cash machine withdrawal limits and the raising of the limit for contactless card payments.
Firms should continue to help vulnerable consumers access their banking services – online or over the phone. Firms should also remind consumers to be aware of fraud and protect their personal data.
The FCA stated it expects all firms to have contingency plans to deal with major events and that the plans have been tested. The Bank of England, Prudential Regulatory Authority and the FCA are actively reviewing the contingency plans of a wide range of firms. This will focus on assessment of operational risks, the ability of firms to continue to operate effectively and the steps firms are taking to ensure continuation of service to customers.
The FCA expects all firms to have read, taken account of and acted upon the issues raised in its Consultation Paper on Operational Resilience (CP19-32) issued in December 2019. The Consultation Paper can be downloaded from the following link – https://www.fca.org.uk/publication/consultation/cp19-32.pdf.
The FCA has indicated that firms must consider the broader control environment as they relocate people and functions to new locations/sites or work from home.
Where normally required to do so, firms should continue to record calls, where possible. They should make the FCA aware if they are unable to meet these requirements. Firms are required to consider what steps they could take to mitigate such outstanding risks if they are unable to comply with their obligations to record voice communications.
Firms may experience difficulties in submitting their regulatory data, in which case the FCA expect them to maintain appropriate records during this period and submit the data as soon as possible.
Firms should continue to take all steps to prevent market abuse risks. This could include enhanced monitoring, or retrospective reviews.
The FCA is supportive of the recent ESMA statement regarding upcoming changes to the tick size regime for certain firms, required by the EU Investment Firms Regulation. The FCA will not prioritise supervision of the new requirements at this time. It expects firms to focus on minimising the potential for operational disruption.
Guidance issued by the FCA can be accessed or downloaded from the following link: https://www.fca.org.uk/coronavirus
The FCA has decided to extend the closure dates for the following published consultation papers and calls for input until 1 October 2020.
| Delayed consultation papers | Date |
| CP20/4: Quarterly Consultation No 27 | 1 October 2020 |
| CP19/32: Building operational resilience: Impact tolerances for important business services | 1 October 2020 |
| CP20/1: Introducing a Single Easy Access Rate for cash savings | 1 October 2020 |
| CP20/3: Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations | 1 October 2020 |
| CP20/5: Consultation paper on ETF Listing: Premium to Standard Listing | 1 October 2020 |
| Delayed calls for input | Date |
| Open Finance | 1 October 2020 |
| Accessing and using wholesale data | 1 October 2020 |
The FCA has decided to delay the following publications due before end June. The FCA will provide updates at an appropriate point.
| Other delayed publications | Date |
| Joint PRA-FCA work with the Climate Financial Risk Forum (CFRF) to develop industry led guidance on how to integrate climate related risks into business decision making across the financial services sector | TBC |
| Motor Finance Policy Statement | TBC |
| Consultation Paper on mortgage switching | TBC |
| Vulnerability Guidance and Vulnerability Research | TBC |
| Options to change our regulatory framework following Duty of Care Feedback Statement | TBC |
| Consumer Credit Act (CCA) review | TBC |
| Credit Information Market Study – Interim Report | TBC |
| GI Pricing Final report and Consultation Paper on remedies | TBC |
Ever since the escalation of the COVID-19 outbreak in Europe, the status quo in the EU’s investment services sector and capital markets has dramatically changed. New developments emerge on an almost daily basis, while the industry is experiencing a major turmoil. Below we summarise the most important EU regulatory developments that have occurred in response to this pandemic in March.
Extreme adverse circumstances that constitute a serious threat to market confidence and financial stability have prompted a number of national competent authorities in the EU to ban net short positions for any shares or debt instruments listed on Trading Venues for which they are the designated regulator. Such bans were issued by the competent authorities of Austria, Belgium, France, Greece, Italy and Spain.
The net short position prohibits both short selling and any transaction that creates or relates to a financial instrument, and the effect or one of the effects of that transaction is to confer a financial advantage on the natural or legal person in the event of a decrease in the price or value of another financial instrument (meaning, among others, options, CFDs, spread bets). The ban applies irrespective of whether the transactions occur on Exchange or OTC. The only entities exempted from the net short position ban are authorised primary dealers and market makers who have applied for the exemption afforded under Article 17 of the Short Selling Regulation.
ESMA has also issued a decision temporarily requiring the holders of net short positions in shares traded on an EU regulated market to notify their relevant competent authorities if the net short position reaches or exceeds 0.1% of the issued share capital after the entry into force of said decision. ESMA considers that lowering the reporting threshold is a precautionary action, taken so that the relevant authorities can carefully monitor market developments following the coronavirus fallout.
In an effort to mitigate COVID-19’s impact, ESMA issued a public statement clarifying that it expects competent authorities not to prioritise their supervisory actions towards entities subject to Securities Finance Transactions (SFT) reporting obligations from 13 April 2020 to 13 July 2020. Moreover, ESMA has clarified in an updated public statement that SFTs concluded between 13 April 2020 and 13 July 2020 and SFTs subject to backloading under SFTR are also not to be prioritised as part of the competent authorities’ supervisory actions.
ESMA issued a public statement clarifying that, considering the exceptional circumstances created by the COVID-19 outbreak, some scenarios may emerge where the recording of relevant conversations required by MiFID II may not be practicable. If firms, under these exceptional scenarios, are unable to record voice communications, ESMA expects them to consider the alternative steps they could take to mitigate the risks related to the lack of recordings.
Firms are expected to deploy all possible efforts to ensure that the above measures remain temporary and that the recording of telephone conversations is restored as soon as possible.
ESMA issued a public statement to promote the consistent application of IFRS in the EU and avoid divergence in practice on the application of IFRS 9 given the COVID-19 outbreak. The statement addresses the accounting implications of the measures taken or proposed by the national governments and EU bodies (for example, the moratoria on the repayment of loans) to address the adverse systemic economic impact of COVID-19.
In its statement, ESMA provides guidance to issuers and auditors, specifically regarding the calculation of expected credit losses and related disclosure requirements.
The EBA has also issued a related statement on the prudential framework and accounting implications of COVID-19. The two statements are consistent as with regards to financial reporting.
In light of the difficulties encountered by issuers in preparing financial reports and the challenges faced by auditors in carrying out timely audits of accounts due to the COVID-19 pandemic, ESMA issued a public statement recommending that national competent authorities apply forbearance powers towards issuers who need to delay the publication of financial reports beyond the statutory deadline. At the same time, the statement underlines that issuers should keep their investors informed of the expected publication delay and that the requirements under the Market Abuse Regulation still apply.
ESMA also highlighted that financial reporting is an important anchor for the economic decisions of users of financial information, as well as for exercising their rights to vote or otherwise influence management actions. The preparation of periodic information must continue to be carried out in accordance with the applicable financial reporting framework to ensure investor protection and to preserve the integrity and proper functioning of the EU’s financial markets.
The EBA announced that it has decided to postpone the EU-wide stress test to 2021 as a way of alleviating the immediate operational burden for banks during this challenging juncture. The final timeline for the EU-wide stress test will be communicated by the EBA in due course.
In another recent public statement, ESMA urged financial market participants to apply their contingency plans, including the deployment of business continuity measures, to ensure operational continuity in line with the regulatory obligations.
Similarly, several national competent authorities urged their regulated entities to do the same, alongside reviewing their business continuity and disaster recovery systems and making the necessary amendments based on each entity’s size, complexity and nature of business.
ESMA has announced that it has decided to extend by four weeks the response date for all ongoing consultations with a closing date on or after 16 March.
The COVID-19 outbreak significantly impacted the activities of all market stakeholders, pushing them to reprioritise their efforts to address the crisis. To mitigate the impact of COVID-19, several national regulators have extended, where possible, several local reporting deadlines and other obligations. In an effort to limit the spread of the virus, some national regulators have announced working from home plans as well as suspended relevant activities such as examinations and training courses.
Furthermore, regulators are alarmed over COVID-19’s effect on the industry and are constantly gathering data across the market to understand and assess the extent of its impact with the aim of taking appropriate actions where necessary.
In another recent public statement, ESMA acknowledges the difficulties encountered by execution venues and firms in preparing the general best execution reports required under RTS 27 and 28 of MiFID II. In this respect, ESMA recommends that national competent authorities take into account these circumstances by considering the possibility that:
Furthermore, ESMA encourages national competent authorities not to prioritise supervisory action against execution venues and firms in respect of the deadlines of the general best execution reports for the periods referred to above.
The application date of the new tick-size regime for systematic internalisers under the Markets in Financial Instruments Regulation (MiFIR) and the Investment Firms Regulation (IFR) was set at 26 March 2020. In response to developments related to the COVID-19 pandemic, ESMA issued a public statement clarifying that it expects competent authorities not to prioritise their supervisory actions in relation to the new tick-size regime until 26 June 2020, and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner.
Our team of experts can offer you the following services:
Complyport is a regulatory compliance consulting firm supporting the UK financial services industry for around 20 years. They specialise in providing Governance, Risk and Compliance services to firms in the financial services industry in the UK and overseas. Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. They have successfully assisted over 300 firms to become authorised with the FCA and have been providing regulatory support to over 500 regulated firms on an ongoing basis at a Group level. With presence in the UK, EU and Hong Kong, Complyport can assist firms across multiple jurisdictions.
Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers. The team assists firms on issues relating to corporate governance, risk management, business controls, compliance and business improvement. They conduct audits and reviews of a firm’s products, processes, policies and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Complyport offers full support with financial reporting, capital adequacy assessments and compliance training as well as a suite of online RegTech applications to enable a firm to demonstrate continued compliance with the regulatory obligations.
For more information on our services, please visit our website at 185.183.35.69/~complyport or contact our team at +44 20 7399 4980 or via email at info@complyport.co.uk.
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]]>The post Brexit: Draft UK EU Withdrawal Agreement first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>| Of relevance to: | All firms in the UK’s financial services sector |
| Key date: | 29 March 2019 |
The Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (“Draft UK EU Withdrawal Agreement”) was published on 19 March 2018, showing the agreed transitional period will last from Brexit day on 29 March 2019 until 31 December 2020, a period of 643 days (just over 21 months). There is no specific mention of the financial services industry within the document.
No definitive paper can be written on the Brexit effect on our industry until such time as the UK and EU make more concrete decisions. However, much comment is being made about the two sides using terms such as “mutual recognition” and “equivalence” to describe the post-Brexit relations they seek, but nothing has yet been decided.
Equivalence provisions can be found in many areas of the financial services industry in Europe and throughout the world (whereby each jurisdiction checks whether the other’s regulations achieve a similar outcome to its own), and it appears equivalence is the fallback option if the UK and EU fail to agree a deal. Mutual recognition is a founding principle of Europe’s single market for financial services, but the EU is moving beyond mutual recognition towards a single rule book and common supervision.
This further complicates the politics of providing access to non-EU countries and thus the UK (to be known as a ‘third-country’ after Brexit).
Most of the comment in recent days stems from a Bloomberg article based on a draft document not seen in public, following a speech by the UK Chancellor of the Exchequer, Philip Hammond, on 7 March 2018 in which he explained why it makes sense, for both the UK and the EU, to collaborate closely on cross-border financial services.
The new wording is, according to Bloomberg, in an annex to the draft guidelines for discussion among EU ministers. Earlier drafts didn’t mention financial services explicitly, and made clear that the trade agreement the EU intends to strike with the UK wouldn’t make special provisions for services.
Apparently, the latest draft of the EU’s negotiating stance says the bloc will consider offering the UK “improved equivalence” for its financial services. That may mean, for example, the EU will only let UK banks access its market for as long as it considers British rules to be equivalent to the EU’s. This is a potentially unstable arrangement as the EU can rescind it at short notice.
In his speech on financial services at HSBC’s Canary Wharf headquarters, Mr Hammond said “this may appear to point to a solution based on the EU’s established third-country equivalence regime. But that regime would be wholly inadequate for the scale and complexity of UK-EU financial services trade” and “it is hard to see how any deal that did not include services could look like a fair and balanced settlement”. He also reminded his audience that “We will start from a unique position… …with full alignment on Day 1”.
It is understood the new draft says “Regarding financial services, the aim should be reviewed and improved equivalence mechanisms, allowing appropriate access to financial services markets, while preserving financial stability, the integrity of the single market and the autonomy of decision making in the European Union. Equivalence mechanisms and decisions remain defined and implemented on a unilateral basis by the European Union.”
The main problem with “improved equivalence” seems to be the need for the UK to accept, and adopt in the UK, whatever changes are made to EU rules, without having the option to debate and influence those changes before implementation. It’s doubtful Brexiteers were expecting that outcome.
Complyport will, of course, provide further articles as new definitive information is released at EU and/or UK level.
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]]>The post MIFID II: One month in first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The Markets in Financial Instruments Directive II (2014/65/EU) (“MiFID II”) and the Markets in Financial Instruments Regulation (600/2014) (“MiFIR”) repealed and recast the first Markets in Financial Instruments Directive (2004/39/EC) (“MiFID I”) and were fully implemented in the UK at the beginning of this year.
The aim of MiFID II was clear:
The question everyone is asking themselves is: Has this actually been achieved?
Given we are only one month into the new MiFID II era, it is difficult to accurately assess the full impact that the new Directive and all the associated Regulations and Technical Standards have had on regulated firms and the markets, and whether the aims and objectives of MiFID II have actually been achieved.
What is clear from a brief look into some of the key areas is that out of every National Competent Authority (“NCA”), throughout the European Union, the FCA was one of, if not the only, regulator to have been ready and to have implemented MiFID II in full across all areas.
The majority of NCAs were still behind in implementing key areas – for example, looking at version five of the NCA Status Update sheet from UnaVista, almost all the NCAs, with the exception of the FCA, were still having issues with being able to receive transaction reports.
Firms have also had issues in implementing MiFID II; from the changes to best execution, record keeping, transaction and trade reporting, to actually getting to grips with embedding the new regime within their own systems, procedures and controls.
Although a number of firms may have been technically prepared for MiFID II in terms of having the required systems in place to meet the requirements (telephone recording, transaction reporting or assisted transaction reporting etc.), there was, in some cases, not enough time to adequately test these before the ‘go live’ date of 3 January and so, in many cases, firms are still on an acute learning curve, addressing and rectifying problems as they go.
There was an expectation that MiFID II would enter into force with some sort of fanfare or dramatic changes being brought about. Arguably, MiFID II entered with more of a squeak, with firms and NCAs alike trying to get to grips with one of the lengthiest and possibly most complex pieces of legislation and shake ups to financial services since MiFID I in 2007.
Where do we go from here?
Only time will tell how well MiFID II has been implemented and embedded within firms and by all the NCAs and whether or not the objectives have been achieved. It is perhaps too early to predict anything but, given the initial issues experienced, there are likely to be teething problems for some time to come with further issues down the line once the publication requirements for best execution come into force and once the data for Systematic Internalisers is published.
For the time being, if you would like an independent assessment of your own MiFID II compliance, feel free to get in touch with us on +44 (0)20 7399 4980 and we’ll be happy to discuss your requirements.
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]]>The post Brexit and Article 50 first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>You may find the following brief article (“in less than 500 words”) prepared by Chris Finney of Cooley LLP a useful summary of the Article 50 situation – so far.
Contributed article; Chris Finney, Partner Cooley LLP
This article has been republished with Cooley’s consent. Please see original item on Cooley’s blog
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]]>The post AIFMD Passport: Non-EU Jurisdictions first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>AIFMs and, non-EU fund managers
As we know (see Regulatory Roundup 78) the AIFMD allows for the extension of the marketing passport to EU AIFMs of non-EU AIFs (currently such marketing is subject to the national private placement regime – “NPPR”) and to non-EU AIFMs (currently also NPPR only) as well as the extension of the management passport to non-EU AIFMs. ESMA has already given a thumbs-up to a few countries such as Switzerland, Jersey, Hong Kong etc. – please see Regulatory Roundup 78 for further information.
ESMA has published an updated ‘Advice’ paper which sets out in the one place its assessments of these third-countries.
The document advises (page 105) that ESMA has started gathering intelligence on the following non-EU countries:
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]]>The post EuVECA & EuSEF: Update first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The concept of a European Venture Capital Fund (“EuVECA”) and a European Social Entrepreneurship Fund (“EuSEF”) has been in existence for around three years – see e.g. Regulatory Roundup 47 for an overview of these funds.
A EuVECA or a EuSEF is effectively a fund designation which EU managers can apply to qualifying portfolios (as defined in the respective Regulations) whose total AuM do not exceed €500m. That figure is, of course, the exemption threshold in Article 3(2)(b) of the AIFMD, below which a lighter touch AIFMD regime applies (small AIFM).
The designations are optional rather than compulsory but those small AIFMs whose AIFs meet the qualifying requirements and do so elect for the designation benefit from being able to market those funds across the EU, both to professional investors and to other investors that meet certain requirements (including a minimum investment of €100,000).
The European Commission (“EC”) has proposed a Regulation to amend the Regulations governing EuVECAs and EuSEFs.
Interesting statistics from the Explanatory Memorandum associated with the proposed Regulation show that as of the beginning of April 2016 there were 70 EuVECA funds registered in the ESMA database, but only four EuSEF funds (one in France and three in Germany).
The EC proposes three main amendments:
Highlights from the proposed Regulation include:
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]]>The post EU-US Privacy Shield first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>It may be recalled that in October 2015 the European Court of Justice declared that the ‘Safe Harbor’ framework was invalid.
As a reminder, the transfer of personal data to a country outside the EEA is prohibited unless the European Commission has established (adopted an ‘adequacy decision’) that such a country has an adequate level of protection for personal data.
Whilst the US was not included in the list of ‘adequate’ countries, it was permissible to send personal data to those US firms that had signed up to the voluntary Safe Harbor scheme which, as mentioned above, was subsequently deemed invalid. Please see Regulatory Roundup 70 for further background information relating to the Safe Harbor scheme and Regulatory Roundup 74 in respect of its proposed replacement – the EU-US Privacy Shield.
The EU-US Privacy Shield has now been formally adopted by the European Commission. The effect of this will be that EEA firms will be able to transmit personal data to those US firms that appear on the Privacy Shield list.
Companies appearing on the list will self-certify annually that they meet the relevant requirements. The US Department of Commerce will maintain this Privacy Shield list and will also monitor and actively verify that companies’ privacy policies are in line with the Privacy Shield principles and are readily available to the public. Any firms that are no longer members of the Privacy Shield will be required to continue to apply its principles to personal data received when they were in the Privacy Shield for as long as they continue to retain such data.
The Information Commissioner’s Office (“ICO”) reminds us that whilst the Privacy Shield ensures the ‘adequate protection’ of personal data, it is not the only approach. Therefore, for instance, a UK firm that discovers that the US entity they were intending to transmit personal data to does not appear on the list can consider recourse to Binding Corporate Rules or Standard Contractual Clauses – see the ICO link for further information.
The European Commission has produced a guide to the EU-US Privacy Shield which firms may find of interest.
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]]>The post Securities Financing Transactions Regulation: Disclosure Obligation first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>Firms concluding Securities Financing Transactions
A reminder that, as advised in Regulatory Roundup 72, the ‘risks and consequences’ disclosure obligation arising under the Securities Financing Transactions Regulation (2015/2365) (“SFTR”) applies from 13 July 2016.
A Securities Financing Transaction (SFT) is defined as per Article 3(11) of the SFTR as:
For the avoidance of doubt, recital 7 informs us that the definition of a SFT does not include derivative contracts that are reportable under EMIR (648/2012).
The ‘risks and consequences’ obligation refers to Article 15 of the SFTR on the reuse of financial instruments received under a collateral agreement.
Any right of counterparties to reuse financial instruments, as defined in Section C of Annex I of Directive 2014/65 (‘MiFID II’), must be subject to at least the following conditions:
Any exercise by counterparties of their right to reuse must only be undertaken in accordance with the arrangement referred to in the second bullet above and the financial instruments involved must be transferred from the account of the providing counterparty.
The ‘reuse’ obligation applies to
See Article 15 for further details.
The SFTR is concerned with the reporting and transparency of SFTs and the above is simply one of the provisions coming into force shortly – see Regulatory Roundup 72 for an overview of the SFTR as a whole.
The requirement applies from 13 July 2016, including for collateral arrangements existing on that date (Article 33(2)(d)).
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]]>The post Brexit and its Implications first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The votes have been counted and ‘Brexit’ has won the day. The UK electorate has voted 52% to 48% to leave the European Union (EU).
The Prime Minister David Cameron has announced he will resign in the Autumn as soon as a new Leader of the Conservative Party has been elected. Meanwhile the UK currency, the Pound Sterling has suffered massive falls in value overnight against the US Dollar and the Euro and the London Stock Exchange has also seen massive falls in value in early trading.
BREXIT & FINANCIAL SERVICES KEY POINTS
The UK regulator, the Financial Conduct Authority (FCA) issued a news release this morning saying:
“On 23 June, the UK voted to leave the European Union (EU). This has significant implications for the UK.
The FCA is in very close contact with the firms we supervise as well as the Treasury, the Bank of England and other UK authorities, and we are monitoring developments in the financial markets.
Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament.
Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.
Consumers’ rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation.
The longer term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, in part, on the relationship that the UK seeks with the EU in the future. We will work closely with the Government as it confirms the arrangements for the UK’s future relationship with the EU.”
The now “lame duck” Prime Minister, David Cameron has announced that he will not initiate the immediate EU withdrawal process. This task will fall to the new Prime Minister in the Autumn or later. Our thoughts turn now to what the implications might be for the financial services sector.
The Withdrawal Process
In terms of breaking away from the EU the high-level process can be found in the Treaty on European Union (TEU), which together with the Treaty on the Functioning of the European Union (TFEU), is the legislation upon which the EU is founded.
The right of any Member State (including the UK), to cease to be a Member State of the EU is enshrined in Article 50 of the TEU – see link (the link provided is a consolidated version, the relevant article can be found on page 59).
The UK is required to notify the European Council of its intention to withdraw from the EU under Article 50. Unless agreed otherwise by the EU, the UK then has 2 years within which negotiations must be conducted with the EU to conclude an agreement setting out arrangements for the withdrawal. These arrangements will include a framework for the UK’s future relationship with the Union following withdrawal.
When a withdrawal agreement is concluded and has entered into force then the ‘Treaties’ (being the TEU and the TFEU) cease to apply. If a withdrawal agreement cannot be agreed, the Treaties will cease to apply two years after the notification, unless the European Council, in agreement with the UK, unanimously decides to extend this period.
It is not therefore a foregone conclusion that the details of future trading relationships will have been concluded and finalised as part of the withdrawal arrangements. What is clear is that at that time the UK will cease to be a Member State and will lose all automatic rights of access to the EU markets and institutions.
Unlike firms grappling with the detail of MiFID, EMIR etc. the UK will not have the comfort of ESMA Q&As or Technical Standards to fall back upon to help it ‘conclude an agreement’ – it will be down to hard negotiation on both sides.
Although perhaps not of immediate relevance to the UK case, should a departed Member State change its mind it is entitled to ask to re-join (Article 50(5)). It does raise the intriguing possibility of a change of course by a future Government if the UK finds life outside of the EU too tough! As former Prime Minister Harold Wilson famously said: “A week is a long time in politics!”
The Transition
As far as we can ascertain today (24 June 2016), the UK is likely to remain part of the EU until at least the Autumn of 2018. This is based on the observations that the EU has never agreed new trading relationships in a period of less than 2 years (with between 3 and 7 years being much more the norm). There is also no evidence to suggest that such a complex and unprecedented withdrawal agreement can be concluded in less than 2 years.
Much of the UK’s financial services law is now derived directly or indirectly from EU Directives and Regulations designed to harmonise trade. Unless repealed and replaced by the UK Parliament, even after the official withdrawal date has been agreed, it is highly likely that the majority of such law will remain in force within the UK. The volume of law to be repealed and replaced is simply overwhelming. It is likely to take years for the UK Parliament to complete such a task. In other similar situations internationally, where a Territory has seceded from a State or similar structure, what tends to happen is that much existing law remains in force going forward and is only gradually changed.
During this next 2 year period, it is clear that at day to day level, EU Regulations and Directives will still apply on a ‘business as usual’ basis.
The ‘withdrawal agreement’ is, of course, the most important part of the process, during which the possibility of the UK either going it alone or, perhaps, applying to become a member of the European Economic Area – or even some hybrid arrangement – will no doubt be thrashed out. Having said that, like the Government and the EU, no one actually knows what is going to happen so the following is food for thought.
Impact on Financial Services
The EU Single Market in Financial Services has to a greater or lesser degree, been one of the most integrated and successful aspects of the EU Single Market. It covers banking, investment services, investment funds, pension funds, mortgage broking and lending, consumer credit broking and lending, life assurance, general insurance and motor insurance. It touches the daily lives of citizens and is a major component of the UK economy.
As observed above, for the next 2 years there is likely to be no change as the UK will still be an EU Member State and the UK will still have access to the Single Market. However beyond that timeframe the picture is decidedly uncertain.
Going forward beyond the next 2 years, the impact on UK financial services will depend significantly on the nature of the future trading agreements that are negotiated between the UK and the EU. What is fairly clear from the referendum campaign is that membership of the Single Market via membership the European Economic Area (EEA) is unlikely to be acceptable to a UK Government, as it involves free movement of people. Therefore, unless there is a dramatic change of stance, the UK will need to negotiate access to markets on a market by market and case by case basis. The recent precedent for this was the 7 years it took to negotiate a very much more limited set of agreements with Switzerland.
The scenario is thus beginning to look like no change for the next 2 years followed by a period of likely restrictions on access to the Single Market in Financial Services.
In practical terms, this means that firms that currently conduct cross-border business or have Branches in other EU States under Service or Branch Passports, may no longer be able to conduct such business without authorisation from the Host State regulator(s).
Similarly, unless the UK Government passes legislation in Parliament to permit it, the automatic right of firms based in other EU States, that operate in the UK under Passports, will lapse and they will need to seek authorisation from the FCA and/or PRA in the UK.
The foundation stones of the Single Market are the Insurance Mediation Directive, Solvency 2, the Capital Requirements Directive, MiFID, the Banking Consolidation Directive, UCITS directives, AIFMD, the Payment Services Directive and similar directives applying to mortgage lending and consumer credit.
The Directives are transposed into national (i.e. UK) law by way of statute or UK regulations. However, with each of its Directives, the EU issues implementing regulations and technical standards that are automatically binding and become law in Member States. There are 2 significant Directives that are in the process of implementation and where Brexit is likely to pose problematic questions.
The AIFMD came into force in 2013. Significant aspects of the Directive have not as yet been implemented fully, namely the ability to passport into the EU from outside of the EU and decisions regarding replacing the national private placement regimes.
Passporting is a valuable benefit under the AIFMD, both in terms of the right to manage AIFs established in other Member States, whether directly or via a branch, and the right to market AIFs. As a UK AIFM would be transformed into a ‘non-EU AIFM’ the passporting rights would no longer be available. Whilst the AIFMD allows for the extension of the passport regime to non-EU AIFMs in due course, and assuming that the UK would be assessed in a favourable light for such an extension, the great unknown would be in the period between the UK no longer being able to benefit under the AIFMD as a ‘EU AIFM’ and the, eventual, extension of the passport to the UK as a ‘non-EU AIFM’. This uncertainty would apply to both UK firms that were hoping to obtain a passport for the first time and to UK firms that are already operating under a passport. Although we are looking at the AIFMD for the purposes of this article, it is not unknown for AIFMs to delegate portfolio management to MiFID firms who of course would also face similar problems on the availability of passports under the MiFID regime.
On a positive note, some of these issues, if not all of them, could well be addressed during the ‘withdrawal agreement’ process, although this would presumably depend upon the tenacity of the UK representatives involved.
On the matter of MiFID, the application of MiFID II (and MiFIR), as we know, has been delayed until 3 January 2018. Now this time frame throws up an interesting, but hopefully hypothetical, scenario especially if the UK provides the European Council with its notification to leave the EU sooner rather than later. As mentioned above, based upon Article 50 of the TEU the UK could cease to be a Member of the EU two years from now, if not earlier. UK firms subject to MiFID II may therefore be in the unfortunate position of having to comply with MiFID II on 3 January 2018, only to find that it ceases to be relevant to them later in 2018 when the ‘two year’ period has expired. Of course, what that would mean in terms of UK legislation that transposed and adopted MiFID II is another question.
The UK financial services sector was almost universally opposed to Brexit. The City will be a major loser if access to the single market is lost. Given this scenario, The City and the wider financial services sector will lobby politicians very hard to try to preserve access.
The reality is likely to be that the UK would continue to operate under the requirements of AIFMD, MiFID etc. by way of bringing in UK legislation that mirrors those requirements. Whilst the UK would not be a Member State, the effect of mirror legislation would arguably minimise the disruption that would be encountered if, instead, the UK decided to start its financial regime from scratch. Also, the UK might be looked upon in a more favourable light by the EU when negotiating the terms of a withdrawal agreement if the UK were to continue to be seen to ‘comply’ with EU Directives and Regulations by way of UK legislation.
Although this article is naturally concerned with the ‘financial world’, to gain perspective it must not be forgotten that EU Directives and Regulations extend beyond this to cover many different areas, some of which may also be of relevance to a wider range of firms e.g. ranging from data protection obligations (currently Directive 95/46) to anti-Money Laundering and Counter-Terrorist Financing.
Inward Investment & UK Headquarters
Significant numbers of non-UK financial services companies have located their European HQ in the UK in order to have a wider presence in Europe via the UK membership of the Single Market in Financial Services. Whilst the UK will remain an important financial centre, it remains to be seen what impact Brexit will have on the future attractiveness of the UK compared to other European financial centres for the location of a European HQ.
It is probable that many companies will evaluate whether Dublin/Ireland (same time zone, same language, similar legal and taxation system, preferential Corporation Tax rate) becomes as attractive or even more attractive as a location compared to London/UK.
It is also highly likely that companies from the USA and other non-EU companies looking to locate/invest in Europe will now have to consider what impact Brexit and loss of automatic access to the Single Financial Services Market will have on their appetite to invest in and locate in the UK.
One of the key benefits of the Single Market and its passporting system has been the ability to be authorised in one Home State, but to trade in several other Host States without the need for authorisation by the regulator in each state. Those of us old enough to remember European cross-border financial services before the Single Market, will recall the horrendous regulatory burden of multiple regulatory applications, multiple trading entities and multiple capital adequacy requirements required for each State in which business was to be conducted. It was expensive and inefficient compared to the Single Market passporting system.
What Is To Be Done?
In the shorter-term, there is little positive action that can be taken by firms. More importantly, that is precisely the time to consider and reflect upon business objectives, identify risks (or opportunities) potentially posed by Brexit and to seek advice (where needed). Firms should then be in a position to identify actions required or desired in the shorter to medium term to achieve those business objectives.
This is also likely to be an iterative process. It is possible (indeed highly likely) that the regulatory environment and regulatory requirements may evolve in response to trade negotiations and market conditions. It is highly unlikely that governments, regulators or firms will get this right at the first attempt. It is much more likely that firms will need to keep Brexit and its implications under rolling review, for as long as it takes.
How Can Complyport Assist?
The Complyport Governance, Risk Management and Compliance (GRC) team are not only skilled and experienced in management of regulatory issues, but have significant cross-border experience. Complyport is very well placed to assist firms and their other professional advisers to assess the impact of Brexit upon the firm and its business objectives, to identify risk (and possibly opportunities) and to plan action required.
With a strong knowledge of and depth of experience in Irish regulatory requirements and a strong international network of professionals other European jurisdictions, we are ideally placed to assist.
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]]>The post The votes have been counted and ‘Brexit’ has won the day. first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>Whilst the Government considers what exactly that means for the UK as a whole, and what needs to be done – the run up to the Brexit vote seemed to be heavy on aspirations but light on detail – thoughts turn to what the implications might be for the financial services sector.
In terms of breaking away from the EU the, admittedly high-level, process can be found in the Treaty on European Union (TEU), which together with the Treaty on the Functioning of the European Union (TFEU), is the legislation upon which the EU is founded.
The right of the UK, or indeed of any Member State, to cease to be a Member State of the EU is enshrined in Article 50 of the TEU – see link (the link provided is a consolidated version, the relevant article can be found on page 59).
Withdrawal will require the UK to notify the European Council which in turn will lead to negotiations with the Union to conclude an agreement setting out arrangements for the withdrawal, including a framework for the UK’s future relationship with the Union. Unlike firms grappling with the detail of MiFID, EMIR etc. the UK will not have the comfort of ESMA Q&As or Technical Standards to fall back upon to help it ‘conclude an agreement’ – it will be down to hard negotiation on both sides.
Once (or if) a withdrawal agreement is concluded and has entered into force then the ‘Treaties’ (being the TEU and the TFEU) cease to apply. Failing that, the Treaties will cease to apply two years after the notification above – unless the European Council, in agreement with the UK, unanimously decides to extend this period.
Although perhaps not of relevance to the UK case, should a departed Member State change its mind it is entitled to ask to rejoin (Article 50(5)).
The message here is that, like it or loathe it, the UK is still part of the EU – and, in the absence of a withdrawal agreement, is likely to remain so for at least two years. During this period EU Regulations and Directives will still apply on a ‘business as usual’ basis.
The ‘withdrawal agreement’ is, of course, the most important part of the process, during which the possibility of the UK either going it alone or, perhaps, applying to become a member of the European Economic Area – or even some hybrid arrangement – will no doubt be thrashed out. Having said that, like the Government and the EU, no one actually knows what is going to happen so the following is food for thought.
Setting aside requirements based upon the likes of EMIR etc., arguably the foundation stones of the investment world are MiFID, UCITS and AIFMD.
The AIFMD is the most recent of these foundation stones (UCITS V is essentially UCITS IV with ‘add-ons’) so we will turn our attention to this, although the general comments will apply across all these Directives.
Being a Directive it was the responsibility of each Member State to transpose the requirements into national law. Although not the only piece of relevant legislation, in the case of the UK we have ‘The Alternative Investment Fund Managers Regulations 2013’ (SI 2013/1773). Like many a Directive, the AIFMD did not come alone and is supported by a Delegated Regulation which adds flesh to areas such as operating conditions, leverage etc. Unlike a Directive, a Regulation does not need to be transposed into national law and instead is binding in its entirety and directly applicable in all Member States.
If the UK was suddenly, somehow, no longer a Member State then we would be in the odd situation that the Regulation would no longer be binding on the UK – but the Directive would because it has been transposed into national law. The FCA Handbook would also need to address the situation. Whilst this may, hopefully, be an unlikely scenario it does provide a simple example of the need for careful planning by relevant parties and to consider the impact upon existing, and the need for new, UK legislation in the light of a withdrawal from the EU.
Although careful planning by the authorities will be essential, no amount of planning can overcome the basic fact that if the UK frees itself from the burden of Directives and Regulations it will also lose the benefits arising from them.
Passporting is a valuable benefit under the AIFMD, both in terms of the right to manage AIFs established in other Member States, whether directly or via a branch, and the right to market AIFs. As a UK AIFM would be transformed into a ‘non-EU AIFM’ the passporting rights would no longer be available. Whilst the AIFMD allows for the extension of the passport regime to non-EU AIFMs in due course, and assuming that the UK would be assessed in a favourable light for such an extension, the great unknown would be in the period between the UK no longer being able to benefit under the AIFMD as a ‘EU AIFM’ and the, eventual, extension of the passport to the UK as a ‘non-EU AIFM’. This uncertainty would apply to both UK firms that were hoping to obtain a passport for the first time and to UK firms that are already operating under a passport. Although we are looking at the AIFMD for the purposes of this article, it is not unknown for AIFMs to delegate portfolio management to MiFID firms who of course would also face similar problems on the availability of passports under the MiFID regime.
On a positive note, some of these issues, if not all of them, could well be addressed during the ‘withdrawal agreement’ process, although this would presumably depend upon the tenacity of the UK representatives involved.
On the matter of MiFID, the application of MiFID II (and MiFIR), as we know, has been delayed until 3 January 2018. Now this time frame throws up an interesting, but hopefully hypothetical, scenario especially if the UK provides the European Council with its notification to leave the EU sooner rather than later. As mentioned above, based upon Article 50 of the TEU the UK could cease to be a Member of the EU two years from now, if not earlier. UK firms subject to MiFID II may therefore be in the unfortunate position of having to comply with MiFID II on 3 January 2018, only to find that it ceases to be relevant to them later in 2018 when the ‘two year’ period has expired. Of course, what that would mean in terms of UK legislation that transposed and adopted MiFID II is another question.
Possibly the reality (although note the ‘possibly’) would be that the UK would continue to operate under the requirements of AIFMD, MiFID etc. by way of bringing in UK legislation that mirrors those requirements. Whilst the UK would not be a Member State, the effect of mirror legislation would arguably minimise the disruption that would be encountered if, instead, the UK decided to start its financial regime from scratch. Also, possibly (and again note the ‘possibly’) the UK might be looked upon in a more favourable light by the EU when negotiating the terms of a withdrawal agreement if the UK were to continue to be seen to ‘comply’ with EU Directives and Regulations by way of UK legislation.
Although this article is naturally concerned with the ‘financial world’, to gain perspective it must not be forgotten that EU Directives and Regulations extend beyond this to cover many different areas, some of which may also be of relevance to a wider range of firms e.g. ranging from data protection obligations (currently Directive 95/46) to notifications in the banana sector (Regulation 1333/2011)
The post The votes have been counted and ‘Brexit’ has won the day. first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
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