FCA Updates


  • Update on Liquidity Management for Investment Management Firms: Good Practice
  • Policy Development Update – 7th March 2016
    Quarterly Consultation
  • Handbook Notice – 21st March 2016
  • Policy Development Update – 4th April 2016
  • FCA Business Plan 2016/2017
  • FCA Consults on Regulatory Fees and Levies for 2016/2017
  • Thematic Review on Meeting Investors’ Expectations

Update on Liquidity Management for Investment Management Firms: Good Practice

The FCA has published an update on its work with the Bank of England to assess risks posed by open-ended investment funds investing in the fixed income sector. The purpose of the update is to share good practice observed during the project which are applicable across the investment fund industry.

Summary of Findings
The FCA’s key findings can be summarised using the following headings:

  • The Importance of Managing Liquidity Risk – The expectation of investors is that they are able to redeem their investments in line with the commitments made in the fund prospectus, and this typically means daily dealing. Good liquidity management ensuring that redemption requests can be granted throughout varied market conditions is a key FCA requirement, and the FCA observed good practice in fund managers reviewing and updating their liquidity management in line with market conditions to ensure that their portfolios can continue to meet redemption obligations.
  • Disclosure of Liquidity Risk to Investors – There will often be a difference between the liquidity described in a fund’s prospectus and the actual liquidity characteristics of the underlying securities held by the fund. Good liquidity management makes an effort to limit the impact of this difference to ensure investors can redeem their funds, and good practice involves informing investors about the nature and size of the risks faced using prospectuses and other fund documentation. Good disclosure of liquidity risk to investors makes clear:

i) the potential impact of low liquidity in portfolio holdings on the volatility of fund investment returns;
ii) the ability of the fund manager to use specific tools or exceptional measures which could affect investors’ redemption rights, and an explanation of those situations in which they would be used; and
iii) a description of these tools, measures, and their potential impact on fund investors.

  • Good practice on liquidity risk management and oversight – processes to ensure that the fund dealing arrangements are appropriate for the investment strategy of the fund involve analysing the full lifecycle of a fund and taking steps to ensure that requests for redemption can be met throughout the lifecycle. This could include a review of existing products to ensure that the fund dealing timetable remained appropriate, and a key factor to consider is whether there was any change in liquidity characteristic. In terms of conducting an ongoing assessment of the liquidity of portfolio positions it is good practice to use a range of sources to assess the liquidity of holdings, and this could entail the use of external data feeds and input from internal trading functions.
  • Implementation of exceptional liquidity tools and measures – Exceptional liquidity measures include deferred redemptions and the suspension of dealing. While the use of such extreme measures is unlikely it is advisable to prepare for their potential implementation, and this preparation may include the maintenance of a procedures manual detailing the steps required to implement these tools and testing that these measures work in practice.

Policy Development Update – 7th March 21016

The FCA has published its latest Policy Development Update which contains a timetable of upcoming publications, including:

  • Policy Statement to CP14/13, “Strengthening accountability in banking: a new regulatory framework for individuals”;
  • Policy Statement to CP15/42 chapter 5, “Solvency II – Consequential changes to the Handbook for non-Directive firms”;
  • Policy Statement to CP15/36, “Future regulatory treatment of CCA regulated first charge mortgages”;
  • Consultation Paper, “Implementation of MiFID II” due mid-2016;
  • Policy Statement to CP15/35, “Policy proposals and Handbook changes related to the Implementation of the Market Abuse Regulation”;
  • Policy Statement to CP15/41, “Increasing transparency and engagement at renewal in general insurance markets”;
  • Policy Statement to CP15/43, “Markets in Financial Instruments Directive II Implementation – Consultation Paper I”;
  • Policy Statement to CP12/20, “Review of the client money rules for insurance intermediaries”;
  • Policy Statement to CP15/40, “Financial Services Compensation Scheme: changes to the Compensation sourcebook”; and
  • Policy Statement to CP15/33, “Consumer credit: proposals in response to the CMA’s recommendations on high-cost short-term credit”.

Quarterly Consultation

On 18th March the FCA published its 12th Quarterly Consultation Paper (CP16/8) on changes to its Handbook, in which the FCA proposes to:

  • Make changes to the Listing Rules, the Disclosure and Transparency Rules and the Prospectus Rules - The proposals include :
    • Modifications to the Listing Rules (LRs) to make clearer the link between the definition of a reverse takeover in LR5 and the aggregation provisions in LR 10;
    • Proposed amendments to the Disclosure and Transparency Rules (DTRs) to implement a prescribed reporting format for the annual reports on payments to governments prepared under the Transparency Directive (2004/109/EC) (TD) in accordance with DTR 4.3A; and
    • Proposed amendments to the Prospectus Rules (PRs) to reflect further ESMA publications.

  • Make changes to the rules on final notices in the Enforcement Guide – EG 6.10C sets out how the FCA deals with Warning Notice Statements if it subsequently decides not to take any further action, or where it publishes a Decision Notice and the subject of the enforcement action successfully refers the matter to the Upper Tribunal. At present, where a Warning Notice Statement has been issued and the matter has been progressed to the issue of a Final Notice, the Enforcement Guide does not offer guidance on whether the Warning Notice Statement should be endorsed with an appropriate statement indicating the subsequent action and/or be de-anonymised.
  • Make changes to the regulatory reporting requirements in the Supervision Manual – The FCA wish to provide clarifications for firms who complete the forms PSD001 (transaction and affordability data for mortgages) and PSD0007 (mortgage performance sales data). First, the Regulator has altered the notes in SUP 16 Annex 21R to clarify that basic household expenditure in PSD001 should be a monthly figure. Secondly the guidance in relation to PSD007 has been changed; for the date of balance the FCA has added extra notes to SUP Annex 21R to explain that this date should be within the reporting period of the return.
  • Make changes to the Decision Procedure and Penalties Manual to refer to the European Long-term Investment Funds Regulations 2015 – The European Long-term Investment Funds Regulations 2015 add a new part to the Alternative Investment Fund Managers Regulations 2013 in relation to the authorisation and revocation of authorisation of an ELTIF by the FCA. To reflect this, the FCA is proposing to amend EG 19.131 to make reference to the ELTIF Regulation. The Regulator is also proposing to amend DEPP 2 Annex 1 to set out the decision-making procedure to be followed when proposing or deciding to refuse an application for authorisation as a UK ELTIF, or to revoke that authorisation under Part 3A of the Alternative Investment Fund Managers Regulations 2013.

Handbook Notice – 21st March 2016

On 17th March the FCA issued a notice of changes made to the FCA Handbook. Legislative changes included the following:

  • Training and Competence sourcebook (Qualifications amendments no 14) Instrument 2016 (FCA 2016/16). This instrument came into force on 18th March 2016 and made changes to update the appropriate qualification list in Part 2 of TC Appendix 4.1.1E;
  • Financial Services Compensation Scheme (Management Expenses Levy Limit 2016/2017) Instrument 2016 (FCA 2016/21). This instrument came into force on 1st April 2016 and implemented the new management expenses levy limit for 2016/17;
  • Mortgage Contracts (Legacy CCA) Instrument 2016 (FCA 2016/22). This brought pre-2004 first charge Consumer Credit Act 1974 loans into the mortgage regime in line with the legislative framework and came into force on 21st March 2016;
  • Supervision Manual (Reporting) Instrument 2016 (FCA 2016/26). This instrument makes rules to improve the clarity of guidance notes and change submission methods for compliance reporting, partially coming into force on 31st March 2016 with the remainder on 31st October 2016; and
  • Prospectus Rules sourcebook (Omnibus 2 Directive Regulatory Technical Standards) Instrument 2016 (FCA 2016/27). This amends the Prospectus Rules sourcebook to align it with regulatory technical standards contained in the Commission Delegated Regulation and came into force on 24th March 2016.

Policy Development Update – 4th April 2016

The FCA has published its latest policy development update which contains a timetable of upcoming publications, including:

  • Policy Statement to CP14/13, “Strengthening accountability in banking: a new regulatory framework for individuals”, expected date to be confirmed;
  • Consultation Paper, “Implementation of MiFID II - CP 2”, due mid-2016;
  • Policy Statement to CP15/35, “Policy proposals and Handbook changes related to the Implementation of the Market Abuse Regulation”, due spring 2016;
  • Policy Statement to CP15/41, “Increasing transparency and engagement at renewal in general insurance markets”, due mid-2016;
  • Consultation Paper and Policy Statement to CP15/43, “MiFID II Implementation – Consultation Paper 1”, expected date to be confirmed;
  • Policy Statement to CP15/32, “Smarter Consumer Communications: Removing certain ineffective requirements in our Handbook”, expected date to be confirmed;
  • Policy Statement to CP12/20, “Review of the client money rules for Insurance Intermediaries”, expected date to be confirmed;
  • Policy Statement to CP15/30, “Pensions reforms – proposed changes to our rules and guidance”, due April 2016;
  • Policy Statement to CP15/40, “Financial Services Compensation Scheme: changes to the Compensation sourcebook”, due April 2016; and
  • Policy Statement to CP15/33, “Consumer credit: proposals in response to the CMA’s recommendations on high-cost short-term credit”, due Q2 2016.

FCA Business Plan 2016/2017

The FCA has published its Business Plan and risk outlook for 2016/2017. The Business Plan outlines the following seven priority themes which will guide how the FCA will use its flexible resources and provide additional focus for the core activities of the organisation;

1) Pensions – Parliament has given the FCA the duty to impose a cap on early exit charges from pensions. The FCA will develop and consult on proposals to discharge its duty, and will consult to ensure that customers are able to use their pension freedoms more freely.

2) Financial Crime and Anti-Money Laundering – The FCA will focus on action against firms and individuals who perpetrate scams. There are a range of enforcement tools to tackle those engaging in unauthorised business including civil court action to stop activity, to freeze assets, insolvency proceeding and criminal prosecution. There will also be a focus on consumer education.

3) Wholesale Financial Markets – The regulator aims to finish implementing and to start applying the new EU Market Abuse Regulation (MAR) which will strengthen the existing UK market abuse framework. The FCA also plans to take action based on the Fair and Effective Markets Review (FEMR) assessment, an assessment of the way Wholesale Fixed Income, Currencies and Commodities (FICC) markets operate. There will also be further Consultation papers to make the necessary changes to the FCA Handbook, primarily to add new conduct of business and organisational requirements.

4) Advice – The FCA aims to simplify and clarify the regulation of financial guidance. One of the ways to achieve this is with the creation of a specialist Advice Unit to give regulatory support to new automated advice models. Another activity is to clarify certain rules relating to financial advisers including on cross subsidisation, training and fact finds.

5) Innovation and Technology – The FCA seeks to encourage innovation, competition and new entrants to the market to benefit consumers, and a regulatory sandbox will create a place for businesses to test new ideas to ensure that they can meet regulatory requirements.

6) Firms’ Culture and Governance – The Senior Managers and Certification Regime (SM&CR) aims to enhance individual accountability and should provide clarity for firms and regulators about each senior manager’s responsibilities. A focus on the culture within financial services firms is a high priority. The FCA will focus on the drivers of good or poor mind-sets and behaviours such as remuneration and other incentives. The use of supervisory tools and methods will be exercised to monitor firms individually on issues of conduct or culture.

7) Treatment of Existing Customers – It has been found that existing customers are not kept informed of other available products and applying switching/ exit fees on their accounts, and the FCA seek to ensure existing customers enjoy the benefits of increased competition and innovation by financial services firms. Customers should be offered greater product choice and availability, barriers to switching/ exiting should be removed and firms should generally work to retain customers rather than taking loyalty for granted.

FCA Consults on Regulatory Fees and Levies for 2016/2017

The FCA has issued a Consultation Paper (CP16/9) with policy proposals for 2016/17 regarding regulatory fees and levies. In the consultation paper the FCA state that their ongoing regulatory activities (ORA) have decreased by £7.6m (1.6%), and the regulator is proposing to apply the decrease evenly across fee blocks covered by those ongoing regulatory activities.

Thematic Review on Meeting Investors’ Expectations

The FCA has published a thematic review on whether UK authorised investment funds and segregated mandates are operated in line with investors’ expectations, as set by marketing material, disclosure material and investment mandates. The review concluded that, overall, fund managers are taking the right steps to manage investors’ expectations and comply with their responsibilities towards investors. Most funds in the sample were found to be investing in line with their stated strategy, however the FCA did find examples of unclear product descriptions and inadequate governance and oversight.

The review has encouraged firms to:

  • Ensure that product descriptions are clear;
  • Provide governance and oversight throughout the funds life; and
  • Identify and eliminate trends that may indicate inappropriate sales by monitoring the firm’s distribution channels.
PRA Updates


  • Policy Statement on Board Responsibilities
  • New PRA CEO Announced

Policy Statement on Board Responsibilities

Following an earlier consultation from 2015, the Prudential Regulatory Authority (PRA) has published a final supervisory statement (SS 5/16) on corporate governance. The purpose of the supervisory statement is to identify the aspects of governance the PRA attaches particular importance to and to which the PRA may devote attention in the course of its supervision.

An Effective Board
An effective Board – from a regulatory standpoint – is one that:

  • establishes a sustainable business model and a clear strategy consistent with that model;
  • articulates and oversees a clear and measurable statement of risk appetite against which major business options are actively assessed; and
  • meets its regulatory obligations, is open with the regulators and sets a culture that supports prudent management

To be effective a board needs to include individuals with a range of skills and experiences that cover the major business areas within the firm.
The specific accountabilities of individual directors established by the Senior Managers and Certification Regime (SM&CR) are additional and complementary to the collective responsibility shared by directors as members of the Board.

Setting Strategy
A key role for any Board is to set the firm’s strategy and to ensure that any goals within that strategy are within the agreed risk appetite. The PRA will expect to see evidence that the Board has taken decisions consistent with a sustainable business model, the firm is managed within a clear and prudent risk strategy, and regulatory obligations are met.

The Board should maintain a culture of risk awareness and ethical behaviour for the entire organisation to follow in pursuit of business goals. The PRA expects the culture to be embedded with the use of appropriate incentives.

Risk Appetite, Risk management and Internal Controls
Business strategy should be supported by a well-articulated and measurable statement of risk appetite. The PRA will expect to see evidence that the Board has exercised effective oversight of its risk management, and it is the responsibility of the Board to ensure that risk management is kept actively under review.

Board Composition
A cornerstone of best practice is for non-executive directors to be able to hold management to account effectively to ensure that executive directors are meeting their responsibilities effectively. The PRA also expects firms to have a non-executive chairman who is independent on appointment, in line with the corporate governance code. Where this is not the case, the firm should be able to explain how its governance arrangements will otherwise satisfy the need for independent oversight of the executives.

The Respective Roles of Executive and Non-Executive Directors
Executive directors have specific management responsibilities for which they are accountable to the Board. It is their responsibility to manage the firm’s business on behalf of the Board, non-executive director’s responsibilities require them to both support and oversee the executive management. Both parties should fulfil their responsibilities in a cooperative manner.

Knowledge and Experience of Non-Executive Directors
Non-executive directors need to have sufficient relevant knowledge and experience to understand the key activities and risks involved in the business. The PRA expects to see evidence of challenge from non-executive directors in relation to key strategic decisions.

Board Time and Resources
Non-executive directors should ensure they have sufficient time to fulfil their duties. Meetings should also be organised to allow adequate time to deal with all matters to be covered.

Management Information and Transparency
The PRA expects management to be open and transparent with the Board to ensure that it is adequately apprised of all significant matters about which it should be made aware. Management should not simply confine such information to matters formally reserved for the Board or falling outside the board’s stated risk appetite, but should raise issues where, for example, the size, nature or impact suggest that disclosure or escalation is appropriate.

Succession Planning
Boards should maintain succession plans that address the unexpected loss of key individuals, particularly those roles covered by the Senior Managers Regime including arrangements covering immediate and short term situations as well as longer term replacements.

The PRA expects Boards to oversee the design and operation of the firm’s remuneration system ensuring the incentives are aligned with prudent risk taking.

New PRA CEO Announced

HM Treasury announced on 8th April that Sam Woods is to be appointed as the Deputy Governor of the Bank of England and as the Chief Executive Officer of the PRA. Mr Woods will succeed Andrew Bailey and will have specific responsibility for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.

Mr Woods will sit on the Bank of England’s Court of Directors, the Financial Policy Committee, the Board of the PRA and the Board of the FCA. In addition, he will represent the Bank of England on international groups and institutions including the European Banking Authority and the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervisions.
The appointment will be effective from 1st July and will be for a renewable term of five years.



  • MiFID - ESMA Peer Review of MiFID Suitability Requirements
  • MiFID - Key Findings from Inducements and Conflicts of Interest Thematic Review
  • MiFID – ESMA Q&As on CFDs and Other Speculative Products
  • MiFID II – Minutes of FCA Meeting on Implementation
  • MiFID II – PRA Consults on Implementation
  • MiFID II – Commission Delegated Directive on Safeguarding Client Assets and Funds, Product Governance and Inducements
  • MiFID II - Council of EU Issues Final Compromise Texts to Delay Application
  • MiFID II – Commission Adopts Delegated Regulation on Organisational Requirements and Operating Conditions for Investment Firms

MiFID – ESMA Peer review of Suitability Requirements

ESMA has published a peer review of how EEA national competent authorities (NCAs) manage the supervision of firms to ensure compliance with the suitability requirements of MiFID when investment advice is provided to retail clients. The work identifies areas that could benefit from greater supervision and ESMA found that there is scope to adopt more proactive supervisory approaches and to strengthen enforcement activities.

Some of the main findings were:

  • NCAs have a good understanding of the difference between investment information and investment advice but there is limited supervision to determine whether clients are receiving investment advice instead of information or have the perception that they are receiving advice when they are actually receiving information;
  • Few NCAs provided specific information on the tools they use to supervise compliance with the suitability requirements; and
  • NCAs could improve how they communicate with stakeholders on their supervision and enforcement activities/ findings.

MiFID – Key Findings from Inducements and Conflicts of Interest Thematic Review

The FCA has published key findings regarding benefits provided and received by firms conducting business under MiFID, and these will be taken into account in the FCA’s planned MiFID II Consultation Paper. The aim of the key findings is to remind firms of the FCA’s expectations around the current rules, given the delay in implementing MiFID II to January 2018.

Key expectations noted by the FCA are that:

  • In relation to Gifts and Entertainment firms are expected to consider whether all aspects of the benefit are designed to enhance the quality of the service to the client, including the venue, and those activities which are not conducive or required for business discussions, e.g. sporting events;
  • Sufficient details should be recorded of any benefits for effective monitoring and compliance;
  • When product providers supply training or educational material to advisory firms, the product provider may make payments to the advisory firm to cover the costs of facilitating the training, e.g. by setting up a webinar. However, any such payments should not exceed any costs incurred; and
  • When disclosing a summary of the allowable benefits provided, MiFID firms must ensure that clients are given an indication of the value of those benefits for the client to be aware of the possible level of inducement.

MiFID – ESMA Q&As on CFDs and Other Speculative Products

ESMA has recently published a question and answer document on the application of the Markets in Financial Instruments Directive (MiFID) to the marketing and sale of financial contracts for differences (CFDs) and other speculative products to retail clients. The Q&A aims to promote common supervisory approaches in the application of MiFID when CFDs and other speculative products are sold to retail clients.

MiFID II – Minutes of FCA Meeting on Implementation

FCA has published the minutes of the MiFID II implementation round table meeting it held on 22nd February, during which it was noted that there was little implementation news since the previous meeting but that progress in this area is expected soon.

The minutes recognised that the debate surrounding the Commission’s proposal to delay the implementation by a year focused around the issues of the application of pre-trade transparency to package transaction, and the possible opportunity to change Article 2.1.d to allow commercial firms to be members or participants in forex venues without being required to be authorised.

During discussions about the European Commission narrowing the scope of instruments judged as complex for the appropriateness test under MiFID II, the FCA said that the Commission would be required to explain any departure from ESMA’s advice.

The round table also discussed aspects of FCA’s now-closed consultation on MiFID II and reported that the European Commission will not be publishing written responses to questions raised on the Level 1 legislation at its MiFID II transposition workshop.

MiFID II – PRA Consults on Implementation

The PRA has released its first Consultation Paper (CP 9/16) on the implementation of the amended Markets in Financial Instruments Directive and associated Regulation (MiFID II) legislative package. The application date has been pushed back to January 2018, although the 3rd July 2016 deadline by which Member States are required to transpose their provisions into national legislation still exists.

The two main policy proposals covered by the Consultation Paper are:

i) the extension of scope and harmonization of the passporting regime; and
ii) the systems and controls for firms undertaking algorithmic trading and providing direct electronic access to trading venues.

MiFID II extends the scope of the existing passporting regime to include new activities in a bid to increase harmonisation across the European Economic Area (EEA).

The current passporting regime allows firms to provide investment services and conduct investment activities in EEA states without requiring further authorisation. MiFID II makes some small but important changes to the current regime which impact dual-regulated firms; it extends the range of investment services and activities that can be passported into the United Kingdom to include the operation of an organised trading facility (OTF) and a new category of financial instruments, emissions allowances. Each firm will need to assess whether it wants to revise its passport to include these new activities, and if a firm decides to passport any of the additional permitted activities then it must notify the PRA.

Algorithmic trading
Technological developments in algorithmic trading have driven new legislation under MiFID II. There have not previously been any rules in the PRA Handbook focused on algorithmic trading, although the PRA proposes to create a new Algorithmic Trading part of the PRA Rulebook. The content of the new Algorithmic Trading Part is related to, but does not replace, the existing rules on firms’ systems and controls, and the regulator proposes that firms engaging in algorithmic trading should ensure that their trading systems:

  • Are resilient and have sufficient capacity;
  • Are subject to appropriate trading thresholds and limits; and,
  • Prevent the sending of erroneous orders or contribute to a disorderly market.

MiFID II – Commission Delegated Directive on Safeguarding Client Assets and Funds, Product Governance and Inducements

The European Commission has published the final text of the Commission Delegated Directive supplementing the revised Markets in Financial Instruments Directive (MiFID II) with regard to the protection of financial instruments belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits.

Directive 2014/65/EU (commonly referred to as ‘MiFID II’) is due to come into force on 3rd January 2018 and, together with Regulation (EU) No 600/2014 (MiFIR), replace Directive 2004/39/EC (MiFID I). MiFID II/MiFIR provide an updated harmonised legal framework governing the requirements applicable to investment firms, regulated markets, data reporting services providers and third country firms providing investment services or activities in the Union.

In respect of inducements and the use of dealing commission to fund research, the Delegated Directive provides that investment research is an inducement and so prohibited unless it is either (i) paid for by the firm out of its own resources, or (ii) out of a Research Payment Account (RPA) which can be funded by commission generated by specific trades provided certain (potentially onerous) conditions are met. RPAs must be controlled by the investment manager and not by the broker (though a degree of delegation - for example to a broker - is permitted) and must be funded by a specific research charge to the client.

The investment manager must:

(i) set and regularly assess a research budget
(ii) regularly assess the quality of the research purchased - based upon robust criteria and its ability to contribute to better investment decisions
(iii) make prior, ongoing and ad hoc disclosures of the use of RPAs
(iv) obtain client's prior agreement to the RPA

The Delegated Directive addresses one previous lacuna in MiFID II in that it requires all brokers subject to MiFID II to separately identify charges for (1) execution of an order and (2) other services - including research. Of course this will not apply to brokers not regulated under MiFID II; that is non-EEA brokers. As a Directive it will require each member state to implement it through national law. In the UK this will be by statute, in the form of a Statutory Instrument issued by HMT, and by changes to the FCA's rules. At present the FCA has not issued any consultation on how it will implement this Delegated Directive though the policy in the Directive is largely in sympathy with the FCA's stated policy that research should not be paid out of dealing commission. It remains to be seen the extent to which the FCA will seek to impose the requirements on, for example, collective portfolio management firms who do not engage in any activities coming within MiFID II.

Finally, the overarching aim of the MiFID II/MiFIR regulatory package is to level the playing field in financial markets and to enable them to work for the benefit of the economy, supporting jobs and growth.

MiFID II – Council of EU Issues Final Compromise Texts to Delay Application

The Council of the EU has published the proposed texts with regard to delaying the date of application of the revised Markets in Financial Instruments Directive and associated Regulation (MiFID and MiFIR, together MiFID 2) by one year to 3rd January 2018.

The Council Presidency has invited the Permanent Representatives Committee to:

  • agree on the negotiating mandate texts; and
  • invite the Council Presidency to start negotiations with the European Parliament with a view to reaching an agreement at first reading.

MiFID II – Commission Adopts Delegated Regulation on Organisational Requirements and Operating Conditions for Investment Firms

The European Commission has published its adopted Delegated Regulation supplementing the revised Markets in Financial Instruments Directive (MiFID II) as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive, as well as its associated annexes.



  • MAR – RTS on Investment Recommendations and on Arrangements for Preventing, Detecting and Reporting Abusive Practices
  • MAD – ESMA Updates Q&As

MAR – RTS on Investment Recommendations and on Arrangements for Preventing, Detecting and Reporting Abusive Practices

The European Commission has published the final text of the following Level 2 measures:

  • Commission Delegated Regulation supplementing the Market Abuse Regulation (MAR) with regard to Regulatory Technical Standards (RTS) for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest.
  • Commission Delegated Regulation supplementing MAR with regard to RTS for the appropriate arrangements, systems and procedures as well as notification templates to be used for preventing, detecting and reporting abusive practices or suspicious orders or transactions and related annex.
    Both of the RTS are intended to apply from 3rd July 2016.

Updated ESMA Q&As on AIFMD

The European Securities and Markets Authority (ESMA) has published an updated questions and answers document (Q&As) on the Market Abuse Directive (MAD). The updated Q&As include a new question on the definition of investment recommendation in Article 1(3) of the Level 2 Commission Directive (2003/125/EC) on the fair presentation of investment recommendations and the disclosure of conflicts of interest.



  • ESMA Publishes New UCITS V and Revised AIFMD Remuneration Guidelines
  • Updated ESMA Q&As on AIFMD

ESMA Publishes New UCITS V and Revised AIFMD Remuneration Guidelines
The European Securities and Markets Authority (ESMA) has published its final Guidelines on sound remuneration policies under the UCITS Directive and AIFMD. ESMA has also written to the European Commission, European Council and European Parliament on the proportionality principle and remuneration rules in the financial sector.

UCITS Remuneration Guidelines
The UCITS Remuneration Guidelines provide clarity on the requirements under the UCITS Directive for management companies when establishing and applying a remuneration policy for key staff. The Guidelines will ensure a convergent application of these provisions and provide guidance on the governance of remuneration, requirements on risk alignment and disclosure. The Guidelines will apply to UCITS management companies and national competent authorities from 1 January 2017.

Proportionality Issue
While finalising its UCITS Remuneration Guidelines, ESMA had to balance the alignment with the AIFMD Remuneration Guidelines and the obligation to closely cooperate with the European Banking Authority (EBA) in order to ensure consistency with requirements developed for other financial services sectors, in particular credit institutions and investment firms.

The UCITS Directive prescribes that proportionality shall apply to the full set of remuneration principles set out under this Directive. However, the Guidelines do not include guidance on the possibility of dis-applying certain specific requirements on the pay-out process. This follows recent work and legal analysis, including the EBA’s Guidelines under CRD IV, which have called into question the existing understanding that the proportionality provisions as set out under the UCITS Directive and AIFMD may lead to a result:
a) where – under specific circumstances – the requirements on the pay-out process i.e. the requirements on variable remuneration in instruments, retention, deferral and ex post incorporation of risk for variable remuneration are not applied; or
b) where it is possible to apply lower thresholds whenever minimum quantitative thresholds are set for the pay-out requirements e.g. the requirement to defer at least 40% of variable remuneration.
ESMA considers that these scenarios should remain possible in certain situations and, in its letter to the European institutions, suggests that further legal clarity on this possibility could be beneficial to all the interested parties. Legislative changes in the relevant asset management legislation could be one way to further clarify the applicable regulatory framework.
ESMA believes that it would be inappropriate for the following fund managers to be subject in all circumstances to the requirements on the pay-out process:
i) smaller fund managers (in terms of balance sheet or size of assets under management);
ii) fund managers with simpler internal organisation or nature of activities; or
iii) fund managers whose scope and complexity of activities is more limited.

ESMA also considers that it would be disproportionate to apply the requirements to relatively small amounts of variable remuneration and to apply certain requirements to certain staff when this would not result in an effective alignment of interests between the staff and the investors in the funds.

AIFMD Remuneration Guidelines
The amended AIFMD guidelines will come into force on 1st January 2017. The amendment to the AIFMD guidelines relates to the section of these guidelines dealing with the application of the remuneration rules in a group context and is intended to acknowledge the potential outreach of the CRD rules in a banking group.

The current AIFMD Guidelines will not be amended to bring them into line with the UCITS Guidelines pending clarification on the application of the proportionality principle.

Next Steps
The Guidelines in Annexes III and IV will be translated into the official languages of the European Union and the final texts published on the ESMA website. The deadline for compliance notifications will be two months after the publication of the translations.

Updated ESMA Q&As on AIFMD

The European Securities and Markets Authority (ESMA) has published an updated questions and answers document (Q&As) for the Alternative Investment Fund Managers Directive (AIFMD). The updated document includes a new Q&A on notification requirements relating to additional investment in existing AIFs.



  • PRA and FCA Update Webpages
  • FCA and PRA Policy Statement on Consequential Changes
  • PRA and FCA Updates

PRA and FCA Updated Webpages
The FCA and PRA updated their websites in advance of the implementation of the Senior Managers and Certification Regime (SM&CR) and Senior Insurance Managers Regime (SIMR) on 7th March 2016.
The PRA published a new webpage on Senior Manager approvals and updated its webpage on submitting, amending and withdrawing applications under the SM&CR and the equivalent webpage for applications made under the SIMR. The PRA also issued a document containing a list of the PRA-designated Senior Management Functions under the SMR.

The update makes the following points:

  • Grandfathering notifications that have been submitted and acknowledged by an automated response confirming receipt (with the PRA or FCA having made no further response) are being processed. The FCA and PRA will only contact applicants if there are questions regarding a submission;
  • Applicants who have been contacted to resubmit their grandfathering application are reminded to resubmit their application addressing all queries and make a successful resubmission as soon as possible;
  • Firms which have not yet submitted a grandfathering notification should do so as soon as possible.

If a firm does not successfully transfer current controlled functions under the approved persons regime to senior manager or senior insurance manager functions, existing approvals for these persons will lapse. It could also lead to a firm being in breach of the FCA and PRA’s Threshold Conditions if a non-approved person continues to perform a senior management or senior insurance management function after 7 March 2016.

FCA and PRA Policy Statement on Consequential Changes
The FCA and PRA have published Policy Statements (FCA PS16/6 and PRA PS9/16 respectively) on proposed consequential amendments to the Senior Managers and Certification Regime (SMR&CR).

FCA PS 16/6
The FCA’s Policy Statement finalises the practical changes that need to be made to the FCA’s Handbook and related forms as a result of the suspension of section 64B(5) of the Financial Services and Markets Act (FSMA) 2000. It indicates that the final instrument does not differ significantly from the consultation versions, and also signals that the FCA will be consulting (via a quarterly Consultation Paper in March 2016) on the proposal to mandate electronic reporting of Form H for all firms bar credit unions. Also finalised by the Policy Statement are some minor technical amendments to Annex 1 to Chapter 1 of the Senior Management Arrangements, Systems and Controls (SYSC) sourcebook which deal with how SYSC applies to foreign branches.

PRA PS 9/16
PRA PS9/16 reports on the main issues arising from “Consultation Paper 16/1 Consequential Changes to the Senior Managers Regime” and publishes final rules. It also finalises some minor technical amendments to SYSC 1 Annex 1 which deal with how SYSC applies to foreign branches, and sets out the amended definition of the term ‘significant risk taker’ in the PRA’s Certification rules as proposed in CP 29/15.
The PRA’s intention throughout the development of the SM&CR has been to base the Certification Regime on the criteria used to define ‘Material Risk Takers’ (MRTs). This definition is outlined in the MRTs regulation and comprises:

  • A catch-all subjective definition covering all categories of staff whose professional activities have a material impact on an institution's risk profile (Article 2 of the MRTs Regulation);
  • A set of defined of qualitative criteria (Article 3 of the MRTs Regulation); and
  • A set of defined quantitative criteria (Article 4 of the MRTs Regulation), which can be overridden in specified circumstances.

The original definition of a MRT took into account the quantitative and qualitative criteria in Articles 3 and 4 of the MRT regulation but made no mention of the catch all subjective definition in Article 2 of the MRT regulation.
The effect of CP29/15 was to extend the definition of a ‘significant risk taker’ to reflect Article 2 of the MRT regulation, and theoretically this could lead to an increase in the number of employees that would need to be certified under the PRA’s rules. It should be kept in mind that most, if not all, employees covered by the broader definition are likely to be already subject to certification under the FCA’s rules which have a wider scope.

PRA and FCA Updates
The Senior Managers and Certification Regime (SM&CR) for the banking sector came into force on 7th March 2016. The new regime will hold individuals working at all levels of relevant firms to appropriate standards of conduct and ensures that senior managers are held to account for misconduct that falls within their area of responsibility.
Andrew Bailey – Deputy Governor for Prudential Regulation at the Bank of England and Chief Executive Officer of the PRA – said:
“At the heart of the new accountability regime…is one very simple principle - you can delegate tasks but you cannot delegate responsibility. This means that senior managers at banks and insurers should know what they are responsible for and can be held accountable for failings in their area. This is a crucial milestone in our drive for greater accountability in financial services”.
The new rules will make it easier to be clear about who is responsible for what and strive to focus managers, improve standards and make firms easier to manage.



  • Bank of England Statement on Compliance with EBA Guidelines on Sound Remuneration Policies

Bank of England Statement on Compliance with EBA Guidelines on Sound Remuneration Policies
The PRA and FCA have notified the European Banking Authority (EBA) that they will comply with all aspects of the EBA Guidelines on Sound Remuneration Policies except for the provision that the limit on awarding variable remuneration to 100% of fixed remuneration, or 200% with shareholder approval (the bonus cap), must be applied to all firms subject to the Capital Requirements Directive (CRD).
The PRA and FCA take a proportionate, risk-based approach to applying the bonus cap based on the wording under Article 92(2) CRD which states that “competent authorities shall ensure that … institutions comply with the following principles [including the bonus cap] in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities”.
This decision has been made on the principle of proportionality and has led to the bonus cap not being applied to smaller firms posing less substantial risk to the soundness of the wider financial system. All large CRD regulated firms must apply the bonus cap, whilst smaller firms are required to find an appropriate ratio between fixed and variable income without having to apply a bonus cap.
Since the introduction of the bonus cap a number of firms have significantly increased fixed pay as a proportion of total pay while total pay has changed very little, although this has made it difficult for firms to adjust variable pay in line with their overall financial health.
In the FCA and PRA’s opinion the blanket application of a bonus cap would exacerbate this problem by disregarding a firm’s size, internal organisation, nature, scope and complexity of their activities.



  • Final Report

Final Report
HM Treasury issued a final report following its Financial Advice Market Review (FAMR) which examined how to enhance access to financial advice for consumers.
The report makes 28 recommendations intended to tackle the barriers to consumers wishing to access advice. These are directed at the FCA, employers, service providers and consumers, and focus on three main areas:

At present not all consumers can afford to access the advice they need. Not everyone needs nor can afford advice that is tailored to their circumstances or a comprehensive analysis of their circumstances and requirements. More can be done to help these people make financial decisions, and FAMR believes that the use of new technologies can play a role in making financial advice more accessible to a greater number of people.
The report recommends that HM Treasury ought to consult on amending the definition of ‘regulated advice’ to include advice based upon a personal recommendation in line with MiFID. A clear framework should be developed to give advisory firms the confidence to provide streamlined advice on simple consumer needs in proportionate way, and the FCA should issue guidance on the standard types of information required as part of the customer assessment process.

FAMR found that there is a lack of customer engagement which is holding back the financial advice market, an example being a lack of trust in financial advisers by virtue of empirical examples of the mis-selling of financial products like personal pensions and structured products. The report concludes that there is a need to raise awareness of recent changes to increase consumer confidence in the financial advice industry.

It is recommended that the Financial Advice Working Group works with employers to develop and promote a guide to the top ten ways to support employees’ financial health, and that HM Treasury ought to explore options to allow consumers to access a small part of their pension pot to pay for advice before the normal minimum pension age so as to redeem against the cost of pre-retirement income.

Liabilities and Consumer Access to Redress
The report stresses the significance that customers receiving financial advice have confidence in the regulatory system and have access to redress should they be wrongly advised.
It is recommended that the Financial Ombudsman Service (FOS) considers undertaking regular ‘Best Practice’ roundtables with industry and trade bodies where both sides can discuss relevant issues such as the evidence used when considering historic sales and suitability requirements. Additionally, the report advises against the FCA introducing a longstop limitation period for referring complaints to the FOS. As part of the review in 2019, the FCA and HMT will consider any ongoing trends and the impact of the Financial Ombudsman Service’s complaints data relating to advice on long-term products.




  • ESMA Issues Final Draft RTS on Risk Mitigation Techniques for OTC Derivatives Not Cleared by a Central Counterparty

ESMA Issues Final Draft RTS on Risk Mitigation Techniques for OTC Derivatives Not Cleared by a Central Counterparty

On 8th March ESMA published the final draft Regulatory Technical Standards (RTS) outlining the framework of the European Market Infrastructure Regulation (EMIR).
The RTS covers the risk mitigation techniques related to the exchange of collateral to cover exposures arising from non-centrally cleared over-the-counter (OTC) derivatives. They also specify the criteria concerning intragroup exemptions and the definitions of practical and legal impediments to the prompt transfer of funds between counterparties. These standards aim to increase the safety of OTC derivatives markets in the EU.
Also covered in the RTS are the following:

  • The operational procedures related to documentation, legal assessments of the enforceability of the agreements and the timing of the collateral exchange;
  • The procedures for counterparties and competent authorities related to the treatment of intragroup derivative contracts.
  • The list of eligible collateral for the exchange of margins, the criteria to ensure that collateral is sufficiently diversified and not subject to wrong-way risk, and the methods to determine appropriate collateral ‘haircuts’.
  • For OTC derivatives not cleared by a Central Counterparty (CCP) the draft RTS prescribe that counterparties have to exchange both initial and variation margins. This will reduce counterparty credit risk, mitigate any potential systemic risk and ensure alignment with international standards.

The RTS will be applied in a proportionate manner to allow counterparties to phase in the requirements.



  • HM Treasury Updated Advisory Notice on Money Laundering and Terrorist Financing Controls in Overseas Jurisdictions

HM Treasury Updated Advisory Notice on Money Laundering and Terrorist Financing Controls in Overseas Jurisdictions

HM Treasury has published an updated advisory notice on money laundering and terrorist financing controls in overseas jurisdictions. This has been made in response to two statements made by the Financial Actions Task Force (FATF) identifying jurisdictions with strategic deficiencies in their Anti-Money Laundering and Counter Terrorist Financing regimes.

HM Treasury advises firms to consider the following jurisdictions as high risk and so to take action to reduce risk through enhanced due diligence:

Democratic People’s Republic of Korea; and
HM Treasury also advises firms to take appropriate action to minimize risk which may include enhanced due diligence in relation to the following jurisdictions:

  • Afghanistan,
  • Bosnia and Herzegovina,
  • Guyana,
  • Iraq,
  • Lao PDR,
  • Myanmar,
  • Papua New Guinea,
  • Syria,
  • Uganda,
  • Vanuatu; and
  • Yemen

The government’s strategy is to use financial tools to deter crime and terrorism, detect it when it happens, and disrupt those responsible and hold them to account for their actions.



  • FCA Fines and Prohibits Director from Performing Regulated Activity for Breach of Statement of Principles

FCA Fines and Prohibits Director from Performing Regulated Activity for Breach of Statement of Principles
The FCA has imposed a fine of £450,000 on Mr Timothy Alan Roberts – of Catalyst Investment Group Limited – for failure to comply with Statement of Principles 1 and 6 of the FCA’s Statements of Principle for Approved Persons. An order has been made prohibiting Mr Roberts from performing any function in relation to any regulated activities carried on by any authorised or exempt persons, or exempt professional firm..
The FCA’s action follows a decision by the Upper Tribunal that Mr Roberts’ behaviour showed a lack of integrity and that he failed to act with due care, skill and diligence in continuing to allow Catalyst to promote ARM bonds and collect funds from potential investors despite awareness that ARM had been asked to stop issuing bonds by its relevant regulator. On 27 January 2016 the Court of Appeal refused Mr Roberts permission to appeal and, therefore, the FCA has issued the final notice in this matter.

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