"You don't need to have 20/20 vision to see that the year ahead will be challenging…"

We wrote those words just 12 short months ago. Of course, none of us knew that a public health tragedy and related economic crisis was just a few months away, and challenges came in abundance and from all directions.

However, it is striking how relatively resilient the financial services industry has proved to be; firms have managed to conduct some semblance of "business as usual" and worked with investors and other stakeholders to solve many of the most urgent issues. But, as we look ahead to 2021 – with the pandemic continuing to disrupt lives and businesses –  most of the challenges we trailed last year are still on the agenda, and we re-focus on those in this year's new year briefing.

For the financial services sector, the UK/EU Trade and Cooperation Agreement that was agreed on Christmas Eve 2020 might be called the "no deal deal", given how little space was dedicated to the sector.  As we describe in Part 1 below, the focus for most UK-based and international firms will be on the Commission's equivalence assessments and a UK/EU MoU that are expected in the coming months (while, for some firms, the access arrangements that have been adopted in a few EU Member States are also of interest).

Meanwhile, the UK's domestic financial services rulebook is largely unchanged. As we also explain in Part 1 below, the substance of what firms need to comply with looks very much the same as before, although there are some transitional arrangements that may assist some. Meanwhile, some indications of how the UK might adapt its rules are beginning to emerge. See Part 2.

One forthcoming EU law that the UK will adopt (at least in amended form) is the Investment Firm Prudential Regime, included in the recently published Financial Services Bill. However, a huge amount of detail regarding the implementation of the regime will be the preserve of the FCA and its rules. The government's current target date for application of the new regime in the UK is January 2022 – i.e. only a year away – so in-scope firms will have much to do in a relatively short space of time. See Part 3.

Climate change and sustainability will continue to dominate the legislative and regulatory agenda in the UK, the EU and globally. Although the UK will not be implementing the EU Sustainable Finance Disclosure Regime (which will apply to EU27 countries on 10 March 2021), the latest intelligence suggests that the government will nonetheless look to introduce a domestic version of that legislation, together with a UK version of the EU's Taxonomy Regulation, in due course. Initially, however, it has focused more narrowly on making the Taskforce on Climate-related Financial Disclosures (TCFD) mandatory for certain sectors. See Part 4.

Notable changes to EU law that are in the works are also covered in this bulletin, for example the Commission's ongoing review of AIFMD, the application of the EU legislation on cross-border fund distribution and ESMA's consultative guidance on fund marketing communications. UK and international firms are likely to be affected – directly or indirectly - by the outcomes. See Part 5.

Aside from the above, the next year and beyond will bring yet further initiatives. For instance, the Treasury is currently reviewing responses to its July 2020 call for evidence on its Payments Landscape Review, which it will use to develop evidence to feed into its longer-term legislative work on the UK payments industry. While there are no concrete proposals on which to report at this early stage, it is unlikely that the government will conclude that no changes are required.

More broadly in relation to payments and Fintech, the idea of central bank digital currencies (CBDC) is gaining traction. The European Central Bank (ECB) is actively considering the possibility of issuing a digital euro for retail payments in the Eurosystem and in October 2020 it published a Report on digital euro together with a consultative questionnaire. Also in October, a group of seven central banks (including the Bank of England and the ECB) together with the Bank for International Settlements (BIS) published a report identifying the principles necessary for any publicly available CBDCs: Central bank digital currencies: foundational principles and core features.

Another recently-launched initiative likely to result in legislative proposals at some stage concerns "productive finance"  - funding for investment that has the potential to expand the productive capacity of the economy, including R&D, technologies (including, for example, green technology) and infrastructure. The working group established by the government will, among other things, consider whether Long Term Asset Funds and other potential fund structures may provide the means by which a wide range of investors – including UK defined contribution pension schemes – are able to and can be encouraged to invest in long-term assets.

2021 will certainly be a busy year for financial services firms, and adapting to regulatory developments – perhaps especially the reality of a post-Brexit landscape – will continue to occupy a significant amount of time. Of course, there is still much uncertainty to resolve. On that point - and after the last few years when unexpected, unpredictable and even unimaginable events became reality - it is perhaps best, in looking forward to the year ahead and beyond, to adopt Winston Churchill's philosophy:

"I always avoid prophesying beforehand because it is much better to prophesy after the event has already taken place."


UK and EEA post-Brexit measures

Big Ben was reconnected to provide more than one set of 'bongs' on New Year's Eve. One of these, a "test", was at 11:00 p.m., which coincided with the end of the EU transition period and the UK's final departure from the single market and the customs union. At that time, the UK and EEA post-Brexit measures became effective. The trade deal which the EU and UK negotiators finally struck just before midnight (figuratively speaking) did little to alter the "no deal" contingencies which the UK and EU had prepared for in relation to financial services. A full overview of these measures and their implications is beyond the scope of this briefing, but the main points are summarised below.

"So long, and thanks for all the fish"?

On Christmas Eve 2020, the UK and EU finally agreed a post-Brexit Trade and Cooperation Agreement. Much of the 1,259-page Agreement is devoted to matters of cooperation, trade and services in areas other than financial services. Furthermore, while, as the EU Commission reported, the Agreement generally "goes well beyond traditional free trade agreements", those comparatively few provisions that do specifically address financial services are high level and very similar to those which are seen in the EU's other free trade agreements with third countries.

What we can say about the Trade and Cooperation Agreement and financial services is as follows:

  • International standards: The UK and EU agree to use their best endeavours to ensure that internationally agreed standards in the financial services sector are implemented and applied – these standards include those from the Basel Committee, IOSCO, FATF and OECD.

  • Prudential carve-out: While general provisions relating to services and investment (including most favoured nation treatment) apply, specific provisions governing the supply of financial services apply to (and override) these, including a significant "prudential carve-out", meaning that neither Party is prevented from adopting or maintaining unilateral measures for the protection of investors, depositors, policy-holders or persons to whom a fiduciary duty is owed by the financial services supplier or to ensure the integrity and stability of the Party's financial system.

  • Clearing and payment systems: Financial service suppliers from the UK and EU will have access to each other's payment and clearing systems operated by "public entities" and to funding and refinancing facilities in the normal course of business (but not access to "lender of last resort" facilities).

  • Regulatory cooperation: In a non-binding declaration outside the terms of the Trade and Cooperation Agreement itself, the UK and the EU will "aim to agree" by March 2021 a Memorandum of Understanding between them establishing a framework for regulatory cooperation on financial services. 

What the Trade and Cooperation Agreement does not, and was not expected to, address, however, is the question of equivalence for financial services. This is a matter of respective unilateral decisions, not bilateral negotiation and takes account of national interests: it is not an objective assessment of "equivalence". In many ways, this is the critical question for financial services firms. The UK has already announced a package of unilateral equivalence assessments over and above its temporary arrangements in some, but by no means all, areas (see below). The European Commission's process of assessing the UK is continuing. In the joint declaration referred to above, the UK and the EU agreed to discuss "how to move forward" on both sides with equivalence determinations "without prejudice to the unilateral and autonomous decision-making process of either side". It remains to be seen how long it will take before there are meaningful mutual equivalency declarations and, if so, in which of the single market regimes there is such mutuality.

UK measures for EEA firms operating in the UK

  • Temporary Permissions Regime: The Temporary Permissions Regime (TPR) allows certain EEA passported firms, which made a notification to the Financial Conduct Authority (FCA) by 30 December 2020, to continue operating in the UK pending an application for full UK authorisation.  It was made available to firms exercising their inward passporting rights under Schedule 3, FSMA as well as to incoming electronic money institutions, payment institutions and registered account information service providers who had been exercising their passporting rights under the Electronic Money Directive (EMD) or the Payment Services Directive (PSD2). Unless extended, the TPR lasts until 31 December 2023 (although for individual firms within the regime their temporary permission will likely cease before then, depending on the status of their applications for full authorisation or registration – firms which passported under Schedule 3, FSMA will be given a timeframe by the FCA by which they must apply for authorisation).  EEA firms operating under the TPR will be subject to the full scope of the FCA's supervision and its rules, including those which implemented EU directives, subject in this case to "substituted compliance" as regards certain of those obligations, which before 31 December 2020, were home state matters.  This means that EEA firms would not breach the relevant FCA obligation if they comply with the home state provision (or apply the provision where, under the home state's law, the obligation does not apply to the firm's activity in the UK).

  • Temporary Marketing Permission Regime - AIFMs: The Temporary Marketing Permission Regime (TMPR) (which the FCA sometimes confusingly also refers to as the TPR) allows EEA Alternative Investment Fund Managers (AIFMs) which made a notification to the FCA by 30 December 2020, to continue to market in the UK those of their funds that were in existence on 31 December 2020 on the same terms as previously applied, subject to compliance with certain obligations including notifying the FCA of changes to documentation or the EEA AIFM's programme of operations.   Unless extended, the TMPR lasts until 31 December 2023 (although coverage will likely end sooner than that in respect of specific funds, depending on circumstances). For instance, the EEA AIFM must make a national private placement (NPPR) notification in the UK within two years. Any marketing of a new fund coming into existence after 31 December 2020 must be under NPPR.

  • Temporary Recognition Regime - EEA UCITS: The Temporary Recognition Regime (UCITS TRR) allows an EEA UCITS to apply to become a recognised scheme for the purposes of Part 17, FSMA for a temporary period: EEA UCITS wishing to take advantage of the TRR had to notify the FCA by 30 December 2020. On the face of the legislation as it currently stands, the temporary recognition is due to last three years (subject to a Treasury power to extend it by a further 12 months). However, the Financial Services Bill (see below) includes an amendment which would extend the temporary recognition period to five years after IP completion day. Any new, stand-alone EEA UCITS established after 30 December 2020 will not be covered by the TRR and marketing to retail investors in the UK will not be allowed unless it has obtained "full" recognition as an "individually recognised overseas scheme" under section 272, FSMA (but see the Financial Services Bill in Part 2 below, which will include an Overseas Funds Regime based on equivalence as an additional and alternative route to recognition). While the TRR will not cover new, stand-alone EEA UCITS established after 30 December 2020, it will be available to new sub-funds of an umbrella UCITS which are authorised in accordance with the EU UCITS Directive by their EEA home state regulator on or after IP completion day, provided at least one other sub-fund of the umbrella UCITS did notify the FCA and entered into the TRR before IP completion day.

  • Temporary Recognition Regime - EEA CCPs: The Temporary Recognition Regime (CCP TRR) means that UK firms can continue to use non-UK (including EEA) CCPs, provided the CCP had notified the Bank of England before the end of the transition period. Unless extended by the Treasury, the CCP TRR lasts for three years.

  • Financial Services Contracts Regime: The Financial Services Contracts Regime (FSCR) applies automatically to EEA firms that failed (through choice or omission) to enter the TPR and allows them to run off existing contracts and therefore conduct an orderly exit from the UK market. No new UK business may be entered into and the FSCR will apply for a maximum of five years. There are two types of run-off:

    • Supervised run-off (SRO): Applies to EEA firms with a UK branch, EEA firms that enter the TPR but exit it without UK authorisation and EEA firms that hold "top-up" permissions before Brexit (the FCA does not explain whether this means AIFMs with MiFID "top-ups" or any EEA firm that has Part 4A permission for a domestic regulated activity not covered by a passport (or both)). During the SRO, these EEA firms will be deemed authorised for the purposes of winding down their UK regulated activities.

    • Contractual run-off (CRO): Applies to EEA firms without a UK branch that do not enter the TPR or do not hold a top-up permission and provides for a limited exemption from the general prohibition on carrying on regulated activities without authorisation for the purposes of winding down UK regulated activities.

Measures for UK firms operating in the EEA

With the exception of EU temporary recognition of some UK financial market infrastructure (addressed below), there are no EEA-wide measures to smooth the transition for UK firms operating in the EEA.  However, some individual countries have either existing or new regimes which may assist.  These typically fall into two categories, although (where they exist at all) the scope varies from country to country:

  • Temporary transitional regimes, which may enable firms to conduct some existing business and/or service some existing contracts for a limited period.

  • Limited licensing regimes, under which firms may apply for a local licence to undertake limited types of business, subject to compliance with local rules.

Temporary standstill directions under temporary transition powers (TTP)

The main directions

The FCA, as well as the Prudential Regulation Authority (PRA) and the Bank of England, have temporary transitional powers (TTP) to delay, or phase in, statutory and regulatory requirements where they change as a result of Brexit or where they apply to firms for the first time. The FCA directions were finalised on 22 December 2020. A transitional direction made under the TTP allows - or in the case of the FCA's prudential transitional direction for instance, requires - firms to comply with the pre-exit version of the requirements for a limited period.

The two annexes to the FCA's main directions set out how the standstill direction applies (and where it does not apply) to amendments made in Statutory Instruments and EU Exit Instruments amending binding technical standards (Annex A) and how it applies (and where it does not apply) to FCA rules (Annex B). For instance, in Annex A, the standstill direction in relation to amendments made by the Alternative Investment Fund Managers (Amendment etc.)(EU Exit) Regulations 2019 contains two transitional provisions that are not covered by the TMPR outlined above:

  • The first provides that a UK AIFM can continue to market an EEA AIF that was being marketed in the UK immediately before the end of the UK/EU transition period (IP completion day) in accordance with the UK implementation of AIFMD: the effect of this is to relieve the UK AIFM from having to immediately re-notify the marketing under the UK NPPR on the grounds that an EEA AIF is now a third country AIF.

  • The second provision provides that an EEA AIFM can continue to market in the UK a non-EEA AIF (or a feeder AIF of a non-EEA AIF) in accordance with the UK implementation of AIFMD as it stood immediately before IP completion day: the effect of this is to relieve the EEA AIFM from having to immediately re-notify the marketing under the UK NPPR on the grounds that the EEA AIFM is now a third country AIFM.

All FCA standstill directions are intended to apply until 31 March 2022.

The Share Trading and Derivatives Trading Obligations – transitional directions

The FCA has also made two further transitional directions in relation to trading obligations under the onshored Markets in Financial Instruments Regulation (UK MiFIR):

  • Transitional direction for the Share Trading Obligation (STO): firms are now required to trade shares that are subject to the share trading obligation under article 23, UK MiFIR on a regulated market, MTF or SI in the UK, or on an equivalent third country trading venue (no such venue has yet been declared as equivalent by the EU or the UK). EU MiFIR requires shares that are subject to the MiFIR share trading obligation to be traded on an EU trading venue. This could be problematic for UK firms trading with EU counterparties, particularly in relation to dual-traded shares. In order to avoid disruption for a temporary period, the transitional direction has the effect of modifying Article 23 of UK MiFIR to allow UK firms to continue to trade shares on EU trading venues and systematic internalisers without breaching the share trading obligation. However, this only applies if the EU trading venue or systematic internaliser has an appropriate regulatory status from a UK perspective: i.e. it is a Recognised Overseas Investment Exchange, or benefits from the temporary permission regime, or complies with the conditions under the "overseas person exclusion" in the Regulated Activities Order. The FCA has emphasised that only mutual equivalence will ultimately mean that firms will be able to satisfy their STO obligations in both the UK and the EEA.

  • Transitional direction for the Derivatives Trading Obligation (DTO): Article 28 of UK MiFIR now requires firms to trade certain derivatives (broadly certain fixed-to-float interest rate swaps denominated in EUR, USD and GBP and a couple of credit default swap indices) on a regulated market, MTF or OTF in the UK, or on an equivalent third country trading venue (no such venue has yet been declared as equivalent by the EU or the UK). By contrast, EU MiFIR requires such derivatives to be traded on an EU trading venue (and ESMA has declared that it does not believe a change to the current approach is currently warranted). In the absence of a coordinated position adopted by the UK and the EU (FCA says that mutual equivalence is the only long-term solution) some firms – and particularly branches of EU firms in London – will face a conflict of law between the UK and EU positions. In the light of this, the FCA has used its TTP to modify the application of the UK DTO to provide that, where firms that are subject to the UK DTO trade with, or on behalf of, EU clients that are subject to the EU DTO, they will be allowed to transaction or execute those trades on EU venues (without breaching the UK DTO) provided that:

    • firms take reasonable steps to be satisfied that the client does not have arrangements in place to execute the trade on a trading venue to which both the UK and EU have granted equivalence; and

    • the EU trading venue has the necessary regulatory status to enable it to do business in the UK (i.e., as with the STO, that it is a Recognised Overseas Investment Exchange, or benefits from the temporary permission regime, or complies with the conditions under the "overseas person exclusion" in the Regulated Activities Order).

In terms of application, the above transitional relief is available to UK firms, EU firms using the TPR and branches of overseas firms (including EU firms) in the UK (where, in each case, they are trading with, or on behalf of, EU clients that are subject to the EU DTO). Transactions by EEA UCITS or EEA AIFs are currently outside the scope of the UK DTO and therefore do not face the conflict of law. The relief does not apply to trades with non-EU clients, to proprietary trading (e.g. conducted to hedge a firm's own risk exposure) or to trades between two UK branches of EU firms, all of which all remain subject to an obligation to trade/execute on a UK trading venue under the UK DTO.

 Areas where a standstill direction was not appropriate

There were some areas of regulation where it was not considered appropriate for standstill directions under the TTP to apply, for instance as regards MiFID II transaction reporting and EMIR reporting. In respect of these, firms needed to be compliant with the new rules as from 1 January 2021.

UK equivalence determinations

The UK has also made a number of equivalence determinations confirming that the law, regulation and supervision in EEA jurisdictions is deemed equivalent, on an outcomes basis, to that in the UK.  As a result of this, certain entities will be able to apply for certification or recognition with the FCA and, subject to the satisfaction of certain conditions, to provide services in the UK.

The equivalence decisions serve as a necessary precursor to recognition, registration or certification and include determination in relation to:

  • EEA central securities depositories (CSDs) which, subject to the establishment of co-operation arrangements with the relevant EU authorities, can be assessed for recognition by the Bank of England, allowing them to continue to service UK securities.

  • EEA central counterparties (CCPs) which, subject to the establishment of co-operation arrangements with the relevant EU authorities, can be assessed for recognition by the Bank of England under Article 25, UK EMIR, so that UK firms can continue to use them (note that the equivalence decision does not exclude EEA CCPs from the CCP TRR (see above) meaning that they can continue to rely on temporary recognition pending such "full" recognition).

  • EEA benchmark administrators which may be added to the FCA's benchmarks register, allowing UK firms to use their benchmarks.

  • Certain EEA credit rating agencies which may apply for certification with the FCA, allowing UK firms to use credit ratings issued by them.

EU temporary recognition of UK financial market infrastructure

As will be seen from the above, most of the post-Brexit transitional arrangements are unilateral – i.e. there hasn't been a corresponding EU-wide set of mutual measures enabling UK firms to continue providing services into the EU. However, there have been two significant, albeit temporary, exceptions in relation to UK financial market infrastructure following temporary equivalence decisions by the European Commission.

  • The European Securities and Markets Authority (ESMA) announced in September 2020 that the three UK CCPs: ICE Clear Europe Limited, LCH Limited, and LME Clear Limited, will be recognised as third country CCPs for a temporary period until 30 June 2022. As a result, the CCPs will be able to continue to provide their services in the EU until that date.  During this temporary period ESMA will carry out a comprehensive review of their activities and the impact for the EU.   

  • ESMA has also announced that it will recognise Euroclear UK & Ireland Limited, the UK CSD, as a third-country CSD until 30 June 2021. This is intended to allow Euroclear to continue providing certain services in respect of certain Irish, Cypriot, Luxembourg and Dutch securities to allow the relevant issuers enough time to transfer their securities to EU CSDs.
Financial services regulation

UK post-Brexit financial services regime - the Financial Services Bill

WHAT IS THIS? New financial services rules in a number of areas.

WHO DOES THIS APPLY TO? A wide range of authorised and non-authorised firms.

WHEN DOES THIS APPLY? Not known yet.

The UK government issued a Financial Services Bill (FS Bill) in October 2020 which proposes new financial services rules in a number of areas.

As proposed, the new measures covered in the FS Bill include:

  • Investment Firm Prudential Regulation: This sets out, in broad terms, the framework for the new prudential regime for investment firms (see Part 3 below), including powers for the FCA to make the rules implementing such a regime. It also includes measures under which the FCA may impose a requirement for a UK parent undertaking to be established where two or more FCA-authorised investment firms are subsidiaries of a common non-UK parent and the FCA considers that the law and practice in that non-UK jurisdiction is not equivalent to UK rules. It also grants power to the FCA to impose requirements on a parent undertaking if it is not FCA-authorised.

  • Credit Institution Prudential Regulation: As regards the prudential regulation of credit institutions, the FS Bill provides flexibility for future divergence from the EU regime under the Capital Requirements Regulation (CRR). The FS Bill includes powers for HM Treasury (HMT) to revoke certain provisions of CRR, such as deductions from Common Equity Tier 1 capital and certain own funds requirements, where the relevant requirements are to be replaced by a PRA rule or where the provision is no longer considered appropriate. It also requires the PRA to have regard to the relevant standards recommended by the Basel Committee on Banking Supervision. 

  • Overseas Funds Regime: This is a new regime for non-UK collective investment schemes (CIS) (which will include EEA UCITS). It will permit non-UK CIS to market to UK retail investors if they meet certain criteria and the FCA has approved the scheme as "recognised". The criteria include that the non-UK CIS is from a jurisdiction which has been approved by HMT as providing protection to investors equivalent to that which they would receive in a comparable UK CIS and the non-UK CIS is of a type which has been approved by HMT for the purposes of the regime. There will also be additional requirements on the operator of a recognised non-UK CIS including a requirement to provide certain information. The new equivalence-based recognition regime will be available in addition to the existing and continuing provisions allowing overseas schemes to be individually recognised under section 272, FSMA.

  • Variation of permission or cancellation of authorisation: This extends the circumstances in which the FCA may vary or cancel the permission of an FCA-authorised firm to include where the FCA considers that an FCA-authorised person is not actually carrying on a regulated activity. This would require the FCA to follow a specified procedure before doing so, including giving notice in writing to the relevant firm.

  • Amendments to the PRIIPs regulation: These include:

    • A power for the FCA to make rules specifying whether a type of product falls within the definition of packaged retail and insurance-based investment products (PRIIPs). This is intended to address uncertainty as to the scope of PRIIPs (e.g. in the case of corporate bonds) but it is not expected that the definition of PRIIPs will be changed.

    • The requirement to include "performance scenarios and the assumptions made to produce them" in the Key Information Document (KID) is to be replaced by a requirement to include "information on performance". This results from concerns that the current methodology can be misleading.

    • A right for HMT to extend the UCITS exemption (i.e. the exemption under which UCITS may use their UCITS Key Investor Information Document (or KIID) to provide information instead of the PRIIPs KID) until 31 December 2026 at the latest.
  • UK MiFIR third country equivalence regime: The FS Bill amends the third country equivalence provisions in UK MiFIR including, it appears, the ability for HMT to make an equivalence determination in respect of some MiFID services or activities only. It also includes powers for the FCA to impose requirements on third-country firms making use of third-country equivalence provisions, to require certain information to be provided and to prohibit such firms from providing services or carrying on activities in the UK temporarily (or to withdraw the right to do so at all).

  • Overseas trusts and the MLRs: The FS Bill gives power to the government to make regulations in respect of money laundering or terrorist financing in relation to conduct outside the UK by trustees with links to the UK (broadly where the trust property is in the UK, the income of the trust is from the UK, the trustee enters into business or professional relationships with a certain UK persons or one of the trustees is resident in the UK when property becomes subject to the trust). The government's commentary on this provision suggest that it is intended to be used to facilitate the use of trust registration powers.

  • Benchmarks: The FS Bill includes a number of provisions on critical benchmarks including extending the mandatory period for administration of a critical benchmark to ten years and the power to prevent firms from new use of a benchmark which is being discontinued. There are also provisions around the assessment of a critical benchmark's capability to measure the underlying market or economic reality and, where the FCA considers that the benchmark is not representative of the relevant market or economic reality, a power for the FCA to prohibit its use by firms.  There are also powers to ensure the orderly cessation of critical benchmarks which may become particularly relevant in the context of LIBOR (see below).

  • Financial Collateral Arrangements Regulations: The FS Bill contains provisions, including amendments to the Banking Act 2009, which will seek finally put to rest the vires concerns raised in obiter dicta made by Lord Mance at paragraphs [65] to [69] of the Supreme Court judgment in The United States of America v Nolan [2015] UKSC 63 in relation to the Financial Collateral Arrangements (No.2) Regulations 2003 (FCARs). Clause 36 of the Bill provides that the FCARs as originally made, and all amendments made to them, have effect, and are to be treated as having had effect, despite any lack of power to make the regulations and amendments. Therefore, the validity of anything done under or in reliance on the FCARs will be treated as unaffected by any such lack of power.

The FS Bill is currently proceeding through the legislative process. It is likely that some of the details relating to the measures outlined above will change before the Bill is finalised.



Overseas persons framework

WHAT IS THIS?  Call for evidence on the functioning of the UK framework which allows overseas persons limited access to the UK market without authorisation.

WHO DOES THIS APPLY TO?  Everyone; but of particular interest to non-UK entities providing financial services or accessing customers in the UK.


HM Treasury has issued a call for evidence on the UK framework for access by overseas persons.  This is intended to examine how this framework operates in practice and how it could develop in the future. 

The areas of particular interest in the call for evidence include: the exclusions and exemptions for overseas persons in the Regulated Activities Order and the Financial Promotion Order; the position of non-UK trading venues and the recognised overseas investment exchange regime; and equivalence under UK MiFIR – particularly its interaction with the overseas persons exclusion in the Regulated Activities Order.

The call for evidence closes on 11 March 2021. The responses will be used by the Treasury to inform how the existing regulatory framework measures up to the overarching principles that govern the government's approach to cross-border financial services and will therefore feed into longer-term policy and legislative work. There are therefore no specific proposals at this stage.

Prudential regulation

UK Investment Firm Prudential Regulation

WHAT IS THIS?  New prudential regime for most UK investment firms.

WHO DOES THIS APPLY TO?  UK investment firms (other than very large firms which will be subject to the UK's CRD/CRR legislation) and UK AIFMs with MiFID top-up permissions.

WHEN DOES THIS APPLY? The government's target is January 2022.

The UK will not directly implement the EU's Investment Firms Regulation and Directive (IFR/IFD) (see next item below). Instead, the government will introduce its own UK regime for UK investment firms (IFPR), implemented by way of statutory measures and FCA rules.  That said, the IFPR is expected to be heavily based on IFR/IFD but with some potentially quite significant UK-specific changes.

The FCA initiated the process by way of a discussion paper issued in June 2020 which set out at a preliminary and high level, its current approach to the IFPR and also included some questions for feedback.  A first consultation paper was subsequently issued in December 2020 which we discussed in our December briefing. Two further consultation papers will follow.

The IFPR was originally slated to come into force in June 2021 in line with IFR/IFD in the EU.  However, due to concerns about the quantity of new rules coming into force in 2021, this date has now been pushed back to January 2022. Despite the postponement, a great deal of preparation will clearly be required in a relatively short period of time and project planning should be underway.



EU Investment Firms Regulation and Directive: Consultation and final report on RTS/ITS

WHAT IS THIS?  Consultation and final report on draft Regulatory Technical Standards and Implementing Technical Standards for IFR/IFD.

WHO DOES THIS APPLY TO?  EU MiFID investment firms.


In June 2020, the European Banking Authority issued a number of consultation papers on EU IFR/IRD which included a range of draft Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) providing further detail on various requirements under the legislation. It also published in December 2020 its final report on some of those draft RTS.

A high level overview of the main proposals under the drafts is set out below. 

Investment firms as credit institutions and application of CRR

  • Information to be provided for the authorisation of investment firms as credit institutions: This is based on the existing draft RTS for credit institutions under the Capital Requirements Directive (EBA RTS 2017/08) with amendments to reflect the different business models of investment firms (such as the lack of deposit taking).

  • Methodology for calculating the EUR 30 billion threshold requiring authorisation as a credit institution: This provides details of how relevant assets are to be defined and their values calculated, the undertakings to be considered when calculating the threshold and how to measure the assets of branches of third country groups.

  • Criteria for subjecting certain investment firms to the CRR: This sets out the circumstances in which the activities of an investment firm should be considered to be of such a scale that failure or distress of the firm could lead to systemic risk and therefore should be subject to the requirements in CRR. These include: total gross notional value of non-centrally cleared OTC derivatives of EUR 50 billion; total value of financial instruments underwritten and/or placed on a firm commitment basis of EUR 5 billion; total granted credits or loans to investors to carry out transactions of EUR 5 billion and/or total outstanding debt securities of EUR 5 billion.

Prudential requirements for investment firms

  • Calculation of the fixed overheads requirement and the notion of a material change: This provides details of how fixed overheads should be calculated, including the expenses to be included and the items which may be deducted. It also provides the criteria for deciding when there has been a material change permitting the competent authority to adjust the amount of capital required.  This is broadly either: (i) where there has been an increase or decrease in the firm's business activity resulting in a change of 30% or greater in the firm's projected fixed overheads; or (ii) where there has been an increase or decrease in the firm's business activity resulting in changes to the firm's own funds requirements based on projected fixed overheads of EUR 2 million or more.

  • Methods for measuring the K-factors: This includes several provisions which will be of particular relevance to private equity firms and corporate finance advisers.

    • There is detail on how assets under management (AUM) should be calculated and a statement that AUM does not include assets in respect of which certain types of corporate finance advice is provided.

    • There is confirmation that firms providing ongoing non-discretionary advice to portfolio managers must include the assets advised on in their AUM.

    • There is clarification on the circumstances in which delegates can exclude amounts from their calculations.

    • Financial instruments should be calculated at fair value with financial instruments with a negative fair value being included at absolute value.

    • Firms are also required to include amounts related to the activities of their tied agents for the purposes of calculating AUM, client money held, assets safeguarded and administered and client orders handled (COH).

    • There are also a number of provisions around the calculation of COH including one which clarifies that firms are not required to include orders in respect of which they are bringing together two or more investors to bring about a transaction between those investors (such as in the case of corporate finance or private equity transactions).
  • Segregated accounts: The RTS set out the requirements that apply for an account to be considered a segregated account.  These largely reflect current practice, such as having records and accounts which enable assets held for one client to be distinguished from assets held for other clients and for the firm.

  • Adjustments to K-DTF coefficients: The draft RTS sets out details of the adjustments that may be made to the coefficients for calculating daily trading flow in stressed market conditions.

  • Calculation of total margin for the calculation of K-CMG: The draft RTS provide details of how total margin required is calculated for the purposes of the clearing margin given calculation (K-CMG).   They also provide information on what firms should do where they use the clearing services of multiple clearing members and provisions to ensure that the firm is not seeking to make use of K-CMG, instead of the alternative calculation of net position risk (K-NPR), to engage in regulatory arbitrage.

  • Prudential consolidation of an investment firm group: The draft RTS includes details of the indicators that there is a relationship of significant influence or that entities are considered to be under single management.  It also provides rules on the prudential consolidation of own funds requirements.


  • Instruments for variable remuneration: The draft RTS include the conditions that different classes of instruments must meet in order to be considered to reflect adequately the credit quality of an investment firm as a going concern for the purposes of variable remuneration.  It also sets out the conditions that must be met for firms wishing to make use of alternative arrangements for the pay out of variable remuneration.

  • Criteria to identify material risk takers: The draft RTS set out the criteria to be used to identify the categories of staff whose professional activities have a material impact on an investment firm's risk profile (MRT) for the purposes of considering whether the remuneration requirements apply.  They set out both qualitative and quantitative criteria, with a member of staff being considered to be a MRT if they meet either the qualitative or the quantitative criteria (most of which are applied on an individual and a consolidated basis).  The qualitative criteria are largely based on the role of the member of staff, for example, whether they are a member of senior management or have certain managerial (or managerial-type) responsibilities, such as performing a control function, or the authority to approve or veto new products.  As regards quantitative criteria, a staff member will be considered a MRT if, among other things, they have been awarded total remuneration of over EUR 750,000 for the preceding financial year (or EUR 500,000 if, broadly, this is equal to or greater than the average remuneration of the management body or senior management).  However, there is an exemption where the staff member is considered to have no material impact on the risk profile of the investment firm or the assets they manage (subject in certain cases to the prior approval of the competent authority – which will only be given in exceptional circumstances if total remuneration for the preceding financial year was EUR 1 million or more).

Reporting requirements

The consultation also includes draft ITS on reporting requirements for firms as well as a number of draft reporting templates.



UK prudential regime - Capital Requirements Directive V

WHAT IS THIS?  Changes to UK prudential regime to reflect the Capital Requirements Directive V.

WHO DOES THIS APPLY TO?  Firms subject to CRR/Capital Requirements Directive.


As the fifth Capital Requirements Directive (CRD V) took effect before the end of the Brexit Transition Period, it was implemented in UK law through legislation (The Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020) and through changes to the PRA rules.

There had been some concern about the interaction between the requirements to reflect CRD V and the IFPR as some of those new requirements will come into force before UK investment firms are subject to the new regime under IFPR and therefore, without more, some of those firms would need to comply with the new CRD V requirements for a short period before moving to IFPR.  HM Treasury recognised this concern and UK investment firms which will be subject to IFPR are not required to comply with the new CRD V requirements.

The legislative changes included:

  • A framework for the approval of financial holding companies by the PRA and the granting of certain supervisory and enforcement tools to the PRA, such as the ability for the PRA to make rules in respect of financial holding companies and the power to impose penalties. The PRA also issued a very short consultation in December 2020 (which closed on 16 December) on proposed rules on which entities within a UK banking consolidation group are responsible for ensuring that consolidated prudential requirements are met until a financial holding company is approved by the PRA.

  • A power to the PRA to remove directors of institutions and holding companies where, among other things, the member is not of sufficiently good repute, does not have sufficient knowledge, skills or experience or is no longer able to commit sufficient time to their duties.

  • Application of the Other Systemically Important Institutions (O-SII) buffer requiring systemically important institutions to hold additional capital to address their higher risks and a power to the PRA to set capital requirements through the Systemic Risk Buffer.

Certain provisions in CRD V in respect of gender equality were not implemented on the basis that these were sufficiently covered by existing legislation.

The changes to the PRA rules included:

  • Changes to clarify how the PRA’s supervisory review and evaluation process (SREP) process takes account of proportionality and money laundering or terrorist financing.

  • Amendments to the setting of the PRA buffer for subsidiaries of UK consolidation groups and the removal of duplicative reporting.

  • Changes to remuneration requirements, including the basis on which remuneration requirements are disapplied to firms and individuals on proportionality grounds and changes to deferral periods, eligible instruments and currency thresholds.

  • New governance requirements to address operational risk from outsourcing; the monitoring of loans to board members; verification of fitness and propriety where supervisors have reasonable grounds to suspect either money laundering or terrorist financing has been committed or there is an increased risk of money laundering or terrorist financing; and independence of mind.

  • Revised reporting requirements for third country branches.



UK prudential regime - simpler regime for smaller UK banks and building societies

WHAT IS THIS?  Suggested simpler prudential regime for smaller UK banks and building societies.

WHO DOES THIS APPLY TO?  Small UK banks and building societies.

WHEN DOES THIS APPLY? Not yet known but possible discussion paper in Spring 2021.

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer at the PRA, gave a speech in November 2020 on simplifying the prudential regime for small UK banks and building societies.  He said that current prudential requirements (which reflect the CRD/CRR regime and which have been upgraded to include CRD V requirements – see above) may be disproportionately more burdensome for small firms and exceed the associated social benefit. 

Therefore, he thought that the PRA could make use of its greater freedom, post-Brexit, to move towards a graduated regime in which firms can migrate from a very simple regime, up through a series of steps towards the full Basel regime as they become larger and/or involved in more complex activities.  However, it was emphasised that this was not intended to result in a weaker prudential regime for small firms.

It was suggested that a bank or building society could be considered "small" for these purposes if its total assets fall below a certain threshold and it is not systemically important, internationally active, involved in trading activities or approved to run an internal model for capital requirements.  Another criterion could be that it is capable of exiting the market in an orderly way.

As regards the prudential regime itself, two main options for simplification were mooted: replacing existing requirements with simpler versions and/or narrowing the set of applicable requirements.

The PRA may issue a discussion paper in Spring 2021.


UK Taskforce on Climate-related Financial Disclosures

WHAT IS THIS?  Outline of the UK's approach to mandatory climate-related disclosures.

WHO DOES THIS APPLY TO? UK-authorised asset managers (AIFMs & UCITS management companies).

WHEN DOES THIS APPLY? In 2022 for large asset managers and large occupational pension schemes; 2023 for other asset managers; and 2024/2025 for other occupational pension schemes.

In November 2020, the UK's Joint Government-Regulator Taskforce on Climate-related Financial Disclosures (TCFD) published its Interim Report accompanied by A Roadmap towards mandatory climate-related disclosures.

These outline at a high level the UK's approach to making TCFD-aligned, climate-related disclosures mandatory across the UK economy by 2025 at the latest.

As well as listed and large private companies, the proposals would also apply to a number of financial services firms including UK MiFID investment firms which provide portfolio management services, UK AIFMs (including small AIFMs with managing permissions), UK UCITS management companies and UK UCITS funds without an external management company. UK occupational pension schemes will also be caught.

Further details can be found in our briefing.



EU Sustainable Finance measures

WHAT IS THIS?  New rules requiring firms to make disclosures in respect of sustainability.

WHO DOES THIS APPLY TO?  EU portfolio managers, investment advisers and AIFMs and UCITS management companies and non-EU firms marketing or distributing financial products in the EU.

WHEN DOES THIS APPLY? The first set of requirements apply from 10 March 2021.

In our 2020 New Year briefing, we covered three important forthcoming areas of EU sustainability legislation: the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR); the integration of sustainability risks and factors in existing EU legislation and the framework to facilitate sustainable investment (Taxonomy Regulation).

Since then, it has been confirmed that the UK will not implement those pieces of legislation directly but will instead put in place its own sustainable finance regime. It has already set the ball rolling with respect to climate-rated disclosures (see Part 4 above) and has confirmed that it will implement a UK-specific version of the EU's taxonomy. We also expect that the UK will implement a more principles-based version of the SFDR but an announcement is said to be "imminent" on that. In addition, EU sustainability legislation will continue to be relevant for UK and international firms marketing or distributing financial products in the EU.

EU sustainable finance disclosure regulation

The majority of the provisions in the EU SFDR will apply from 10 March 2021.

Broadly, EU SFDR requires disclosures on the integration of so-called "sustainability risks" by firms in their investment decision-making and an assessment of the likely impact of such risks on investment returns. Firms will also have to say whether they consider the "principal adverse impacts of investment decisions on sustainability" and, if they do, make disclosures in relation to those impacts. Products which promote environmental and/or social characteristics, and those that have sustainable investment as their objective, are subject to further requirements.  Disclosures are required to be made on the firm's website as well as at the pre-contractual stage and in periodic reports.

EU SFDR applies to portfolio managers, AIFMs, UCITS management companies, EuVECA managers and EuSEF managers as well as investment advisers.  Although it principally applies to EU firms, some obligations in EU SFDR are also applicable to non-EU firms marketing or distributing financial products in the EU. UK and international firms will therefore be caught.

A consultation on the draft technical standards was published in April 2020 but was widely criticised and is expected to change significantly before being finalised in 2021. As a result of COVID-19 and in order to allow firms time to prepare, the date on which the implementing measures will come into force has been delayed until (probably) January 2022. This has inevitably created some difficulties for firms which are now faced with having to comply with the high level provisions in EU SFDR but without having the details of the final technical standards which will specify how they should be doing this, for instance by way of more granular details of the presentation and content of the information to be disclosed.

It has also become clear that there remain a number of areas of uncertainty which may not be clarified in implementing measures in any event.  These include the extent of the application of EU SFDR to non-EU firms marketing or distributing financial products in the EU, the application of SFDR to legacy products and the circumstances in which a financial product is considered to be promoting environmental or social characteristics.

Integration of sustainability risks and factors - MIFID II, AIFMD and UCITS directive

The European Commission has now issued draft delegated regulations on the integration of sustainability risks and factors.  These are in the form of amendments to certain existing EU legislation including the Alternative Investment Fund Managers Directive (AIFMD) Delegated Regulation, the MiFID II Delegated Regulation and Delegated Directive and the UCITS Delegated Directive. 

The draft delegated regulations require AIFMs, UCITS management companies and MiFID investment firms (including portfolio managers and adviser/arrangers) to integrate sustainability risks and factors into their policies and procedures.  This includes by taking sustainability into account when complying with organisational requirements, including (where relevant) risk management and conflicts of interest requirements.  MiFID investment firms will also need to factor sustainability factors and preferences into their product governance processes.  In addition, AIFMs and UCITS management companies will need consider sustainability risks when selecting and monitoring investments and when carrying out investment decisions.

It is not yet clear when these changes, if adopted, would apply to EU-regulated firms – or whether the UK will adopt them – but (since drafts suggest that the changes will be effective 12 months after publication in the Official Journal) it is unlikely to be before the end of 2021.

EU taxonomy regulation

The Taxonomy Regulation introduces an EU-wide taxonomy or classification system for determining whether and to what extent an economic activity can be considered environmentally sustainable.   Environmental sustainability is one element of sustainability under SFDR.  Parts of the Taxonomy Regulation take effect as from 1 January 2022 with the remainder coming into effect as from 1 January 2023

The Taxonomy Regulation sets out six environmental objectives: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems. In order to be "taxonomy compliant" (meaning the relevant activity is classified as environmentally sustainable according to the EU's criteria and is also compliant with basic social standards) an activity must contribute substantially to at least one of these and do no significant harm to any of the others. The activity must also comply with certain social safeguards.

A draft Commission Delegated Regulation has now been issued setting out the (very granular) technical screening criteria for determining whether an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation (which are the first two of the environmental objectives in the Taxonomy Regulation and which will come into effect first, on 1 January 2022) and for determining whether that economic activity causes no significant harm to any of the other environmental objectives in the Taxonomy Regulation.

In addition, ESMA issued a consultation paper on its draft advice to the European Commission under Article 8 of the Taxonomy Regulation.  This addresses the obligation for undertakings which fall under the Non-Financial Reporting Directive (and which are therefore required to disclose how/to what extent their activities are associated with environmentally sustainable economic activities) to publish information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. Broadly, the Non-Financial Reporting Directive applies to "large undertakings" (as defined by the EU Accounting Directive) which are "public-interest entities" (as defined in the same Directive), with more than 500 employees. There are, however, proposals to expand the scope to cover more companies and in some EU member states the Directive has already been applied more widely.

The draft advice covers the content, methodology and presentation of the three key performance indicators (turnover, capital expenditure and operating expenditure) to be used by non-financial undertakings under the Non-Financial Reporting Directive when making the disclosures required under Article 8.  It also includes advice on the content, methodology and presentation of those three key performance indicators for asset managers.  In both cases, it recommends that the disclosures should be provided in a standardised table.  The final advice is to be provided by the end of February 2021.

Investment funds

Review of the EU Alternative Investment Fund Managers Directive

WHAT IS THIS?  Public consultation on potential amendments to the EU AIFMD.

WHO DOES THIS APPLY TO?  EU AIFMs and EU AIF depositories.

WHEN DOES THIS APPLY?  Not yet known.

In June 2020 the European Commission issued a report to the European Parliament and the Council on the scope and application of the AIFMD which concluded that there were a number of areas where the legal framework could be improved.  In response to this, ESMA wrote a 25-page letter to the European Commission on the review of AIFMD with a wide-ranging set of comments highlighting areas where ESMA believed improvements could be made. 

The European Commission has now issued a public consultation on the AIFMD review with a view to improving the functioning of the EU AIF market.  It is in the form of an online questionnaire and therefore does not follow the more orthodox consultative approach of seeking responses to a set of express, reasoned policy proposals; having said that, some of the policy proposals are arguably implicit given the nature of the questions posited; and a number of the issues covered by the questionnaire reflect the points raised by ESMA in its letter. While the direct application of the proposals is to EU AIFMs and EU depositaries, they will inevitably have wider impact, e.g. to those accessing EU investors under the national private placement regimes and to firms acting as delegates of EU AIFMs. It is too soon to say whether any ultimate changes will be mirrored in the UK.  The consultation period closes on 29 January 2021.

We have set out the main areas covered by the consultation below.

Authorisation and scope

This includes the scope of the AIFM licence and whether any other functions should be added.  There are several questions around the regulation of sub-threshold AIFMs including whether the lack of a passport impedes capital raising.   It also includes concerns about whether there is a level playing field between the AIFMD and the regulation of other entities providing similar services such as MiFID firms and UCITS management companies, for example, in respect of capital requirements.

Investor protection

This includes questions on investor access particularly in respect of the differences between retail and professional clients.  In its letter, ESMA called for clarification of the definition of professional investors under AIFMD and questions include whether AIFMD should cross-refer to the client classification sections in MiFID II and, if not, how investor classification could otherwise be improved.  The consultation also asks how AIFM access to retail investors could be improved and whether there is a need for an AIF that could be marketed to retail investors under a passport. 

As regards depositaries, there are several questions around tri-party collateral management services and, in particular,  whether any services of tri-party collateral managers should be regulated under the AIFMD.  Questions around the value of introducing a depositary passport are also included.

The consultation also considers mandatory disclosures and whether these could be amended, including by reference to the type of investor.  The consultation appears to be considering both fewer and additional disclosures.

Questions on conflicts of interest and valuation are also included.

International issues

The consultation includes a large number of questions on delegation. This was also a key focus of ESMA's letter. In particular, the questions include whether the current delegation rules are sufficient to prevent "letter-box entities" and to ensure effective risk management. They also ask whether delegation rules should include quantitative criteria, a list of core or critical functions that must always be performed internally and cannot be delegated and/or any other requirements. This reflects the suggestions put forward by ESMA for clearer legal drafting and to ensure that AIFMs maintain sufficient substance in the EU. 

Financial stability

The consultation asks for views on a number of areas intended to permit supervisors to recognise and mitigate systemic risks.

These include: improving supervisory reporting requirements; harmonising the availability of liquidity risk management tools; further co-operation of national competent authorities when activating liquidity risk management tools; clarification of grounds for supervisory intervention; defining inherently liquid/illiquid assets and/or granting strong powers to ESMA in market stress situations.

The questions around reporting requirements include: reporting on loan origination; reporting on links between AIFMs and other financial entities; classification of AIFs, and more detailed portfolio reporting requirements such as those in respect of liquidity, leverage, hedging, margin and sustainability.

The consultation also asks whether the requirements for loan originating AIFs should be harmonised at EU level which could include restricting loan origination to closed-ended AIFs, imposing additional organisational requirements, imposing diversification or concentration requirements and/or permitting marketing only to professional investors. There are other questions relating to whether additional data should be captured in relation to an AIF's exposure to securitisations and leveraged loans.

The rules on investing in private companies are also being consulted on, including the requirements to notify information on the financing of the acquisition of control over a non-listed company and the rules on asset stripping.

The consultation asks a number of questions on sustainability including whether AIFMs should be required to quantify sustainability risks and whether potential principal adverse sustainability impacts should be taken into account as part of an AIFM's investment decision-making. It also asks whether adverse impacts on sustainability factors should be integrated into the quantification of sustainability risks and at what level (for example, at AIFM or financial product level).



EU Cross-border distribution of funds

WHAT IS THIS?  New rules on the marketing of funds.

WHO DOES THIS APPLY TO?  EU AIFMs, UCITS management companies, EuSEF managers and EuVECA managers.

WHEN DOES THIS APPLY?  Largely from 2 August 2021.

The Regulation on cross-border fund distribution (CBD Regulation) applies as from 2 August 2021 and EU member states must also implement the Directive on the cross-border marketing of funds (CBD Directive) as from that date. 

The CBD Directive introduces a new definition of ‘pre-marketing’ (broadly information or communication relating to investment strategies or investment in order to test investor interest in a fund which is not yet established, or is established but is not yet notified for marketing) and requires an AIFM to notify details of the pre-marketing to its home member state regulator.

In addition, new requirements will apply when an EU AIFM, UCITS management company, EuSEF or EuVECA manager is marketing units or shares in an AIF to retail investors.  These include putting in place certain ‘facilities’ in the relevant member state to perform certain defined tasks and, where required by the relevant regulator, prior notification of the marketing communications which the AIFM intends to use.

The UK government has decided that, post-Brexit, neither the CBD Regulation nor the CBD Directive will apply in the UK.  However, UK and other non-EU fund managers seeking to market their funds into the EU may be affected by amendments that individual EU member states may decide to make to their national private placement regimes following the changes introduced by the CBD Regulation and Directive.

More broadly, it is possible that the EU or individual member states may seek to increase the duties to which non-EU AIFMs marketing to investors in the EU or the relevant member state are subject.  For example, they may require such non-EU AIFMs to treat the investors as their own clients and require them to comply with investor protection rules, such as those under MiFID and/or other more specific contents requirements such as any marketing communications being clear, fair and not misleading.

We discussed the CBD Regulation and the CBD Directive in more detail in our briefing in May 2019 and in our 2020 New Year Briefing.



ESMA consultation on guidelines for funds' marketing communications

WHAT IS THIS?  Consultation on guidelines for funds' marketing communications.

WHO DOES THIS APPLY TO?  EU AIFMs, UCITS management companies, EuSEF managers and EuVECA managers.  Also fund distributors.

WHEN DOES THIS APPLY?  2 August 2021

In November 2020, ESMA issued a consultation paper on its draft guidelines for funds' marketing communications.  These supplement the requirements in the CBD Regulation regarding marketing communications (see previous item above).

The draft guidelines include the following:

  • Identification of marketing communications: Marketing communications should include sufficient information to make it clear that the communication has a purely marketing purpose, is not a contractually binding document or an information document required by any legislative provision, and is not sufficient on which to take an investment decision. A marketing communication should include a prominent disclosure of the terms “marketing communication” and a disclaimer.

  • Description of risks and rewards: Both risks and rewards should be described equally prominently and in the same font, size and position. Information on risks should not be disclosed in footnotes or in small characters within the main body of the communication.

  • Fair, clear and not misleading information: The level of information and its presentation may be adapted to the type of investor (i.e. retail or professional).  The information should also be consistent with the other legal and regulatory documents of the relevant fund.  Any description of the features of the investment should be kept up to date and contain sufficient information to enable the key elements of those features to be understood. 

  • Information on costs: Information on the costs associated with purchasing units or shares should allow investors to understand the overall impact of costs on the amount of their investment and on the expected returns.

  • Information on past performance and expected future performance: Information on past performance should not be the main information of the marketing communication and any change that affected significantly the past performance of the fund should be prominently disclosed. Expected future performance should be based on reasonable assumptions supported by objective data and disclosed on a time horizon which is consistent with the recommended investment horizon of the fund. Certain disclaimers may also be required. 

  • Information on sustainability-related aspects: Information on the sustainability-related aspects of the fund should not be disproportionate to its relevance in the fund's strategy and marketing communications should indicate that any decision to invest in the fund should take into account all the characteristics or objectives of the fund.

The draft guidelines also include some examples of what ESMA proposes should and should not be considered a marketing communication for these purposes.  Examples of marketing communications include communications describing the characteristics of a fund provided to distributors which are then sent to investors (regardless of whether that was the intention) and advertising messages, irrespective of their medium.  Examples of communications which are not marketing communications include legal and regulatory documents of a fund, corporate communications describing market developments which do not refer (explicitly or implicitly) to a specific fund and/or short online messages linking to marketing communications but which do not themselves contain any information on a specific fund.

The consultation closes on 8 February 2021 and the final guidelines are expected to be issued by 2 August 2021



UK ban on bearer units in collective investment schemes

WHAT IS THIS?  Prohibition on the issuance, creation and/or cancellation of bearer units in a collective investment scheme.

WHO DOES THIS APPLY TO?  UK operators of collective investment schemes.


The issuance, creation and/or cancellation of bearer units in a collective investment scheme from 1 January 2021 is now prohibited under FSMA following the entry into force of the Bearer Certificates (Collective Investment Schemes) Regulations 2020

Open-ended investment companies (or OEICs) are also subject to a similar prohibition under an amendment to the Open-Ended Investment Companies Regulations 2001.

Bearer units for these purposes means units where the title is evidenced by a certificate or any other documentary evidence of title transferable by delivery and not through a register entry.

The Regulations also include transitional provisions which allow for the conversion and cancellation of existing bearer shares and bearer units which were held at the time the regulations came into force up until 1 January 2022.



ESMA Guidelines on performance fees in funds

WHAT IS THIS?  Guidelines on the calculation and disclosure of performance fees.

WHO DOES THIS APPLY TO?  UCITS management companies and AIFMs of certain types of AIFs marketed to EU retail investors.


ESMA issued its final report on guidelines on performance fees. These apply to UCITS management companies and AIFMs of AIFs marketed to EU retail investors. However, they do not apply to closed-ended AIFs, EuVECAs, EuSEFs, private equity AIFs or real estate AIFs.

At a high-level, the guidelines are as follows:

  • Guideline 1 - Performance fee calculation method: The performance fee calculation method should include the reference indicator such as an index; the frequency at which the fee becomes payable to the manager and the date at which the fee is credited to the manager; the performance reference period; the performance fee rate; the performance fee methodology defining the method for the calculation of the performance fees, and the computation frequency which should coincide with the calculation frequency of the NAV.  The calculation method should ensure that performance fees are proportionate to the actual investment performance of the fund.  UCITS management companies and AIFMs should be able to demonstrate how the performance fee model constitutes a reasonable incentive for them and is aligned with investors’ interests.

  • Guideline 2 – Consistency between the performance fee model and the fund’s investment objectives, strategy and policy: UCITS management companies and AIFMs should implement and maintain a process to demonstrate and periodically review that the performance fee model is consistent with the fund’s investment objectives, strategy and policy.

  • Guideline 3 - Frequency for the crystallisation of the performance fee: The frequency for the crystallisation and payment of the performance fee should ensure alignment of interests between the UCITS management company or AIFM and the shareholders and fair treatment among investors. In general, the crystallisation frequency should not be more than once a year.

  • Guideline 4 - Negative performance (loss) recovery: Performance fees should only be payable in cases of positive performance and the performance fee model should ensure that the manager is not incentivised to take excessive risks and that cumulative gains are duly offset by cumulative losses.

  • Guideline 5 - Disclosure of the performance fee model: Investors should be adequately informed about performance fees and their potential impact on investment return. This may include disclosure in the prospectus, any ex-ante information documents and marketing material, as well as annual and half-yearly reports and any other ex-post information.

The guidelines applied from 5 January 2021. Competent authorities should incorporate the guidelines into national frameworks or should notify ESMA if they do not intend to do so.

UCITS management companies and AIFMs of affected funds which are already in existence before 5 January 2021 should apply the guidelines by the beginning of the financial year starting at least six months after that date.


EU Capital Markets Recovery Package: "Quick fix" amendments to MiFID II

WHAT IS THIS?  Proposed amendments to MiFID II to assist recovery from the COVID-19 pandemic.

WHO DOES THIS APPLY TO?  EU MiFID investment firms.

WHEN DOES THIS APPLY? Not yet known.

In July 2020, the European Commission adopted a legislative proposal amending MiFID II and the MiFID II Delegated Directive addressing information and reporting requirements, product governance, commodity derivative position limits and the research regime for small and mid-cap issuers “to help the recovery from the COVID-19 pandemic”. This was part of a wider Capital Markets Recovery Package.

It is unclear whether and to what extent the UK government will make corresponding amendments to the “onshored” UK MiFID regime.

We provided more details on this in our briefing. Since then, the Capital Markets Recovery Package, including the MiFID "quick fix" measures, was agreed by the Council on 16 December 2020 and, once approved by the European Parliament in plenary session, will proceed to publication in the Official Journal. EU member states will then have 12 months in which to transpose the changes into their national laws.


Senior Managers and Certification Regime

WHAT IS THIS?  Extension to the implementation deadlines for the Certification Regime and Conduct Rules.

WHO DOES THIS APPLY TO?  Solo regulated firms.

WHEN DOES THIS APPLY? Now, with the new deadline being 31 March 2021.

The implementation deadlines for elements of the Certification Regime and Conduct Rules have been extended to 31 March 2021.  This is in response to upheaval caused by COVID-19 and is set out in FCA Policy Statement 20/12.

This follows HMT's extension of the deadline by which firms must have first assessed the fitness and propriety of Certified Staff to 31 March 2021.

As a result the following deadlines were extended from 9 December 2020 to 31 March 2021:

  • The date the Conduct Rules come into force and the deadline for training staff in the Conduct Rules. The extension does not apply to Senior Managers, Certification Staff or directors.

  • The deadline for assessing Certified Persons as fit and proper (which reflects HMT's extension) and therefore the deadline for issuing certificates – although the FCA encourages firms that are able to certify their staff before 31 March 2021 to do so and also not to wait until the deadline to remove staff from a certified role if they are not fit and proper.

  • The deadline for reporting Directory Person data.

The extensions apply to solo regulated firms.  The deadlines for Conduct Rule breach reporting are not affected.



FCA guidance on LIBOR transition

WHAT IS THIS?  FCA guidance on how firms should manage transitioning away from LIBOR.

WHO DOES THIS APPLY TO?  FCA authorised firms whose financial products or other financial arrangements are referenced to LIBOR – including asset managers.


The FCA is continuing to provide guidance on the transition from the interest rate benchmark LIBOR (the London Inter-Bank Offered Rate). In particular, it emphasises that firms cannot rely on LIBOR being published after the end of 2021 and should therefore continue to take action accordingly. The FCA provides guidance on its webpage on LIBOR transition.

The FCA also sent a Dear CEO letter to asset management firms in February 2020 setting out how they should be preparing now for the end of LIBOR.  This includes taking all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or harm to consumers and supporting industry initiatives to ensure a smooth transition.

Measures that the FCA expects firms to be taking may include:

  • Considering whether products and services will meet the needs of clients and perform in the manner expected after 2021.

  • Ensuring that operational processes are prepared for the transition to alternative rates and take appropriate steps to protect clients, the firm and the markets.

  • If there are material exposures to or dependencies on LIBOR, establishing a proportionate transition plan agreed by the governing body (or if there are considered to be few, or no, LIBOR exposures or dependencies, ensuring that this view is tested periodically).

  • Statements of Responsibility for senior managers must include any responsibilities arising from LIBOR transition plans.

  • Potentially developing and offering new products that reference alternative rates and amending existing products to include fall-back provisions or to replace LIBOR with alternative rates.

  • Where investing on clients’ behalf in instruments which reference LIBOR, investing in instruments that reference alternative rates or have fallback provisions. Also engaging with issuers and counterparties to convert outstanding instruments to alternative rates or to add fall-back provisions.

  • Mitigating and managing risks and any conflicts of interest arising from LIBOR transition.

Finally, the FCA recognises that there may be issues with ‘tough legacy’ LIBOR contracts (i.e. contracts that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended).  The FCA has said that, as LIBOR has been designated a critical benchmark, it may seek to use its powers under the UK amendments to the Benchmarks Regulation in the FS Bill to manage and direct an orderly wind-down of critical benchmarks by enabling the continued publication of LIBOR, potentially by using a different and more robust methodology (see Part 2 above).

The FCA intends to engage with the market with a view to publishing a statement of policy on how it might exercise this power.  In respect of the EU, the European Commission has also published proposals under the Benchmarks Regulation (see Part 10 below).



FCA letter to Chairs of Remuneration Committees

WHAT IS THIS?  Information on the how the FCA intends to assess firms' remuneration policies and practices in 2020/21.

WHO DOES THIS APPLY TO?  FCA authorised firms.


The FCA sent a letter to Chairs of Remuneration Committees setting out its findings from the 2019/20 remuneration round and how it plans to assess policies and practices in 2020/21. The letter also warned the Chairs of the risk of firms deprioritising their focus on culture as a result of dealing with COVID-19.

The FCA’s expectations of firms for 2020/21 include:

  • Ensuring that remuneration policies and practices remain aligned with the firm’s long-term business plans.

  • Considering how the firm’s remuneration policies reinforce healthy cultures and promote equality of opportunity.

  • Ensuring that diversity and inclusion is embedded in the firm’s approach to rewarding individuals and avoids unconscious bias.

  • Making consistent and timely judgements on any adjustments for performance and conduct issues,

  • Considering gender and BAME pay gap reports and addressing any inequalities.



Dear CEO letters on client money and client assets

WHAT IS THIS?  Dear CEO letters for firms holding client money and/or client assets.

WHO DOES THIS APPLY TO?  FCA authorised firms holding client money and/or client assets.


The FCA has sent two Dear CEO letters to firms in respect of client money and client assets.

The first letter, which related to client money, was sent in August 2020 and was addressed to firms providing non-discretionary investment services.  Where such firms have increased client money balances, the FCA said that firms should discuss with clients whether such balances should be returned to them or be held for further investment in the short term.  This is particularly likely to be relevant where client portfolios have been rebalanced to mitigate volatility as a result of COVID-19.

The FCA expects firms to return any client money balances which are unlikely to be reinvested in the short term where it is in the clients’ better interests to do so.

The second letter was sent in September 2020 to firms and related to client assets arrangements.

It stated that that the FCA expected firms’ senior management to have appropriate oversight over client assets arrangements and that the letter should be discussed with the board (or equivalent).   The FCA also said that if it contacted a firm in the future it would expect the firm to be able to explain its actions in response to the letter.

The letter included the following observations:

  • Firms should have adequate governance to identify material risks to client assets arrangements and ensure monitoring of those arrangements, including appropriate oversight by the senior manager with responsibility for client assets and monitoring and testing by Compliance and/or Internal Audit where relevant.

  • Firms should carry out periodic due diligence reviews on third parties holding client money and/or custody assets. In particular, firms holding client money and/or custody assets with EEA entities should ensure client assets will not be subject to increased risk as a result of the end of the Brexit transition period and manage the risks accordingly. Firms should also ensure that safeguards and protections for client assets, especially in the event of insolvency, remain effective from the end of the Brexit transition period.

  • Any tripartite arrangements must be robust and clear on the parties' respective responsibilities.

  • Firms should have oversight arrangements in place to manage the risks where operational functions are outsourced to third party administrators and to ensure their processes comply with the relevant rules.

  • Where firms act as principal to appointed representatives, they should have adequate systems and controls to monitor the activities carried out. Any client money from an appointed representative’s activity must be received directly into a client bank account of the firm and not held in the name of the appointed representative.

  • Firms must have accurate records and accounts and conduct frequent reconciliations in a timely manner. They should also review any balances held with intermediate brokers in client transaction accounts to make sure no excess client money is held in them.

  • Firms are also reminded that client money bank and transaction accounts must have an acknowledgement letter in line with the relevant requirements and firms should maintain adequate arrangements to ensure the completeness and accuracy of the acknowledgement letters, conducting reviews where necessary.

  • Firms must maintain a complete and up-to-date CASS Resolution Pack.
Financial crime and market abuse

The UK Money Laundering Regulations and express trusts

WHAT IS THIS?  Regulations on trust registration under the UK Money Laundering Regulations including the exclusion of certain types of express trust from the registration requirement and a registration requirement for certain non-UK express trusts.

WHO DOES THIS APPLY TO?  Trustees of relevant UK and certain non-UK express trusts.


The Money Laundering and Terrorist Financing (Amendment)(EU Exit) Regulations 2020 largely came into effect on 6 October 2020 and made amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) to address trust registration issues.

Under the Fifth Money Laundering Directive, which the UK implemented through the MLRs, the default position is that all UK express trusts are required to be registered, regardless of whether they generate tax consequences.  In addition, the UK government decided that any non-UK trust which is an express trust will also be required to register if the trustees acquire an interest in land in the UK or enter into a business relationship with a relevant person, where at least one of those trustees is resident in the UK and the trust is not an EEA registered trust.

However, as (following consultation) the default position was thought to be excessive in some cases, certain types of express trust have now been excluded from the registration requirement applying in respect of UK express trusts and in-scope non-UK trusts.

The excluded trusts include:

  • Financial markets infrastructure: 

    • Trusts created under, or for the purpose of default arrangements of a designated system under the UK Settlement Finality Regulations or of the default rules of a recognised body (i.e. a recognised investment exchange, recognised clearing house or a recognised central securities depositary).

    • Trusts relating to the creation of a beneficial interest in securities maintained on the CREST Register.

    • Certain client money and assets trusts created by or for a segregating entity (i) for the purpose of protecting sums or assets belong to the segregating entity’s clients or (ii) for the purpose of complying with a legal obligation to safeguard and segregate sums or assets belonging to a segregating entity’s clients or to keep separate client records and accounts.
  • Custodians: trusts created for the holding of sums or assets where the trustee is carrying on the regulated activity of safeguarding and administering investments.

  • Client assets: certain incidental trusts for the purpose of holding client money, securities or other assets.

  • Capital markets: certain incidental trusts created to enable or facilitate certain capital markets activities such as lending and trading.  

  • Commercial transactions: certain incidental trusts to enable or facilitate a transaction effected for genuine commercial reasons or to protect or enforce rights relating to such a transaction.

  • UK registered pension schemes: trusts holding sums or assets of a pension scheme which is a registered scheme for the purposes of Part 4 of the Finance Act 2004.

  • Trustees of AUTs: certain trusts where the trustee is acting as the trustee of an authorised unit trust scheme.

  • Other trusts: including legislative trusts (i.e. imposed or required by an enactment), trusts imposed by court order, co-ownership trusts (i.e. where the trustees and beneficiaries are the same persons) and trusts created to hold legal title until the procedure effecting a transfer or disposal of assets is completed.



UK Economic Crime Levy

WHAT IS THIS?  Proposals for a levy to pay for enhanced government action to tackle money laundering.

WHO DOES THIS APPLY TO?  The "AML-regulated sector" – i.e. all "relevant persons" under the Money Laundering Regulations including most financial services firms.

WHEN DOES THIS APPLY? Not yet known.

HM Treasury issued a consultation in July 2020 on a new economic crime levy (Economic Crime Levy) which had first been announced by the Chancellor of the Exchequer in the March 2020 Budget. The purpose of the Economic Crime Levy is to pay for enhanced government action to tackle money laundering and will be paid for by the AML-regulated sector (which includes financial services firms).

According to the consultation, the levy calculation is likely to be based on three elements:

  • Levy base: This will probably be based on UK revenue (either a fixed percentage or revenue bands) and the consultation asks whether this should be from total business activity or just AML-related activity.

  • A small business exemption: The consultation considers three potential thresholds: £1 million, £5 million and £10.2 million (with £10.2 million seeming to be the preference).  There may also be a small flat fee for businesses under the threshold.

  • Money laundering risk weighting: This may require an increase in the amount to be paid depending on certain criteria. Factors being considered include number of suspicious activity reports (or SARs) being made, National Risk Assessment ranking of the relevant business sector and/or risk assessments by the relevant supervisor.

The consultation also discusses different options for collecting the Economic Crime Levy including by a single government agency or by the relevant supervisors.

The consultation closed in October 2020 and it remains to be seen how soon HM Treasury will respond with feedback and specific legislative proposals. While the government recognises that the economic crime levy is "novel", both in approach and motivation, there is nothing to suggest that the levy will not become a reality at some point.



EU Market Abuse Review Report

WHAT IS THIS?  Report suggesting potential changes to the Market Abuse Regulation including in respect of inside information, pre-hedging, market soundings and collective investment undertakings.  


WHEN DOES THIS APPLY? Not yet known.

ESMA published its final Market Abuse Review report in September 2020 following a consultation in 2019 (which was covered in our 2020 New Year Briefing). The report concludes that, overall, the Market Abuse Regulation (MAR) has worked well in practice and is fit for purpose. Feedback supported this and respondents tended to focus on specific amendments and clarifications rather than a major overhaul of the legislative framework.

Accordingly, ESMA’s paper includes some proposals for some targeted amendments to the regime (including where there should be guidance rather than legislative change) alongside confirmations of where it has decided that change is not necessary. The main points are set out below.

Spot FX

The question of whether spot FX should be brought within the scope of MAR had been one of the main topics in the consultation. ESMA concluded that, rather than propose specific legislative amendments at this stage, there should be further analysis of whether it would be suitable to set up an EU regulatory regime on market abuse on FX spot contracts.

Inside information

ESMA concluded that it was not necessary to change the main definition of “inside information” itself.  However, as regards its interpretation it received a number of requests for clarifications and therefore ESMA stands ready to issue guidance.

As regards the definition of inside information with respect to front running, ESMA is proposing to broaden the scope beyond the persons charged with the execution of orders so that it would additionally apply where there is no client-broker relationship.


ESMA deemed that guidance was necessary in respect of pre-hedging including in the following areas:

  • Pre-hedging for requests for quotes concerning illiquid instruments.

  • Pre-hedging in the context of optimisation of orders in market makers’ and brokers’ strategies.

  • Factors to consider when assessing if specific pre-hedging conduct poses risks of market abuse.

ESMA also stated that pre-hedging should constitute a risk-management tool for a broker (to contain the exposure deriving from possible orders for which a request for quote has been submitted) and should be designed to benefit the client and the intended benefit should be traceable.  A broker should not pre-hedge for speculative reasons or to the detriment of the client. 

Market soundings

ESMA recommended a number of measures in respect of market soundings, including:

  • Changes so that market participants are obliged to follow the market sounding provisions in MAR.
  • An additional and express sanction for violations of the market sounding requirements.
  • Clarification that the market sounding requirements apply even if a transaction is not eventually announced.

ESMA also proposed that market sounding procedures and requirements be simplified, including: 

  • In market soundings where no inside information is passed on, clarification that the disclosing market participant (DMP) does not need to do any of the following:

    • obtain the consent of the market sounding recipient (MSR) to receive inside information;
    • inform the MSR that they are prohibited from using that information;
    • inform the MSR that they are obliged to keep the information confidential; or
    • inform the MSR when information has ceased to be inside information.

  • In market soundings where inside information is passed on, clarification that:

    • the requirement to cleanse could be waived wherever the transaction is publicly announced;
    • where recording facilities are not available, written minutes of the sounding agreed and exchanged via email or other electronic means between the DMP and MSR should suffice, without formal exchange of signatures; and
    • the requirement to repeat reminders of the wall-crossing requirement could be removed for follow-up calls after the initial one.

In relation to all types of market soundings, ESMA also recommended that it be allowed to amend its own guidelines by introducing recommendations to MSRs that are calibrated to the nature of those persons (e.g. by distinguishing between natural and legal persons or regulated and non-regulated entities).

Collective investment undertakings

ESMA remains of the view that collective investment undertakings admitted to trading or traded on a trading venue are issuers and there are no compelling arguments to exempt them from the scope of MAR.

In terms of the obligations for persons discharging management responsibilities (PDMR), and because AIFMD and the UCITS Directive already address the risk of market abuse of personal transactions, ESMA believes that there is no need for the managers of management companies of externally-managed collective investment undertakings admitted to trading or traded on a trading venue to be covered by the PDMR obligations.

The management company of externally-managed collective investment undertakings with legal personality admitted to trading or traded on a trading venue should be held responsible for disclosing inside information where it arises. When the management company has delegated the execution of certain functions to third parties (for example, asset managers), the delegate is responsible for reporting immediately to the management company any information that might be relevant.

As regards insider lists, ESMA recommends clarifying that the management company of collective investment undertakings admitted to trading or traded on a trading venue should be responsible for drawing up and maintaining the insider list where necessary.


EU Digital Finance Strategy

WHAT IS THIS?  Proposed new EU legislation on digital finance including digital operational resilience, markets in crypto-assets and digital risks.

WHO DOES THIS APPLY TO?  Most EU financial services entities and also certain non-authorised entities.  Certain non-EU entities operating in the EU (which will include some UK firms).   

WHEN DOES THIS APPLY? Not yet known.

As part of the EU digital finance strategy, the European Commission has issued four proposed draft new pieces of legislation comprising a wide range of digital finance rules, including on digital operational resilience, markets in crypto-assets and digital risks. The proposed new rules will apply in some form to most EU financial services entities and also certain non-authorised entities as well as other non-EU entities operating in the EU (which will include some UK firms).   

The UK government has not said whether it intends to adopt similar measures.  However, given the focus of UK regulators on fintech and crypto-assets, we think that it is likely that the UK will also seek to implement rules in this area. 

The four new pieces of legislation are:

An overview of the proposed rules can be found here and an analysis of the likely implications for market infrastructure providers can be found here.

Financial markets infrastructure

EU Central Securities Depositories Regulation - Settlement Discipline Regime

WHAT IS THIS?  The introduction of the settlement discipline regime as provided for by the Central Securities Depositories Regulation.

WHO DOES THIS APPLY TO?  EU CSDs and CCPs and parties in the settlement chain, when settling through EU CSDs.

WHEN DOES THIS APPLY? 1 February 2021 (with a likely further postponement to 1 February 2022).

The RTS on settlement discipline set out measures to address and prevent settlement fails as part of the settlement discipline regime under the EU Central Securities Depositories Regulation (CSDR).  We provided more details of the settlement discipline measures set out in the RTS in our 2020 New Year Briefing.

The RTS were due to come into effect on 13 September 2020 but this deadline was pushed back by an amending Delegated Regulation to 1 February 2021. However, by October 2020 ESMA had published a final report with draft amended RTS suggesting yet a further delay to 1 February 2022. The European Commission adopted this on 23 October 2020 and the legislation is currently subject to a three-month non-objection period. Assuming the Council and the European Parliament do not object the further delay will become law.

On 23 June 2020, the Chancellor of the Exchequer announced in a written statement that (amongst other things) the UK will not be implementing the CSDR settlement discipline regime. UK firms were told they should therefore continue to apply the existing industry-led framework, pending future domestic legislative changes.  Therefore, UK firms will not have to comply with the EU settlement discipline regime, including the mandatory buy-in regime, in relation to "domestic" transactions that settle through CREST (Euroclear UK & Ireland), the UK central securities depository. However, the EU CSDR and the EU settlement discipline regime will still be relevant for those firms that settle via EU central securities depositories.



EU Central Securities Depositories Regulation - review

WHAT IS THIS?  Consultation on potential amendments to CSDR.

WHO DOES THIS APPLY TO?  Central securities depositories.

WHEN DOES THIS APPLY? Not yet known.

The European Commission has issued a consultation on a limited review of CSDR, in part to consider the impact of COVID-19 and Brexit.

Topics being consulted on include:

  • Whether any changes are needed to the application process for CSDs.

  • Whether competition in the provision of CSD services has increased or improved and any difficulties in obtaining or making use of the CSDR passport.

  • Internalised settlement reporting.

  • The need to reflect new technologies, such as distributed ledger technology, in CSDR.

  • The provision of banking-type ancillary services by CSDs and the related rules and requirements.

  • Whether the settlement discipline framework needs to be revised.

  • The regime for third-country CSDs.

The consultation closes on 2 February 2021.



Special administration regime for payment institutions and electronic money institutions

WHAT IS THIS?  Proposals for a new special administration regime for payment institutions and electronic money institutions.

WHO DOES THIS APPLY TO?  Payment institutions and electronic money institutions.

WHEN DOES THIS APPLY?  Not yet known.

On 3 December 2020, HM Treasury issued a consultation setting out its proposals for a bespoke Special Administration Regime (SAR) for payment institutions (PIs) and electronic money institutions (EMIs).  The proposals are largely based on the existing special administration regime for investment banks, with some minor modifications.

The proposed SAR would include the following key features:

  • an explicit objective on the special administrator to return customer funds as soon as reasonably practicable and a bar date for client claims to be submitted to speed up the distribution process;

  • a mechanism to facilitate the transfer of customer funds to a solvent institution including novation of contracts;

  • provisions for continuity of supply to minimise disruption;

  • rules for treatment of shortfalls in safeguarding accounts (broadly these will be allocated pro rata across all customers within the asset pool); and

  • a right for the FCA to participate in the process to protect consumers.

Two annexes are attached to the main consultation document providing details of the draft regulations for the proposed SAR. On 17 December 2020, the government also published a further, supplementary annex with details regarding rules that will govern the proposed SAR.

The deadline for responses to the main consultation document and its annexes is 14 January 2021. The deadline for responses in relation to the rules in the supplementary annex published on 17 December 2020 is 28 January 2021.


EU Benchmarks Regulation

WHAT IS THIS?  Proposal to amend the EU Benchmarks Regulation to designate a replacement benchmark for certain benchmarks that will cease to be published and provide an exemption for certain non-EU currency benchmarks.

WHO DOES THIS APPLY TO?  Persons publishing or making use of benchmarks.


The European Commission has published a proposal for a Regulation amending the EU Benchmarks Regulation. This seeks to allow for the mandatory replacement of benchmarks (largely to address concerns around the transition from LIBOR) and to provide an exemption for certain non-EU currency benchmarks.

Mandatory replacement of a benchmark

Under the proposals the Commission will be able to designate a replacement benchmark for a benchmark that will cease to be published where the cessation may result in significant disruption in the functioning of EU financial markets in certain cases.  The replacement benchmark will by operation of law replace all references to the benchmark that has ceased to be published provided that the relevant financial instruments, contracts or performance measurements contain no suitable fall-back provisions.

Designation of non-EU foreign exchange benchmarks

The Commission will be empowered to designate foreign exchange benchmarks administered by administrators located outside the EU as exempt from the Benchmarks Regulation where all the following conditions are satisfied:

  • the foreign exchange benchmark refers to a spot exchange rate of a third-country currency that is not freely convertible;

  • supervised entities use the foreign exchange benchmark on a frequent, systematic and regular basis in derivative contracts for hedging against third country currency volatility; and

  • the foreign exchange benchmark is used as a settlement rate to calculate the pay-out of the above derivative contract in a currency other than the above currency with the limited convertibility.

The position in the UK

The proposed amending Regulation will not be onshored in the UK. However, see Part 2 above as regards the UK's initiative on benchmarks set out in the Financial Services Bill. This includes provisions that would grant powers to the FCA to prohibit the use of benchmarks and to ensure the orderly cessation of critical benchmarks.



Short selling

WHAT IS THIS?  Amendments to the initial notification threshold for the reporting of net short positions.

WHO DOES THIS APPLY TO?  Anyone with net short positions (as defined) in the issued share capital of companies with shares admitted to trading on a UK trading venue.

WHEN DOES THIS APPLY? 1 February 2021

On 6 January 2021, the Short Selling (Notification Thresholds) Regulations 2021 were made. In line with HM Treasury's previously announced intention, they amend the initial notification threshold for reporting of net short positions to the FCA under the onshored Short Selling Regulation (UK SSR).  Under Article 5(2) of the UK SSR, the threshold will be reduced from 0.2% to 0.1% of the issued share capital of a company that has shares admitted to trading on a UK trading venue (i.e. a UK regulated market or UK MTF).

This reflects the temporary approach that ESMA originally took in March 2020 (and which it has renewed several times since) although this lower EU threshold only applies respect of shares admitted to trading on an EU regulated market and not those traded on an EU MTF. 

The lower notification threshold comes into effect on 1 February 2021 (although persons can notify at this level before then if they choose).



Credit servicers and the NPL Action Plan

WHAT IS THIS?  European Parliament compromises on the draft EU Credit Servicers Directive and the European Commission's NPL Action Plan.

WHO DOES THIS APPLY TO?  Credit servicers and investors and participants in EU non-performing loan markets.

WHEN DOES THIS APPLY? As yet, not clear – development to be monitored in 2021.

The EU's proposed Directive on Credit Servicers and Credit Purchasers (Credit Servicers Directive) was originally proposed in 2018.  The European Parliament has recently finalised its compromise amendments.  These will progress through further legislative stages during the course of 2021. The text provides for a carve out from the previously proposed extra-judicial collateral enforcement mechanism. Previous drafts of the Credit Servicers Directive were subject to lobbying by interested trade associations in relation to a number of different points.    

The Credit Servicers Directive provides for a new regime for persons carrying on credit servicing activities in relation to non-performing credit, including administering and enforcing loans on behalf of a creditor.  The new regime will include a requirement to seek authorisation, contractual requirements, additional record keeping and outsourcing obligations as well as a cross-border "passporting" regime.  New requirements are also proposed for the purchasers of credit agreements including information and notification obligations, certain of which would impact EU or other non-EU participants in the non-performing loan (NPL) markets. 

The remain various uncertainties in the draft and points where we expect the industry will seek to lobby further, but the revised draft is helpful in two key regards: first, performing credit appears now to be excluded from the scope of the Credit Servicers Directive and, secondly, the definition of "credit servicer" has been narrowed to more closely align with what market participants would understand credit servicing activity to comprise.   

The desire to progress the Credit Servicers Directive is seen in the European Commission's action plan to tackle non-performing loans in the EU after the Covid-19 pandemic.  The action plan aspires to set in chain measures which will, among other things, further develop a secondary market for NPLs and support the establishment of, and cooperation between, national asset management/resolution authorities.  While we think it is unlikely that the UK will implement these recommendations, developments stemming from the action plan could impact UK and other non-EU firms active in the NPL markets and could include:

  • mandatory data templates to be used by market participants for new NPL deals with the aim of streamlining and improving current templates issued by the European Banking Authority, but which are underutilised;

  • the creation of a centralised EU NPL data hub to improve the availability of comparable, granular data on NPL transactions;

  • new guidance for sellers regarding the means of achieving "best execution" on NPL deals;

  • NPL-specific data disclosure for banks in publicly available "Pillar III" disclosures;

  • progress work on the so-called accelerated extra-judicial collateral enforcement mechanism; and

  • implement certain changes to bank capital charges to reduce risk weights for certain defaulted assets.      


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