Regulatory Focus – February 2021
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Regulatory Focus – February 2021

In this edition of Regulatory Focus, Duff & Phelps’ compliance experts round up the news and publications from the Financial Conduct Authority during November and December 2020.

Updates from the FCA during December 2020

Updates from the FCA during November 2020

Are You Ready for the Sustainable Finance Disclosure Regulation?

The SFDR is an EU regulation that will be implemented from March 10, 2021 and applies to investment managers and certain financial advisers. Although the SFDR comes in after the Brexit transitional period, there are a number of ways in which SFDR could be relevant for UK firms, for instance where firms are marketing into the EU.

For more details, please see our recent article, here.

SFDR requires in scope firms to make policy decisions about how sustainability is integrated into their business and how adverse impacts of investment decisions on sustainability factors are considered. It requires firms to make disclosures on their website and to clients on a pre-contractual and periodic basis, based on those policies and taking into account the types of funds or other products they manage or advise upon.

We have developed an SFDR toolkit, which is comprised of the following:

  • ESG Implementation Guide
  • ESG Project Plan
  • ESG Policy template
  • SFDR template website disclosures

If you are affected by SFDR and would like to find out more about how we could help your firm, please feel free to contact your normal relationship manager. 

Welcome to Brexit

A number of media outlets and newspapers reported earlier in January the news of a Dutch border official confiscating goods from a driver arriving in the Netherlands from the UK. After explaining the new post-Brexit rules to the driver, the official was reported as saying “Welcome to the Brexit, Sir. I’m sorry”.

This may have been the first time that the reality of Brexit hit the unfortunate driver but, surely, he is not alone. After the end of the Brexit transition period on December 31, 2020, frictions, and barriers to trade between the UK and the EU are slowly emerging as industries now have to adapt to new rules and standards. We have seen UK fish exporters impacted by increased bureaucracy and paperwork that needs to be provided to border authorities and EU logistics groups suspending cross-border deliveries due to increased red tape. A number of issues will be resolved over time and frictions will eventually reduce as both the UK and the EU settle into their new relationship.

However, we must acknowledge the fact that we are now living in a new world and that new ways of dealing with the EU, after decades of free access to the single market, will be required. This also applies to firms operating in financial services.

On Christmas Eve last year, with one week to the end of the Brexit transition period, the FCA issued the last series of reminders to firms to ensure that they have taken all required steps with regard to their Brexit preparations, including the loss of cross-border passporting rights, systems and operational changes, and impact on customers.

The FCA has made use of its Temporary Transitional Powers (TTP) to allow firms more time to prepare for the changes to certain requirements but it also set out the key areas where firms are expected to be immediately compliant with the new post-Brexit obligations. It also used the Temporary Permission Regime (TPR) and Temporary Marketing Permission Regime (TMPR) to allow EU firms to continue to perform regulated activities and to market funds in the UK while taking steps to comply with the new post-Brexit requirements. However, no similar co-ordinated solutions have been made available to UK firms operating and marketing funds in the EU.

Below are some key considerations for UK asset managers wishing to continue to operate in the EU (without having to give up their metaphorical “ham sandwich”) and to comply with the applicable post-Brexit requirements in the UK.

Fund Marketing Notifications

UK managers marketing non-EU funds (which now includes UK funds) into the EU are required to make appropriate notifications to the relevant regulators under the local National Private Placement Regimes (NPPR). For example, UK AIFMs previously marketing funds in the EU under Art.36 of the AIFMD will now be required to update their NPPR notifications under Art.42 since the UK is now considered a third country. Similarly, UK UCITS are now considered non-EU AIFs so UK UCITS management companies, which previously relied on their UCITS passport to market their UK UCITS in the EU, will now be required to market those funds in the EU as a third country AIFM.

Cross-border Marketing and Provision of Services

With the loss of their EU financial services passports, UK firms marketing and providing services into the EU on a cross-border basis will have to ensure that they comply with relevant EU and local legislation. As noted above, an EU-wide TPR equivalent to the one adopted in the UK has not been implemented. However a number of EU member states have implemented their own transitional measures or may allow third country firms to provide services on cross-border basis under national law (see list maintained by the FCA on its webpages and our article in the previous edition of Regulatory Focus on this topic).

Other options available to UK firms include:

  • Setting up an EU-based authorized entity
  • Entering into a tied agency relationship with an appropriately licensed EU firm
  • Appointing EU-based placement agents to perform marketing activities on the firm’s behalf

All of the above options come with pros and cons. For example, setting up an EU-based firm or a tied agent would require a physical presence in the EU to meet relevant substance requirements, while the appointment of third-party placement agents can be less palatable for UK firms with large and well-established UK marketing teams.

Where appropriate, UK asset managers may decide to work with an EU-based AIFM/UCITS Management Company and be appointed as delegated portfolio manager. Such arrangements remain permitted in light of the Memoranda of Understanding which have been implemented between the FCA, ESMA and EU National Competent Authorities (NCAs). Where the local AIFM/UCITS Management Company has the required licenses and compliance infrastructure, it can also support UK managers with marketing AIFs and UCITS on their platforms via its AIFMD and UCITS passports.

Firms may also decide to rely on reverse solicitation for the provision of services or marketing to EU-based clients. However, firms will have to ensure that they can demonstrate that the relationship was genuinely initiated by EU clients and maintain appropriate records of this. ESMA recently issued a public statement warning third country firms that the attempt to circumvent local authorisation requirements via unlawful reliance on reverse solicitation could result in administrative and criminal proceedings and relevant sanctions against them.

We have seen UK firms often adopting a combination of the above solutions. It is important that firms carefully consider the relevant local requirements and restrictions to cross-border activities in each EU jurisdiction and seek appropriate legal advice, where appropriate.

Regulatory Reporting

The regulatory reporting landscape for UK firms also became more complicated after December 31, 2020. Below are some of the key changes to be aware of:

  • Annex IV Reporting Under AIFMD
    Where UK managers are marketing non-EU funds in the EU, they will have to submit Annex IV reports to each relevant NCA in the jurisdictions their funds are marketed. For AIFMs, this will add to the Annex IV returns to be submitted to the FCA and for UK UCITS management companies, this may be the first time they have to submit Annex IV returns for their funds.
  • MiFIR Transaction Reporting and Trade Reporting
    UK firms subject to transaction reporting requirements will continue to have to report to the FCA, via a UK Approved Reporting Mechanism (ARM), details of reportable transactions in both UK and EU financial instruments. With regard to post-trade transparency obligations, the FCA confirmed that UK firms will not be required to report transactions executed in the EU via a UK Approved Publication Arrangement (APA). In December 2020, the FCA confirmed its cutover plans for moving MiFID reference data and transparency systems away from ESMA to equivalent UK MiFID reporting systems - the FCA Financial Instruments Transparency System (FCA FITRS) and FCA Financial Instruments Reference Data System (FCA FIRDS).
  • EMIR Reporting
    UK firms will have to report relevant derivative transactions to a Trade Repository (TR) which is either registered or recognized by the FCA. UK managers managing non-EU AIFs (e.g. a Cayman fund) will therefore have to report on behalf of the fund to a UK TR and will not be required to report to an EU TR when dealing with EU counterparties. However, where a UK AIFM manages an EU AIF, the AIF will have a dual reporting obligation both in the UK and in the EU. This is because the AIF will be a non-financial counterparty based in the EU and hence will be subject to the EU EMIR reporting obligation. Furthermore, with regard to the application of the EMIR clearing thresholds in the UK, UK financial and non-financial counterparties will also be required to notify the FCA if they exceed the relevant thresholds, or if they decide not to calculate their positions, by June 17, 2021. The FCA clarified that this would also apply if these counterparties were already subject to the clearing obligation before 31 December 2020.
  • SFTR Reporting
    similarly, UK firms will have to report relevant securities financing transactions (SFTs) to a UK registered or recognized TR. Non-UK (including EU) AIFs managed by UK managers are out of scope of the SFT reporting obligation.

Data Sharing

The rules surrounding the sharing of personal data between the UK and the EU (and vice versa) have also changed. More specifically:

  • UK firms can continue sharing personal data from the UK to the EU since EU countries have been assessed as equivalent under UK data protection regulations.
  • The UK-EU Trade and Co-operation agreement also allows UK firms to continue to receive personal data from EU organizations until appropriate adequacy decisions are adopted by the EU, and in any event for no longer than six months. The UK Information Commissioner Office (ICO) still recommends that UK firms puts in place alternative arrangements with EU organizations that transfer data to them to safeguard themselves against the risk of disruptions.

Access to Clearing and Trading Venues

UK firms will continue to be able to access clearing services provided by EU-based clearing houses. The Bank Of England maintains a list of temporarily recognized CCPs under the Temporary Recognition Regime (TRR).

In the absence of a mutual equivalence assessment, the FCA also used the TTP to modify the application of the UK share trading obligation (STO) and derivatives trading obligation (DTO) to limit the risk of disruption for UK firms and their clients (particularly if these are subject to the EU DTO).

How Can We Help?

Our team of regulatory and compliance experts, with offices in London, Paris, Dublin and Luxembourg, can assist you with all your Brexit-related needs. Our solutions include:

  • Ad-hoc advice and support to help you navigate the regulatory complexity surrounding Brexit
  • Third-party AIFM and UCITS Management Company services in Ireland and Luxembourg
  • Assistance with FCA Authorization for EU firms currently operating in the UK under the TPR
  • Ongoing compliance support in London and Paris

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