FCA response to ESMA’s statement on share trading obligations under MiFID II

FCA reveals findings from first cryptoassets consumer research

On 7 March 2019, the FCA published two pieces of research looking at UK consumer attitudes to cryptoassets. The research included qualitative interviews with UK consumers and a national survey and we set out below, in summary, some of the FCA’s findings:

  • the qualitative research indicated some potential harm, including that many consumers may not fully understand what they are purchasing. For example, several of those interviewed talked of wanting to buy a ‘whole’ coin, suggesting they did not realise they could buy part of a cryptoasset. That said, the cryptoasset owners interviewed were often looking for ways to ‘get rich quick’, citing friends, acquaintances and social media influencers as key motivations for buying cryptoassets;
  • both the survey and qualitative research found that some cryptoasset owners made their purchases without completing any research beforehand. However, despite the general poor understanding of cryptoassets amongst UK consumers, findings from the survey suggest that currently the overall scale of harm may not be as high as previously thought;
  • 73% of UK consumers surveyed did not know what a ‘cryptocurrency’ is or were unable to define it;
  • the FCA estimated that only 3% of consumers surveyed had ever bought cryptoassets. Of the small sub-sample of consumers who had bought cryptoassets, around half spent under £200 – a large majority of these commenting that they had financed the purchases through their disposable income; and
  • Bitcoin appears to be the favourite cryptoasset for consumers with more than 50% of the cryptoasset owner survey sub-sample reporting to have spent their money on this product, while one in three [34%] chose Ether.

Christopher Woolard, the FCA’s Executive Director of Strategy and Competition commented:

‘This research gives us evidence we haven’t had before about how consumers interact with cryptoassets. This will help us ensure we are acting on evidence as we seek to protect consumers and market integrity. The results suggest that although cryptoassets may not be well understood by many consumers, the vast majority don’t buy or use them currently. Whilst the research suggests some harm to individual cryptoasset users, it does not suggest a large impact on wider society. Nevertheless, cryptoassets are complex, volatile products – consumers investing in them should be prepared to lose all of their money.’

The FCA is currently working with the Government and Bank of England, as part of a UK Cryptoassets Taskforce, to understand and address any harms from cryptoassets and encourage innovation in the interests of consumers. The FCA is currently consulting on guidance to clarify the types of cryptoassets that fall within the existing regulatory perimeter. Later this year the FCA will consult on banning the sale of certain cryptoasset derivatives to retail investors. HM Treasury is also exploring legislative change to potentially broaden the FCA’s regulatory remit to bring in further types of cryptoassets.

FCA response to ESMA’s statement on share trading obligations under MiFID II

The EU MiFID II and onshored UK MiFID regimes both have share trading obligations (STOs) which mandate investment firms to trade certain shares on regulated markets, multilateral trading facilities, systematic internalisers or third-country trading venues assessed as equivalent by the EU and UK respectively. The European Securities and Markets Authority (ESMA) has published a statement  on the impact on the MiFIR trading obligation for shares of the UK leaving the EU on 29 March 2019 without a withdrawal agreement (no-deal Brexit), and without an equivalence decision for the UK by the European Commission (EC).

Whilst the FCA acknowledged that clarifying the application of the STO in the event of a no-deal Brexit will help to provide certainty, it commented, in summary, that:

  • the statement from ESMA  made clear that the EU’s STO will apply to all shares traded on EU27 trading venues that are shares of firms incorporated in the EU (EU ISINs), and of companies incorporated in the UK (GB ISINs) where these companies’ shares are ‘liquid’ in the EU. This means EU banks, funds and asset managers will not be able to trade these GB or EU ISIN shares in the UK, even where the UK is the home listing of the British or EU company.  ESMA’s stated that its goal has been to provide as much certainty as possible and to mitigate potential adverse effects of a trading obligation in these circumstances; 
  • only a comprehensive and coordinated approach can provide the necessary certainty to market participants; 
  • without this approach, it would not be possible to address the issues of conflicting obligations applying to the same instruments., as firms may be limited to trading certain shares only in either the UK or the EU or in some cases be caught by overlapping obligations; 
  • the onshoring of EU legislation in preparation for Brexit means that the UK will, as well as the EU, have an STO. Applying the same approach as ESMA to the scope of the UK STO would, based on current trading data, mean there would be a large degree of overlap between the UK and EU obligations. Potentially this could cause disruption to market participants and issuers of shares based in both the UK and the EU, in terms of access to liquidity and could result in detriment for client best execution; 
  • the FCA acknowledged that there potentially this could cause disruption to market participants and issuers of shares based in both the UK and the EU, in terms of access to liquidity and could result in detriment for client best execution, and urged further dialogue on this issue in order to minimise risks of disruption in the interests of orderly markets; and 

the FCA concluded that it stands ready to engage constructively with ESMA and other European authorities to achieve this.

FCA response to ESMA’s statement on various obligations under MiFID 

On 7 March 2019,  ESMA published a statement on its approach to the application of some key MiFID II/MiFIR and benchmark (BMR) provisions should the UK leave the EU on 29 March 2019 without a withdrawal agreement.  

ESMA’s statement aims to inform stakeholders on the approach it will take in relation to these provisions. It sets out details on the following MiFID II and BMR aspects under a no-deal Brexit:

  • the MiFID II C(6) carve-out;
  • the Trading obligation for derivatives;
  • ESMA opinions on post-trade transparency and position limits;
  • post-trade transparency for OTC transactions between EU investment firms and UK counterparties; and
  • BMR: ESMA register of administrators and 3rd country benchmarks.

The FCA’s response is set out below, noting that the FCA’s opinions may change on a  no-deal scenario and may change depending on the final timing and nature of Brexit: 

Post trade transparency and position limits – the Treasury’s approach to the onshoring of EU legislation into UK law means that UK and EU trading venues will operate to the same set of standards on day 1 after the UK leaves the European Union. Consequently, if the UK leaves the EU without an implementation period the FCA will not require UK investment firms to make public, through a UK Approved Publication Arrangement (APA), transactions conducted on EU trading venues in instruments which are also traded on a trading venue in the UK.
In addition, commodity derivative contracts traded on EU trading venues should not be considered as economically equivalent OTC contracts and so will not count towards the UK position limit regime.

Post-trade transparency for OTC transactions between UK investment firms and EU counterparties – under the temporary transitional power, UK investment firms that did not have a reporting obligation for a transaction conducted with an EU27 investment firm before Brexit will not be required to report these transactions to a UK APA for a period of 15 months after Brexit. EU27 investment firms with a branch in the UK that has entered the UK temporary permissions regime may fulfil their UK trade reporting obligations by continuing to make transactions public through an EU APA, where they are obliged to do so.

Trading obligation for derivatives – the FCA’s approach to the trading obligation for derivatives is set out in the onshored MIFID and the associated binding technical standards (BTS). This means that investment firms will need to conclude transactions in certain derivatives only on regulated markets, multilateral trading facilities or organised trading facilities established in the UK or on third-country venues in jurisdictions for which the UK has adopted an equivalence decision.

Benchmarks – the FCA will be setting up a UK public register of benchmarks and administrators authorised in the UK. The UK’s approach to bringing the EU Benchmarks Regulation into UK law, including the transitional period and the register of administrators and benchmarks, is set out in full in the UK.

FCA fines UBS AG £27.6 million for transaction reporting failures

UBS AG (UBS) has been fined £27,599,400 by the Financial Conduct Authority (FCA) for failings relating to 135.8 million transaction reports between November 2007 and May 2017.

A transaction report is  data set submitted to the FCA that relates to an individual financial market transaction which includes, but is not limited to, details of the product traded, the firm that undertook the trade, the trade counterparty, the client (where applicable) and the trade characteristics, price, quantity and venue. The FCA uses the information from transaction reports for the following purposes:

•    monitoring for market abuse;
•    firm supervision;
•    market supervision;
•    for sharing with certain external parties, such as the Bank of England.

Mark Steward, FCA Executive Director of Enforcement and Market Oversight said:

“Firms must have proper systems and controls to identify what transactions they have carried out, on what markets, at what price, in what quantity and with whom. If firms cannot report their transactions accurately, fundamental risks arise, including the risk that market abuse may be hidden. Effective market oversight relies on the complete, accurate and timely reporting of transactions. This information helps the FCA to effectively supervise firms and markets. In particular, transaction reports help the FCA identify potential instances of market abuse and combat financial crime. UBS failed to ensure it provided complete and accurate information in relation to approximately 86.67m reportable transactions. It also erroneously reported 49.1m transactions to the FCA, which were not, in fact, reportable. Altogether, over a period of 9 and a half years, UBS made 135.8m errors in its transaction reporting, breaching FCA rules.

The FCA also found that UBS failed to take reasonable care to organise and control its affairs responsibly and effectively in respect of its transaction reporting. These failings related to aspects of UBS’s change management processes, its maintenance of the reference data used in its reporting and how it tested whether all the transactions it reported to the FCA were accurate and complete. UBS agreed to resolve the case and so qualified for a 30% discount in the overall penalty. Without this discount, the FCA would have imposed a financial penalty of £39,427,795.”

To date, the FCA has fined 12 other firms for MiFID transaction reporting breaches: Merrill Lynch International (MLI), Deutsche Bank AG, Royal Bank of Scotland (RBS), James Sharp & Co, Plus500UK, City Index Limited, Société Générale, Commerzbank AG, Instinet Europe Limited, Getco Europe Limited, Credit Suisse and Barclays Capital Securities Limited and Barclays Bank Plc.

FCA acts to improve competition in the investment platforms market

On 14 March 2019, the FCA published the Investment Platforms Market Study Final Report and accompanying Consultation Paper 19/12. The report set s out the FCA’s final findings and a package of measures to help consumers who invest through investment platforms more easily find and switch to the right one for them. 

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:

‘While the market is working well for most of its consumers, the package we’ve announced today should make it less expensive and time-consuming for investors to shop around and move to the platform that best meets their needs. As part of that, we believe it is right that we restrict exit fees, so people can move their money freely.’

The FCA found that while competition is generally working well, some consumers and financial advisers can find it difficult to shop around and switch to a platform that better meets their needs. Consumers can find it difficult to switch due to the time, complexity and cost involved – driven in part by the exit charges they incur and difficulties switching between unit classes. 

To address the issues uncovered, the FCA is consulting on rules to allow consumers to switch platforms and remain in the same fund without having to sell their investments, and is proposing to ban or cap exit fees.  The proposed restriction on exit fees would apply to platforms, and also firms offering a comparable service to retail clients. The FCA is seeking views from the wider market about how a restriction could work, before consulting on any final rules.

The FCA has welcomed the progress industry is making to improve the switching process, most recently through their STAR initiative to improve the efficiency of the transfer process across the retail investment and pensions sectors. The FCA is encouraging firms not already involved in this initiative to consider taking part as a way of improving the switching process and achieving better outcomes for consumers.  The FCA will review progress made by the industry to improve the switching process later this year, and again in 2020, if needed. The FCA will consider taking forward further regulatory action if the efficiency of the switching process does not improve.

Since publishing its interim report, the FCA has seen firms and the industry acting to improve the provision of information about costs and charges, helping consumers shop around. As a result, the FCA is not proposing new rules but will review the progress of industry in 2020/21, and consider if further action is necessary. The FCA consultation on new rules for switching and feedback on the questions regarding exit fees runs until 14 June 2019. The FCA may then consult on final rules for exit fees.

Endorsement of credit ratings from the European Union into the United Kingdom for regulatory use in the event of a no-deal Brexit

On 15 March, the FCA assessed the European Union (EU) regulatory and supervisory regime to be ‘as stringent as’ the UK’s regime for the purposes of allowing UK-registered Credit Rating Agencies (CRAs) to endorse credit ratings into the UK from affiliated EU CRAs for regulatory use under the Credit Rating Agencies Regulation, as amended by The Credit Rating Agencies (Amendment etc.) (EU Exit) Regulations 2019 (CRAR SI).

Under the CRAR SI, the FCA will become the UK regulator of CRAs. Once the new regime is in place, any legal person wishing to issue or endorse credit ratings for regulatory purposes will need to be registered or certified with the FCA. As of 15 March 2019, the following CRAs listed have either registered or intend to register with the FCA:

A.M. Best Europe, Rating Services Limited
ARC Ratings
DBRS Ratings Limited
Fitch Ratings (CIS) Limited
Fitch Ratings Limited
HR Ratings de Mexico
Kroll Bond Rating Agency Inc
Kroll Bond Rating Agency UK Limited
Japan Credit Rating Agency
Moody’s Investors Service Limited
S&P Global Ratings UK Limited  
Scope Ratings UK Limited
The Economist Intelligence Unit Limited

This list will be updated as necessary, and does not supersede the Financial Services Register. The Register will be updated when the UK leaves the EU and as applications are determined. These CRAs will be eligible to endorse ratings from affiliated EU entities, subject to meeting all the relevant provisions in the Regulation. 

Claire Cummings

Claire practises financial services law with a focus on regulatory issues, cryptocurrencies and tokens, trading and brokerage documentation and advising both existing and start-up funds and fund managers.

If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.

Phone: 0207 585 1406
Email: claire.cummings@cummingsfisher.com

Previous

Next