Legal Shorts 28.06.19 including FCA publishes its first annual report on its perimeter

FCA publishes its first annual report on its perimeter

On 19 June 2019, the FCA published its first annual report on the perimeter which determines which firms require authorisation and what level of protection consumers can expect for the financial services and products they purchase.

The report, which will be published yearly, sets out:

• what the FCA does and does not regulate;
• what challenges the perimeter presents and the actions the FCA is taking to overcome them;
• what this means for consumers; and
• whether there are any issues with the perimeter which might require legislative or other changes

Andrew Bailey, Chief Executive of the FCA, commented:

‘We appreciate that the current perimeter is complicated. The boundary between which firms and activities do or don’t require regulation, is being constantly tested. The recent behaviour of some firms operating around the perimeter has caused serious consumer harm and reduced trust in regulated financial services markets. We will publish this report annually from now on, in order to highlight issues around the perimeter.’

New Prospectus Regulation

On 25 June 2019, the Financial Services and Markets Act 2000 (Prospectus) Regulations 2019 (Regulations) were published giving effect to the new Prospectus Regulation through amendments to FSMA, to ensure that UK legislation is compatible with the new Prospectus Regulation and that it is effective and enforceable in the UK from 21 July 2019.

The Regulations also amend related primary and secondary legislation to reflect the new Prospectus Regulation as follows:

  • designating the FCA as the competent authority for the purposes of the new Prospectus Regulation;
  • amending FSMA including in Part VI (Official listing) introducing provisions that enable the FCA, under specified conditions, to suspend scrutiny of prospectuses; to refuse approval of a prospectus for persons applying for approval who have repeatedly and severely infringed requirements of the new Prospectus Regulation; to suspend or restrict an offer to the public; to suspend or restrict admission to trading on a regulated market; to suspend or prohibit trading on a trading facility; and provisions requiring certain employers to have internal procedures for employees to report infringements of the new Prospectus Regulation;
  • making consequential amendments to Financial Services Act 2012 and the Data Protection Act 2018;
  • setting out transitional provisions for prospectuses approved by the FCA before 21 July 2019 so that the Regulation’s amendments do not apply to these prospectuses. These transitional provisions cease to apply on the earlier of 21 July 2020 or when the prospectus’s validity expires.

The Regulations come into force on 21 July 2019.

HM Treasury – note on enhanced money laundering due diligence

On 25 June 2019, HM Treasury issued an advisory notice identifying countries where enhanced due diligence for anti-money laundering and terrorist financing controls should be applied.

The notice contains three categories of higher risk jurisdictions:

  • Consider as high risk and apply counter measures and enhanced due diligence measures in accordance with
    the risks – Democratic People’s Republic of Korea
  • Consider as high risk and apply enhanced due diligence measures in accordance with the risks, and any other measures as specified by the Financial Action Task Force (FATF) that have a similar effect in mitigating risks – Iran.
  • Take appropriate actions to minimise the associated risks, which may include enhanced due diligence measures in high risk situations – The Bahamas, Botswana, Cambodia, Ethiopia, Ghana, Pakistan, Panama, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen.

The notice replaces all previous advisory notices issued by HM Treasury and is based on the FATF’s statements of 21 June 2019 identifying jurisdictions with strategic deficiencies in the anti-money laundering and terrorist financing controls regime

ESMA – delaying review of certain MiFID II transparency requirements

On 25 June 2019, ESMA published a letter to Olivier Guersent (European Commission Director General for Financial Stability, Financial Services and Capital Markets Union (CMU)), on the annual review required by Article 17 of Commission Delegated Regulation (EU) 2017/583 on transparency requirements for non-equity instruments (RTS 2).

The letter follows up a previous letter from January 2019 relating to the review reports on the MiFID II Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (Regulation 600/2014) (MiFIR). In that letter, ESMA raised the issue of carrying out the annual review of the operation of certain transparency requirements for bonds and derivates, as required by Article 17 of RTS 2. A positive assessment by ESMA can lead to a legislative change subjecting more bonds, and larger trade sizes in bonds and derivatives, to real-time transparency.

ESMA stated that it is of the opinion that the outstanding uncertainties on the time and conditions of Brexit do not currently allow for an adequate assessment. Including or excluding UK data from the assessment would have a fundamental impact on the results, and any decision whether to include UK data would depend on whether the UK is still a member of the EU at the time any legislative change would take effect. In addition, Brexit is likely to impact liquidity in bond and derivative markets and the value of the assessment will be limited if it is carried out before these effects have materialised.

As a result, ESMA concluded that it is not right time to perform the assessment, or to potentially tighten the transparency requirements in RTS 2.

FCA confirms recognition of the FX Global and UK Money Markets Codes

Following consultation feedback, on 26 June 2019, the FCA is today confirmed that it is recognising the following voluntary market codes of best practice under its codes recognition scheme:

•FX Global Code – maintained and updated by the Global Foreign Exchange Committee, this Code sets global principles of good practice standards in the foreign exchange (FX) market, promoting the integrity and effective functioning of the wholesale FX market; and

•UK Money Markets Code – maintained and updated by the Money Markets Committee, this sets standards and best practice expected from participants in the deposit, repo and securities lending markets in the United Kingdom.

Both these codes have been written and are owned by the industry and reflect their views of best practice. The FCA established its codes recognition scheme last year for recognising industry codes for unregulated financial markets and activities. The FX and MM Codes are the first codes to be recognised by the FCA.

Individuals subject to the Senior Managers and Certification Regime (SM&CR) need to meet the requirements for market conduct, for both regulated and unregulated activities. Behaviour that is in line with an FCA recognised code, such as the FX and MM Codes, will tend to indicate a person subject to the SM&CR is meeting their obligation to observe ‘proper standards of market conduct’.

The FCA consulted on recognition of the codes in December 2018. The consultation responses all agreed that they met the recognition criteria and that the FCA should recognise both. The FCA’s SM&CR rules have not changed as a result of this code recognition scheme, nor has its powers or the circumstances in which it supervises or enforces its SM&CR rules. Firms and their Senior Managers, under the SM&CR, are expected to train, monitor and where necessary, discipline their staff in relation to the Individual Conduct Rules.

Following recognition, the FCA will not supervise firms or individuals directly against these codes in unregulated markets. The FCA’s role is to make sure that firms meet their governance and systems and control obligations, including under the SM&CR. The FCA expects firms and individuals to consider both the spirit and letter of code provisions to make sure they fully meet ‘proper standards of market conduct’.

HM Treasury update on mini-bonds review

On 24 June 2019 John Glen (Economic Secretary to the Treasury) wrote a letter to Nicky Morgan (House of Commons Treasury Select Committee Chair) providing an update on the Treasury’s review of policy on non-transferable debt securities issued by companies to consumers (also referred to as mini-bonds). The letter was in response to the collapse of investment firm London Capital & Finance (LCF) and the FCA’s supervision of LCF.

The letter provides more details on the scope of the FCA’s review of the collapse of LCVF which will consider:
• the regulatory arrangements currently in place for the issuance of mini-bonds; and
• whether the current regulatory regime is appropriate.

The letter states that the FCA’s review will take account of the investigations into LCF’s failure which are already started. As part of the wider policy review HMT and HMRC will review the tax rules for, and the administration of, the Innovative Finance ISA (IF ISA) to ensure that it functions for all stakeholders. A separate review will consider the development of the IF ISA market since 2016 and whether the IF ISA rules remain appropriate and are sufficiently flexible to future market developments. The assessment is due to be complete by early 2020 when an update will be provided.