Legal Shorts 27.09.19 including FCA findings from unit-linked funds’ governance review

CoinShares to lobby against UK ban on crypto exchange-traded notes

Investment platform CoinShares is urging customers to lobby the FCA over impending regulations it fears will be too restrictive to crypto asset products. In a letter to investors sent Monday, CoinShares has asked its customers to write emails and text messages to the UK regulator in support of one of its premiere products, exchange-traded notes (ETNs), which would be banned under the proposed regulation for retail investors.

In the letter to investors, CoinShares stated, “We believe that the FCA has not provided sufficient evidence to justify the proposed ban. Through its consultation, the regulator makes little attempt to genuinely evidence its claims and instead ‘cherry picks’ data sets in order to illustrate its perception of crypto assets, ETNs and the perceived harm the FCA believes these products cause.” CoinShares is asking customers and proponents of cryptoassets to write to the FCA over the proposed ban before the Oct. 3 comment deadline

ESMA confirms delay to review of certain MiFID II transparency requirements

On 24 September 2019, ESMA published a letter (dated 19 September 2019) from Steven Maijoor, ESMA Chair, 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 on from Mr Maijoor’s letter to the Commission, dated 17 June 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).

The letter outlines that ESMA and the Commission agree it is not advisable to perform the annual review of RTS 2 in 2019 due to the remaining uncertainties around a potential no-deal Brexit. ESMA reiterates its intention to perform the annual review of RTS 2 by 30 July 2020, which will incorporate an analysis of the empirical data available to ESMA and look specifically into what effects Brexit may have on bond market liquidity

COREPER invited to agree negotiating mandate on proposed Regulation on sustainable investment framework

On 24 September 2019, the Council of the EU published an “I” item note (12360/1/19 REV 1) (dated 23 September 2019) regarding the mandate for negotiations with the European Parliament on the proposed Regulation on the establishment of a framework to facilitate sustainable investment (2018/0178(COD)) (also referred to as the Taxonomy Regulation).

A Presidency compromise proposal for a mandate for negotiations is appended to the note. The note explains that the required majority of delegations in the Financial Services Working Party supported the Presidency compromise in a silent procedure. In a joint statement annexed to the note, Germany, Luxembourg and Austria expressed their concerns that the proposed framework would leave the door open to diverting financial resources away from environmentally sustainable activities and into technologies that cannot be considered either safe or sustainable (specifically, relating to nuclear energy).

In the light of the majority vote, the General Secretariat of the Council invites COREPER to agree on the negotiating mandate as set out in the compromise proposal, take note of the joint statement, and invite the Council Presidency to start, as soon as possible, negotiations with the Parliament based on the mandate with a view to reaching agreement in the form of an early second reading agreement.

The European Parliament announced its adoption of the proposed Regulation in March 2019. The proposed Regulation establishes an EU-wide classification system, or taxonomy, intended to provide businesses and investors with a common language to identify to what degree economic activities can be considered environmentally sustainable. It is one of three European Commission proposals relating to sustainable finance. The proposals were published in May 2018 and form part of the capital markets union (CMU) package of initiatives.

Fine imposed on HSBC for participation in Euro interest rate derivatives cartel annulled (General Court)

On 24 September 2019, the General Court handed down its judgment on an appeal by HSBC against the European Commission’s 2016 decision to impose a fine of EUR33.6 million on HSBC for its participation in an illegal cartel in the euro interest rate derivatives (EIRDs) sector.

The General Court has largely upheld the Commission’s findings that HSBC participated in a single and continuous infringement of Article 101(1) of the TFEU. The General Court concluded that the Commission was right to find that a manipulation of Euribor in which HSBC participated on 19 March 2019 was an infringement by object. However, it did find that the Commission had not established that two discussions in which HSBC traders had exchanged information on their trading positions with traders from other banks restricted competition by object.

The General Court also found that the Commission had made some errors in establishing HSBC’s participation in a single and continuous infringement. The General Court concluded that HSBC’s participation in such an infringement could be upheld only in respect of its own conduct in that infringement and of the conduct of other banks forming part of the manipulation of 19 March 2007 and any potential repeat of that manipulation.

The General Court held, however, that the errors made by the Commission in its assessment did not affect the validity of the finding that HSBC had breached Article 101(1) of the TFEU as it had nevertheless substantiated this decision.

However, the General Court annulled the fine imposed on HSBC due to the Commission’s failure to state sufficient reasons. It found that the Commission had given inadequate reasons for its approach to determining the value of the sales used as the basis for calculating the fine. The Commission did not provide in its decision a sufficient explanation of the reasons why it set a reduction factor at a particular level. The General Court was, therefore, unable to conduct a review on a factor of the decision which could have had a significant effect on the fine imposed on HSBC.

HSBC Holdings plc, HSBC Bank plc and HSBC France v European Commission (Case T 105/17) ECLI:EU:T:2019:675, judgment of 24 September 2019

FCA findings from unit-linked funds’ governance review

On 24 September 2019, the FCA published a new webpage setting out the key findings of its multi-firm review of firms’ governance practices covering the value provided by unit-linked funds (that is, funds whose performance determines the benefits due to holders of unit-linked insurance contracts).

The review followed on from the FCA’s policy statement (PS18/8) confirming changes to the FCA Handbook implementing some of the remedies identified in its asset management market study (AMMS), which was published in April 2018 (see Legal update, FCA policy statement and final rules implementing asset management market study remedies and consultation on further remedies). A key finding of the AMMS was weak price competition in the sector. New rules are due into force later on in 2019 to address this, but they will not apply to unit-linked funds, although such funds offer many similar features to authorised funds. Consequently, the FCA wanted to find out whether there are similarities between unit-linked funds’ governance practices and those for authorised funds.

The FCA has found that insurance firms’ fund governance for unit-linked funds often does not include considerations that it believes are likely to be important in assessing whether unit-linked funds provide good value for their investors. In particular, the FCA’s findings included the following:

  • How firms think about value is sometimes too limited. Some firms only consider performance net of fees and charges, with limited assessment of how active the manager of a unit-linked fund had been in achieving the net performance.
  • Firms typically do not compare the fees and charges of different funds within their unit-linked fund ranges, even where funds have similar mandates.
  • Firms share scale economies with funds only to a limited extent.
  • Firms were unable to show the FCA how product features other than asset management were good value.
  • The impact of independent governance bodies on unit-linked funds has been positive but limited.

The FCA will assess the findings from the review alongside those from its continuing work on non-workplace pensions, the governance of unit-linked mirror funds, and the effectiveness and scope of independent governance committees. It will then decide whether further remedies are needed.

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

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