Regulatory Update December
In this issue we cover:
- Cloud Service Providers
- FCA fines and prohibits hedge fund Chief Investment Officer for market abuse
- FCA consults on the Investment Firm Prudential Regime
- FCA ban mass-marketing of speculative illiquid securities
- Guidance: Notification thresholds under the Short Selling Regulation
- FCA guidance consultation – guidance for insolvency practitioners on how to approach regulated firms
- FCA publishes evaluation of its work on the financial advice market
- Adding a new sub-fund to an umbrella scheme in the TMPR
Cloud Service Providers
On 18 December 2020 the European Securities and Markets Authority (ESMA) published its final report on its guidelines for outsourcing to cloud service providers (CSPs). The purpose of this publication is to help firms identify, address, and monitor the risks that may arise from their cloud outsourcing arrangements and to support a convergent approach to the supervision of cloud outsourcing arrangements across Member State competent authorities.
The final report follows a consultation paper containing draft guidelines that ESMA published on 3 June 2020, and reports that, in general, respondents agreed with its approach towards outsourcing to CSPs.
The final guidelines apply to Member State competent authorities and to:
- Alternative investment fund managers and depositaries of alternative investment funds;
- Undertakings for collective investment in transferable securities (UCITS), management companies and depositaries of UCITS, and investment companies that have not designated a management company authorised pursuant to the UCITS Directive;
- Central counterparties (CCPs), including Tier 2 third country CCPs which comply with the relevant EMIR requirements;
- Trade repositories;
- Investment firms and credit institutions when carrying out investment services and activities, data reporting services providers and market operators of trading venues;
- Central securities depositories;
- Credit rating agencies;
- Securitisation repositories; and
- Administrators of critical benchmarks.
FCA fines and prohibits hedge fund Chief Investment Officer for market abuse
On 15 December 2020, the FCA announced it had fined a hedge fund’s Chief Investment Officer (CIO) £100,000 for market abuse and had prohibited him from performing any functions in relation to regulated activity. The FCA considered the fine and prohibition to be warranted due to the serious nature of the breach and the need for it to act as a deterrent to other market participants.
Between January and May 2017, the CIO engaged in market abuse by creating a false and misleading impression as to the supply and demand for equities. On multiple occasions the CIO, an “experienced trader”, placed large misleading orders for Contracts for Difference referenced to equities which he did not intend to execute. At the same time, he would place smaller orders that he would execute on the other side of the order book. As a result of the large misleading orders, the CIO falsely represented to the market an intention to buy/sell when his true intention was the opposite.
It was found that the CIO was aware that his actions might constitute market manipulation, but that he recklessly went ahead with them anyway. A feature of the CIO’s conduct which indicated that he was aware of their impact was his placing of the large misleading orders such that their size was visible to other market participants. Conversely, the smaller genuine orders were placed as “iceberg orders”, meaning only part of the total value of the order was visible to other market participants. This imbalance in use of the iceberg order function demonstrated that he wanted to maximise the impression created by the larger misleading orders.
The CIO’s conduct came to the attention of the FCA, not through a self-report or whistleblower, but as a result of the FCA’s own internal surveillance systems. The FCA’s internal surveillance system receives order book data from the leading UK equity trading venues and runs surveillance algorithms across them designed to identify potentially abusive behaviours. Mark Steward, Executive Director of Enforcement and Market Oversight, referred in this regard to the FCA having “increased its capability to detect and take robust action against the harm to shareholder value caused by such abuse”.
Firms and their staff should be aware that the FCA is watching – even in circumstances when a business’ own compliance systems may not be triggered.
FCA consults on the Investment Firm Prudential Regime
The FCA has published a Consultation Paper (CP20/24) on the implementation of the UK Investment Firm Prudential Regime (IFPR). This is the first of three consultations that the FCA will issue in order to implement the IFPR in January 2022.
It is intended that the new regime will simplify the prudential requirements for solo-regulated investment firms in the UK and, in addition, enhance the framework of prudential requirements to mitigate the potential for harm that firms can pose to consumers and markets.
In this consultation, the FCA sets out details of its proposals on aspects of the IFPR relating to categorisation of investment firms, prudential consolidation, own funds and own funds requirements, concentration risk monitoring and reporting requirements.
Firms are invited to respond to this first consultation by 5 February 2021.
FCA ban mass-marketing of speculative illiquid securities
Following feedback on its consultation paper in June (CP20/8), the FCA published a policy statement on 10 December 2020, confirming its temporary product intervention (TPI) for speculative illiquid securities (SIS) to be made permanent, as of 1 January 2021.
The policy statement (PS20/15) not only confirms that the ban on the mass-marketing of SIS to retail investors will be made permanent, but also extends the scope of the ban to listed bonds with similar features to SIS.
Notification thresholds under the Short Selling Regulation
On 15 December 2020, HM Treasury issued a guidance notice stating that following the end of the transition period it intends to lay a statutory instrument under the onshored Short Selling Regulation, amending the initial notification threshold under Article 5(2) for the reporting of net short positions to the FCA, in relation to the issued share capital of a company that has shares admitted to trading on a trading venue, from 0.2% to 0.1%. This change will come into force on 1 February 2021.
The FCA will provide information to reporting persons with respect to notifications in the interim period.
FCA guidance consultation – guidance for insolvency practitioners on how to approach regulated firms
On 7 December 2020, the FCA published Guidance Consultation 20/5: Guidance for insolvency practitioners on how to approach regulated firms (GC20/5).
In GC20/5 the FCA sets out proposed guidance on how an insolvency practitioner should ensure regulated firms meet their ongoing financial services regulatory obligations following appointment. The FCA supervises regulated firms, including those in insolvency proceedings, while they continue to be authorised or registered. The FCA is not the regulatory authority for insolvency practitioners and insolvency practitioners generally act as officers of the court.
The FCA has therefore engaged with the recognised professional bodies, who licence and regulate insolvency practitioners, on the proposed guidance. The proposed guidance is aimed at insolvency practitioners appointed over firms solely authorised or registered by the FCA. It may also be relevant for insolvency practitioners appointed over firms that are dual regulated by the FCA and PRA.
The deadline for comments on GC20/5 is 18 January 2021.
FCA publishes evaluation of its work on the financial advice market
On 3 December 2020, the FCA published its evaluation of its work on the financial advice market.
In May 2019, the FCA published a Call for Input, outlining the intended scope of the review of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). To supplement the Call for Input, the FCA held a series of stakeholder events across the UK to gather further feedback. Through 2019 and 2020, the FCA conducted new research to establish an up-to-date evidence base. This included qualitative and quantitative research with consumers, data collection from a representative sample of firms operating in the market, and looking at some international markets, to see what lessons can be learned.
The evaluation found evidence of some improvements in the market since the conclusion of FAMR:
- 8% (4.1m) of all UK adults have received financial advice, an increase from 6% (3.1m) in 2017.
- Adviser numbers are up from 35,000 in 2012 to 36,400 in 2019 (4% increase).
- The creation of the FCA’s Advice Unit has helped firms to develop new automated advice models (it has received 137 applications for support, with 65 accepted).
- Estimated assets under automated advice services increased from £0.4bn in 2016 to £3.2bn in 2019.
- Consumer awareness of automated advice has increased, with 19% of consumers reporting having heard of these services (compared to 10% in 2017).
The evaluation also found that while more consumers are getting the support they need, further innovation could help even more consumers make better use of their finances.
Many consumers are still holding money in cash that could be invested to provide potentially higher returns, but they have not sought or received the help with their finances that would help them to make better investment decisions.
The industry offers a range of services but there is significant clustering around certain service types and price points. More innovation in services can help drive greater competition between firms across the market.
More tailored guidance services and simpler advice services could help to attract more consumers towards the help they need. However, during the review, some firms raised concerns about understanding the point at which more general forms of consumer support become advice, suggesting this limits their ability to innovate.
Adding a new sub-fund to an umbrella scheme in the TMPR
On 3 December 2020, the FCA published a new webpage in which it explains the proposed process for adding a new sub-fund to an umbrella scheme that will be in the temporary marketing permissions regime (TMPR).
If new sub-funds of EEA UCITS are authorised by the relevant home state regulator after the end of the transition period, but form part of an umbrella scheme that notified for the TMPR prior to the end of the transition period, they may be added into the regime so that they can be marketed to the general public including retail investors.
To use the regime, a sub-fund will need to satisfy the conditions specified in regulation 63(3) of the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2019 (CIS Regulations). These conditions are further described in the new FCA webpage.
The new regime applies to sub-funds authorised on or after 31 December 2020. Sub-funds that are authorised by their relevant home state regulator before this date must be included in a fund manager’s TMPR notification.