The latest regulatory update – April 2021

Home / FINANCIAL CRIME / The latest regulatory update – April 2021

Regulatory Update April 2021

In this issue we cover:

  • Remuneration Code changes
  • FCA speech on regulating the UK as a global financial centre
  • FCA consultation paper on new prudential regime for UK investment firms
  • Financial Stability Board peer review report on UK implementation of remuneration standards
  • MiFIR review report on the obligations to report transactions and reference data
  • FCA policy statement on the extension of annual financial crime reporting obligation

You can find these articles and a searchable archive of all our previous articles at https://objectivus.com

Remuneration Code changes

As one of the last pieces of EU law the UK was subject to before it left the single market, the Capital Requirements Directive V (EU) 2019/878 (CRD V) makes a number of changes to the Remuneration (Rem) Code for UK banks and designated investment firms.

The most significant changes are in respect of scope and proportionality meaning many firms and employees are now subject to additional remuneration rules.

The new Rem Code retains a revised list of qualitative and quantitative criteria for identifying MRTs and also introduces a new list of roles that are deemed to be MRTs:

  • members of the senior management or management body;
  • employees with managerial responsibility over the firm’s control functions or material business units; and
  • employees entitled to significant remuneration in the preceding financial year, for which three conditions must be met:
    • the individual’s remuneration is at least £440,000;
    • the individual’s remuneration is at least the average remuneration awarded to the members of the firm’s management body and senior management; and
    • the individual performs their professional activity within a material business unit and the activity is of a kind that has a significant impact on the relevant business unit’s risk profile.

The qualitative and quantitative tests in the MRT Regulation 2020 are broadly similar to existing ones, although firms will need to go through a careful mapping exercise as there are differences.

Under previous rules, the PRA and FCA divided firms into three categories to apply the Rem Code on a proportionate basis, with many of the rules disapplied for Level Three Firms. Furthermore, individuals who earned less than £500,000 and whose variable remuneration did not exceed 33% of the total were exempted from certain provisions.

CRD V removed the UK’s discretion on how to apply the remuneration code proportionally. Instead, only certain prescribed provisions of the Rem Code can be disapplied for:

  • firms that are not “large institutions” and whose average value of assets does not exceed £4 billion over the four-year period preceding the current financial year; or
  • staff whose annual variable remuneration does not exceed £440,000 and does not represent more than one third of their total annual remuneration.

A firm is a “large institution” if it is:

  • a global systemically important institution or other systemically important institution;
  • one of the three largest institutions in the UK in terms of total value of assets; or
  • an institution with total assets to or greater than €30bn.

The new Rem Code increases the minimum deferral period to four years for anyone earning less than £500,000, although the deferral period must be at least five years for senior management. This four-year period should capture the majority of employees who are subject to deferral for the first time following changes to proportionality thresholds.

Whereas CRD IV only allowed unlisted firms to include share linked instruments in their variable remuneration, the new Rem Code extends this to listed firms.

Solo regulated investment firms are unaffected by the changes to CRD V.

FCA speech on regulating the UK as a global financial centre

On 13 April 2021, the FCA published a speech given by Nausicaa Delfas, FCA Executive Director of International and Interim Chief Operating Officer, on regulating the UK as a global financial centre. The speech focused, in particular, on

  • regulating the UK market as a global financial centre;
  • looking to the longer term; and
  • the FCA’s approach to international firms in the UK.

The key points of the speech were:

  • the FCA is taking steps to better tailor its rules and practices for the wholesale market. Post-Brexit, the FCA can now focus on what works for UK markets in a nimble, flexible and proportionate way, without compromising market and consumer protection. For example, the FCA has decided to not automatically apply the double volume cap to all equities;
  • all firms operating in the UK including international firms, and especially those EEA firms currently in the Temporary Permissions Regime (TPR), need to ensure they are able and willing to be authorised over the next few years and has set out the FCA’s expectations of them;
  • the FCA will continue to work with international regulators to shape global standards and work towards regulatory convergence and co-operation on cross border issues;
  • the FCA is involved in the negotiations for a Mutual Recognition Agreement with Switzerland, and other bilateral work. It has also been working closely with US counterparts to ensure UK firms’ access to US markets continues and is strengthened.

FCA consultation paper on new prudential regime for UK investment firms

On 19 April 2021, the FCA published its second consultation paper (CP21/7), seeking views on the second tranche of their proposed rules to introduce the Investment Firm Prudential Regime. The main areas covered by CP21/7 include:

  • remaining aspects on own funds requirements;
  • basic liquid assets requirement;
  • remuneration requirements;
  • risk management, Internal Capital and Risk Assessment and Supervisory Review and Evaluation Process; and
  • regulatory reporting requirements.

The deadline for responses to this consultation is 28 May 2021.

Financial Stability Board peer review report on UK implementation of remuneration standards

On 14 April 2021, the Financial Stability Board (FSB) published a report setting out the findings of how the UK has implemented the FSB Principles and Implementation Standards (P&S) of Sound Compensation Practices.

It has made four targeted recommendations to further strengthen the UK’s remuneration framework. These include:

  • reviewing the interaction between the UK’s remuneration regime and the SM&CR;
  • improving the efficiency of data collection;
  • considering other supervisory approaches for assessing the effectiveness of the regime; and
  • providing additional guidance to the insurance sector on the UK Solvency II remuneration requirements.

MiFIR review report on the obligations to report transactions and reference data

On 23 March 2021, ESMA published its final MiFIR review report on the obligation to report transactions and reference data. The report highlights the obligation under article 26(10) of MiFIR which requires ESMA to submit a report to the EU Commission assessing the functioning of the transaction reporting regime under article 26 of MiFIR. The key contents of the report are:

  • a recommendation to extend the scope of reporting requirements under article 26 of MiFIR to UCITS and AIFMs when they provide at least one MiFID service to third parties;
  • simplifying reporting with the removal of the short sale indicator. Additionally, the report contains proposals for four additional elements to be included in the set of details to be reported. They include the inclusion of information on client categories and buyback programmes as well as the proposal for a specific empowerment to ESMA to specify the conditions for linking specific transactions and for identifying aggregated orders resulting in the execution of a transaction;
  • interaction with reporting obligations under EMIR and includes proposals to ensure further alignment between the two reporting regimes; and
  • use of LEIs for reference data reporting purposes and potential changes to the rules concerning the use of LEIs.

FCA policy statement on the extension of annual financial crime reporting obligation

In the policy statement, the FCA stated that it is extending the scope of firms which are required to submit the REP-CRIM annual return from approximately 2,500 to approximately 7,000 firms. In summary, the following additional firms will be required to provide a REP-CRIM return irrespective of their total annual revenue:

  • firms authorised under the Financial Services and Markets Act 2000 which fall within the scope of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (SI 2007/2157) (MLRs) and which hold client money or assets; or carry on an activity that the FCA considers to pose a higher money laundering risk (e.g. dealings in investments as agents and managing investments); and
  • all payments institutions except for payment institutions that only carry on at least one of the following:
    • money remittance;
    • account information services and/or payment initiation services;
    • persons with temporary payment institutions authorisation that immediately before IP completion day were providing payment services other than through a branch in the UK or a UK-based agent;
    • all electronic money institutions;
    • all Multilateral Trading Facilities;
    • all Organised Trading Facilities (OTFs); and
    • all crypto-asset exchange providers and custodian wallet providers.

However, the FCA has removed two activities from the REP-CRIM reporting obligation which it considers are outside of the scope of the MLRs: “home finance mediation activity” and “making arrangements with a view to transactions in investments”.