The latest regulatory update – November 2020

Home / FINANCIAL CRIME / The latest regulatory update – November 2020

Regulatory Update November

Commission launches public consultation on criteria defining environmentally sustainable activities

On 22 November 2020, the European Commission issued a consultation on a draft delegated act under the Taxonomy Regulation.

The Taxonomy Regulation establishes the framework for the EU taxonomy by setting out four conditions that an economic activity must meet in order to qualify as environmentally sustainable:

  • It contributes substantially to one or more of the six environmental objectives set out in Article 9 of the Taxonomy Regulation in accordance with Articles 10 to 16 of that Regulation.
  • It does not significantly harm any of the other environmental objectives set out in Article 9 of the Taxonomy Regulation in accordance with Article 17 of that Regulation.
  • It is carried out in compliance with minimum (social) safeguards set out in Article 18 of the Taxonomy Regulation.
  • It complies with technical screening criteria established by the Commission through delegated acts in accordance with Articles 10 (3), 11(3), 12(2), 13(2), 14(2) or 15(2) of the Taxonomy Regulation. The technical screening criteria need to specify the performance criteria for a specific economic activity that determine under what conditions i) the activity makes a substantial contribution to a given environmental objective; and ii) it does not significantly harm the other objectives.

The draft delegated act specifies the technical screening criteria under which specific economic activities qualify as contributing substantially to climate change mitigation and climate change adaptation and for determining whether those economic activities cause significant harm to any of the other relevant environmental objectives.

The deadline for comments on the consultation is 18 December 2020.

Reporting of derivatives under UK EMIR after the transition period

On 25 November 2020, the FCA issued a statement explaining what trade repositories (TRs), and the UK counterparties should do to make sure they are compliant with the onshored European Market Infrastructure Regulation (UK EMIR) reporting obligations following the end of the transition period. The statement replaces the statement the FCA originally published in March 2019.

The statement covers the following topics:

  • The changes for UK counterparties;
  • Temporary transitional powers;
  • Reporting of new and outstanding trades by counterparties in scope;
  • Validation rules;
  • EU non-legislative material;
  • Intragroup exemptions from the reporting obligation;
  • Mandatory delegated reporting;
  • Changes for TRs;
  • Historic EMIR data;
  • Inter-TR reconciliation;
  • Publication of TR data;
  • Data access for authorities;
  • Suspension of the reporting requirements; and
  • List of third country regulated market.

From the end of the transition period, all UK counterparties that enter into a derivative contract (both over-the-counter and exchange-traded derivatives) are in scope of the UK EMIR regime and required to report details of those transactions to an FCA-registered, or recognised, TR according to the UK EMIR regime. The statement adds that:

  • UK branches of firms established in a third-country (including branches of firms from EU27 countries) are not in scope of the UK EMIR reporting regime and so do not have to report under it;
  • Third country (including EU27) branches of firms established in the UK are in scope of the UK EMIR reporting regime and must report details of their derivative transactions to an FCA-registered, or a recognised TR;
  • Alternative Investment Funds that are not established in the UK but are managed by an alternative investment fund manager authorised or registered under the UK Alternative Investment Fund Managers Regulations, are in scope of the UK EMIR reporting regime;
  • No action is required by UK TRs in relation to Gibraltar counterparties (unless it is requested by those parties). However, TRs should confirm their position with the Gibraltar FSC in relation to the obligations imposed by the law of Gibraltar

Note that from the end of the transition period, EU counterparties are not in scope of the UK EMIR reporting requirements. Certain transactions are not in scope of UK EMIR and will not be required to be reported to a UK TR, namely derivative transactions entered into by two EU27 counterparties:

  • that are traded on a UK trading venue;
  • that are denominated in GBP; and
  • where the reference entity of the derivative contract is located in the UK or where the reference obligation is UK sovereign debt.

ESMA sets out its final view on the derivatives trading obligation (DTO)

On 25 November 2020, the European Securities and Markets Authority (ESMA) published a statement setting out its view on the application of the EU trading obligation for derivatives (DTO) following the end of the Brexit transition period. The DTO requires EU investment firms to trade certain classes of derivatives only on EU-authorised trading venues, or third country trading venues certified by the European Commission as equivalent. No such equivalence decision has been made or signalled by the EU for purposes of the DTO and ESMA’s latest statement declines to offer any forbearance or similar relief to EU firms currently using UK venues for this purpose.

The latest ESMA statement states:

“At this point in time, ESMA does not consider that a change of its approach is warranted. Most UK trading venues that offer trading in derivatives subject to the DTO have established new trading venues in the EU. While the trading activity on these trading venues is currently limited, those trading venues have onboarded members and participants, including the major liquidity providers, which will allow EU investment firms to comply with the DTO by trading the relevant derivatives in those trading venues after the end of the transition period. In ESMA’s view, the continued application of the DTO after the end of the transition period would not create risks to the stability of the financial system.

ESMA is aware that, absent an equivalence decision, UK branches of EU investment firms are likely to be subject to the DTO in both the EU and the UK. ESMA understands that this situation is challenging for UK branches of EU investment firms and it may require changes to current business practices in order to ensure compliance with EU law. However, this situation is primarily a consequence of the way in which the UK has chosen to implement the DTO.

ESMA will continue monitoring the situation closely to assess whether markets would be sufficiently liquid to allow EU market participants to execute transactions in derivatives subject to the DTO on eligible trading venues after the end of the transition period.”

FCA publishes details of the benefits of the new RegData platform

On 24 November 2020, the FCA published a new webpage regarding the benefits of its new data collection platform RegData.

The FCA is moving firms and their users to RegData in groups to minimise the impact on them. Firms’ moving dates are determined by their reporting requirements. All users must register for RegData by logging in to Gabriel and completing the one-time registration when prompted. Until they are moved, firms should continue reporting via Gabriel using their existing Gabriel login details.

Firms can find out what to expect from the move to RegData by visiting the FCA’s ‘Moving Your Firm to RegData’ web page and/or watching the short videos that have been produced to assist firms with moving to the platform.

FCA warns firms to be responsible when handling client data

The FCA has published a statement warning firms to be responsible when handling client data, as the current economic situation may give rise to an increase in insolvencies and mergers whereby client data will need to be processed transferred.

The FCA reminds firms of their responsibilities under data protection legislation including the General Data Protection Regulation (GDPR) (and under the onshored GDPR), such as the requirement to inform clients clearly setting out “privacy information”, including the purpose of the data gathering or processing, and the individuals’ rights when their data is processed, maintaining records of how and why they process, share and retain personal data; and keeping a record of the lawful basis for processing data.

Firms are reminded that the Principles in the FCA’s Handbook include provisions on the transfer of clients’ personal data, on maintaining adequate risk systems in relation to the firm’s affairs and on clear and fair communication with clients.

The FCA and FOS correspond in relation to firms’ complaints handling during the COVID crisis.

The FCA has published correspondence with the Financial Ombudsman Service (FOS) confirming the FOS’s approach to assessing complaints arising from firms’ acts or omissions during the COVID-19 pandemic.

In the letter (dated 16 November 2020) the FCA Interim Executive Director and Strategy and Competition asked the FOS Chief Ombudsman to confirm that, when determining what is fair and reasonable in all the circumstances of the individual case, the FOS will continue to take account of the operational challenges faced by firms during this period and the FCA’s revised expectations of what constitutes compliance with its rules, guidance and standards.

The FOS confirmed, in a letter dated 17 November 2020, that it would continue to provide an appropriate framework to give certainty to financial firms that complaints would be dealt with fairly.

The FCA’s Review of Delayed Disclosures of Inside Information

The FCA conducted a review of Delayed Disclosure of Inside Information (DDII) notifications which identified a number of areas where it will be increasing its oversight in the future. This note considers what issuers should be doing to comply with their disclosure requirements under the Market Abuse Regulation (MAR).

An issuer is only able to delay disclosure of inside information where:

  • immediate disclosure would prejudice legitimate interests of the issuer;
  • delay would not be likely to mislead the public; and
  • the issuer is able to ensure the confidentiality of such information.

Where inside information has been delayed, the issuer must inform the FCA (using the prescribed form) of the delay immediately after disclosing the inside information to the public. If requested by the FCA, an issuer must provide a written explanation of the delayed disclosure.

From July 2016 to November 2018, the FCA received 1,610 DDII notifications. In total, 718 issuers submitted DDII notifications (239 were premium-listed issuers). Some interesting results revealed by the FCA’s review include:

  • there was, on average, a longer delay (average delay of 21 days) for notifications relating to unscheduled financial information (e.g. profit forecasts), than for periodic financial information (average delay of 17 days). The FCA felt this was unusual in that instances regarding the delayed disclosure of periodic financial information (i.e. annual accounts) may be able to benefit from the legitimate interest test, but it is less clear to see what specific legitimate interest would be prejudiced by a delay in the disclosure of unscheduled financial information; and
  • the large number of DDII notifications for director/board changes based on the assumption that once an issuer establishes that inside information has arisen within the process of someone leaving/being recruited, it might be challenging to establish grounds to delay disclosure.

In light of these findings, the FCA will be stepping up their monitoring in this area and plan to revisit, refine and replicate this review in the future.

Based on these findings and in light of COVID, issuers should consider the following:

  • Correctly identify what is inside information – Assess on an ongoing and case-by-case basis whether information is inside information and record this. Important areas to consider are, up to date employee training on assessing and handling inside information and recognising inside information as early possible especially as what constitutes inside information may have changed because of COVID.
  • Periodic financial information can contain inside information – When assessing periodic financial information, judgement should be exercised in good faith starting from the assumption that information relating to financial results could constitute inside information. If the financial results contain information which is not in line with market expectations, this should be announced as soon as possible unless immediate disclosure is likely to prejudice the legitimate interests of an issuer.
  • Notify proposed board changes promptly – Proposed changes can constitute inside information. The FCA have commented that once the issuer establishes that inside information has arisen within the process of someone leaving/being recruited, it might be challenging for the issuer to establish grounds for delay.
  • Conditions to delay disclosure apply on an ongoing basis – If there is a need to delay disclosure of inside information, all of the conditions set out above on an ongoing basis need to be satisfied.
  • Failure to identify delayed disclosure can indicate a lack of systems and controls – Sufficient procedures, systems and controls must be in place to identify inside information. ESMA recently commented, in its review of MAR, that the low number of DDII notifications across the EU indicated a need for issuers to invest in appropriate procedures, systems and controls.

Corporate Governance Disclosures by Listed Issuers

The FCA’s reviewed the corporate governance disclosures from a sample of issuers. They found, amongst other things that:

  • Disclosures were standard and generic. The FCA stated that firms should consider including specific details of how they have applied the principles in the UK Corporate Governance Code using examples and cross-references; and
  • The quality of Board Diversity Reporting could have been better. 

The FCA will use the results to inform decisions about the deployment of future surveillance and monitoring efforts in this area.

Inquiry into the Future of the UK’s Financial Services Sector Post-Brexit

On November 20th, the Commons’ Treasury Select Committee launched an inquiry into the future of financial services regulation in the UK after departure from the European Union. Examining how financial services regulations should be set and scrutinised by Parliament as EU legislation will cease to apply in the UK with effect from midnight on the 31st of December.

The Inquiry offers financial services firms an opportunity to contribute to the restructuring and future focus, direction and methodology of the financial services sector.

The Inquiry will evaluate how best to balance the need for new and effective legislation and oversight with a need not to constrain the sector through overly heavy oversight or regulation; will set out how future legislation should be created and passed; and will advise what role Parliament should have either in passing new regulation or in scrutinising it.

It will also consider how best to attract international incubators and Fintech companies to the UK; what the Government’s financial services priorities should be when it negotiates trade agreements with third countries; and whether and to what extent the UK should open its financial services market to competition from those third countries.

Firm’s wishing to submit evidence can do so before 9 January 2020 at: