Summary
In this Sidley Update, we cover, amongst other things:
on the UK side, the Financial Conduct Authority (FCA) updates on consumer duty breaches, FCA focus on new employees and regulatory references, the Financial Services and Markets Bill receiving royal assent, new cryptoasset advertising rules, and a post-Brexit Memorandum of Understanding between the UK and the EU.
on the EU/international side, the European Securities and Markets Authority overview of national rules governing fund marketing in the EU, new sustainability standards published by the International Sustainability Standards Board, new Russia financial sanctions measures, the European Securities and Markets Authority Call for Evidence on integrating sustainability preferences, the European Commission’s new sustainable finance package and draft sustainability reporting standards, and the Cayman Islands likely removal from the Financial Action Task Force “grey list.”
2. UK — Financial Services and Markets Act
3. UK — Cryptoassets Regulation
9. International — Cayman Islands/Financial Action Task Force (FATF) grey list
1. UK — FCA Updates
FCA focus on recruitment and regulatory references
On 26 June 2023, Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations at the FCA, gave a speech on culture in regulated firms in which she noted, amongst other things, that one area where the FCA is focusing supervisory efforts is tackling misconduct in wholesale markets.
In connection with this focus, Shepperd noted that FCA wants firms “to take their regulatory referencing far more seriously” and that if necessary, firms should extend probationary periods, add extra monitoring, or restrict activity. In particular the FCA is concerned that “some firms were willing to turn a blind eye to their new recruits’ being dismissed for market abuse, expense fraud. and sexual harassment.”
The reference to sexual harassment is important, as it shows the FCA is still focussed on nonfinancial misconduct, notwithstanding the setback resulting from the John Frensham case.
UK investment managers may wish to review their recruitment/new employee onboarding processes to ensure that they meet the FCA’s expected standards in this area.
FCA Consumer Duty
On 1 June 2023, Therese Chambers, the newly appointed Co-Executive Director of Enforcement of the FCA, gave a speech in which she outlined the FCA’s approach on consumer duty breaches. She noted that the FCA’s priority on enforcement action is to see the maximum possible penalty imposed on the firms and individuals that cause the greatest harm whilst ensuring that the FCA is able to secure the maximum redress for consumers who have been harmed.
In addition, on 9 June 2023, Sarah Montgomery, Head of Consumer Policy and Outcomes at the FCA, noted in a speech at the Westminster Business Forum that firms causing harm to UK consumers can expect swift intervention and enforcement by the FCA when its new consumer-duty rules come into force on 31 July. The FCA expects firms to be ready to act to deliver good customer outcomes on day one, and firms can expect the FCA to take robust action in connection with breaches of the duty, including interventions or investigations, along with possible disciplinary sanctions.
Finally on 28 June 2023, the FCA published a statement (One month to go for the Consumer Duty) on its website, highlighting the questions firms should consider as they embed the consumer duty.
For a more detailed discussion of the FCA consumer duty and how it may apply to asset managers, please see our Sidley Updates of February 2023, January 2023, and May 2022.
2. UK — Financial Services and Markets Act
Financial Services and Markets Bill receives royal assent
On 29 June 2023, the government announced that the Financial Services and Markets Bill (the Bill) received royal assent and is now the Financial Services and Markets Act 2023 (the Act). The Act is central to delivering the Government’s vision to reform the regulatory framework for the UK’s financial services sector, following Brexit.
The Act also gives the ability to revoke much EU law, including rules for asset managers, insurers, and wholesale markets, once replacement rules are finalized. For example, in its press release, the government notes that the new powers that will set the path for reforms to the current insurance prudential regime under Solvency II will unlock around £100 billion for productive investment and help cultivate innovation and grow the economy.
The Act also introduces new secondary objectives for the FCA and the Prudential Regulation Authority — to facilitate the growth and international competitiveness of the UK economy. This will be backed up by changes to enhance the scrutiny and accountability of the regulators, including ensuring regular reporting and a greater focus on cost-benefit analyses.
For an overview of key topics set out in the Bill, please see our August 2022 Update.
3. UK — Cryptoassets Regulation
FCA announces new cryptoasset advertising rules
On 8 June 2023, the FCA published a press release and policy statement (PS23/6) announcing new advertising rules for cryptoassets, which will come into force on 8 October 2023.
As part of a package of measures designed to ensure that those who buy crypto understand the risk, firms marketing cryptoassets will need to introduce a cooling-off period for first-time investors, and “refer a friend” bonuses will also be banned.
In its policy statement, the FCA confirmed that cryptoassets will be classified as “restricted mass market investments” and will therefore apply the associated restrictions on how such investments can be marketed to UK consumers. In particular, the proposed restrictions would include risk warnings, client categorisation requirements, and appropriateness assessments.
The new rules mean crypto firms must ensure that people have the appropriate knowledge and experience to invest in crypto. Those promoting crypto must also put in place clear risk warnings and ensure that adverts are clear, fair, and not misleading.
The FCA’s rules follow government legislation to bring crypto promotions into the regulator’s remit.
The FCA is also consulting on additional guidance setting out expectations of firms advertising crypto to UK consumers. The consultation window closes on 10 August 2023.
4. UK / EU — Post-Brexit
UK and EU sign MoU on financial services regulatory cooperation
On 27 June 2023, the UK and EU signed the MoU on regulatory cooperation in financial services.
The MoU, which was agreed by the UK and EU earlier this year in May, will set up a joint forum to discuss financial services issues twice yearly and will pave the way for increased contact between officials in the European Commission financial services directorate and the UK Treasury.
The forum will serve as a platform to facilitate structured regulatory cooperation, with objectives including improving transparency, reducing uncertainty, identifying cross-border implementation issues, and exchanging information and views on regulatory issues of common interest.
As mentioned in our June 2023 Update, this MoU will not necessarily result in an “equivalence” assessment by the Commission of the UK Markets in Financial Instruments Directive (MiFID) framework (or other UK financial services legislation), which is what UK investment firms have been hoping for, so that they can provide investment services to professional clients in the EU.
5. UK / EU — ESG
International Sustainability Standards Board (ISSB) issues inaugural sustainability standards
On 26 June 2023, the ISSB issued its inaugural standards, IFRS S1 and IFRS S2 (together, the Standards), which heralds a new era of sustainability-related disclosures in capital markets worldwide. The standards will help to improve trust and confidence in company disclosures about sustainability to inform investment decisions.
IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.
The ISSB developed the Standards with the benefit of extensive market feedback and in response to calls from the G20, the Financial Stability Board, and the International Organization of Securities Commissions (IOSCO), as well as leaders in the business and investor community.
The Standards are designed to ensure that companies provide sustainability-related information alongside financial statements — in the same reporting package. The Standards have been developed to be used in conjunction with any accounting requirements. They are also built on the concepts that underpin the IFRS Accounting Standards, which are required by more than 140 jurisdictions. The Standards are suitable for application around the world and create a global baseline for disclosures.
If the Standards are adopted widely, it should assist investment managers investing with the relevant issuers with assessing such issuers’ approach to sustainability and related issues.
6. EU — AIFMD
On 3 July 2023, ESMA published its second overview of national rules governing fund marketing in the EU (its first overview was published in 2021).
The overview includes a description of the marketing requirements across EU Member States under the UCITS Directive and Alternative Investment Fund Managers Directive (AIFMD) (as amended by the Cross-Border Distribution of Funds (CBDF) Directive and Regulation).
ESMA’s key findings are as follows:
- The transposition of the CBDF Directive and the entry into force of the ESMA Guidelines on funds’ marketing communications helped reach a greater level of harmonisation in areas where national divergences existed (identified in the first ESMA Report submitted in 2021).
- Despite the powers that National Competent Authorities (NCAs) have under the CBDF Regulation, it is apparent that only a limited number of NCAs carried out any ex ante verifications of marketing communications, while an increasing number of NCAs reported carrying out ex post verifications.
For more information on the CBDF Directive and Regulation, please see our Update EU AIFMD — New Rules on the Cross-Border Distribution of Funds From August 2021 — Implications for Non-EU Managers.
7. EU — Russian Sanctions
EU announces new sectoral sanctions affecting the financial sector
On 23 June 2023, the EU adopted the 11th package of sanctions against Russia. This new package includes new asset-freeze designations as well as various sectoral sanctions affecting trade, the financial and energy sectors, transport, broadcasting, etc.
The EU already prohibited the sale of transferable securities (shares, bonds, depositary receipts, etc.) denominated in EUR or any official currency of a Member State issued after 12 April 2022 or units in collective investment undertakings providing exposure to such securities, to any Russian national, resident, or legal entity. With the new sanctions package, the EU extended this prohibition: It is now also prohibited to sell transferable securities denominated in any other currency (e.g., USD, GBP) issued after 6 August 2023, or units in collective investment undertakings providing exposure to such securities, to any Russian national, resident, or legal entity. This prohibition applies to transferable securities issued by both public and private companies.
8. EU — ESG
ESMA call for evidence on integrating sustainability preferences
On 16 June 2023, ESMA launched a call for evidence on integrating sustainability preferences into suitability assessment and product governance arrangements under MiFID II. In particular, the call for evidence aims to help ESMA:
- develop a better understanding of how MiFID II requirements are being implemented and applied by firms across the EU and the challenges firms face in their application;
- gain a better understanding of investor experience and reactions to the inclusion of sustainability factors in investment advice and portfolio management services; and
- collect information, views, and data on main trends on aspects related to the provision of sustainable investment products and services to retail clients.
After the call for evidence concludes, ESMA and the NCAs will assess the responses to this call for evidence and continue monitoring the application by firms of the MiFID II requirements on suitability and product governance, including the related ESMA Guidelines.
The response window for the call for evidence is open until 15 September 2023.
European Commission publishes new Sustainable Finance Package
On 13 June 2023, the European Commission published a new legislative package on sustainable finance.
Please see our Sidley Update Implications of the European Commission’s June 2023 Sustainable Finance Package for a discussion of the legislative package, in particular its implications for investment management firms.
European Commission publishes draft sustainability reporting standards
On 9 June 2023, the European Commission published its first set of EU draft sustainability reporting standards for companies.
The standards, which outline certain sustainability disclosures for companies under the EU Accounting Directive and the Corporate Sustainability Reporting Directive, have taken a more lenient approach than the requirements proposed by the European Financial Reporting Advisory Group. They make timelines for certain disclosures longer, make disclosures such as biodiversity transition plans voluntary, and introduce carveouts for companies with fewer than 750 employees.
The European Commission is inviting feedback on the proposed draft standards before enacting the draft standards as a delegated regulation, and the feedback window is open until 7 July 2023.
9. International — Cayman Islands/Financial Action Task Force (FATF) grey list
On 23 June 2023, the FATF announced that it had made the initial determination that the Cayman Islands had “substantially completed its action plan” to strengthen the effectiveness of its anti-money-laundering/countering the financing of terrorism (AML/CTF) regime.
If so, it is likely that the Cayman Islands will be taken off the FATF “increased monitoring” list (sometimes referred to as the “grey list”) at the FATF plenary in October 2023. Should that occur, it is then expected that the Cayman Islands will also be removed from the EU’s own AML/CTF list.
The EU AML/CTF list is particularly important for the Cayman Islands, because a country on the EU AML/CTF list could find that investment funds domiciled in that country are prohibited from being marketed into the EU under the AIFMD, which is being revised and may be implemented in EU Member States in early 2026. For more information on the revised AIFMD, please see our Sidley Update EU AIFMD II — Implications of the Commission Proposal.
