Navigating Regulatory Compliance Investment Management Update May 2016 Navigating Regulatory Compliance Investment Management Update – May 2016 1. What were April’s highlights? 1.1 Market Abuse The Market Abuse Regulation (MAR) will apply in the UK and across the EU from 3 July 2016. MAR will broaden the civil market abuse regime in various ways by extending the scope of financial instruments covered, incorporating “attempted” market abuse and introducing more robust market abuse detection obligations. In April, the FCA published two papers with respect to market abuse:  CP16/13: In this consultation paper, the FCA sets out its proposals to make changes to its Decision Procedure and Penalties Manual (DEPP) and Enforcement Guide (EG) to implement MAR. The FCA’s previous consultations on MAR implementation did not deal with either the DEPP manual or EG. The FCA has been awaiting the details of an HM Treasury statutory instrument. This instrument is due to be laid before the UK Parliament in the coming weeks, thus the FCA is now consulting on how they intend to enforce MAR once it becomes effective on 3 July this year. The consultation is open until 22 May 2016.  PS16/13: The FCA summarises the responses it has received to its November 2015 consultation paper on policy proposals and Handbook changes relating to the implementation of MAR (CP15/35). The revised provisions and guidance to the Handbook set out in Appendix 1 will come into force on 3 July 2016 at the same time as EU MAR will apply. The FCA notes, however, at the time of writing this statement, it is still unclear when all the final Level 2 texts of the Regulation will be published in the Official Journal of the European Union and therefore they will have to monitor developments and make consequential amendments as needed. In addition, on 29 April 2016, AIM Regulation published an “Inside AIM” update setting out information to support nominated advisers as they work with their clients to prepare them for the introduction of MAR and the consequential changes to the AIM Rules. 1.2 MiFiD II In April, two sets of Level 2 measures were adopted by the European Commission:  Delegated Directive supplementing MiFID II Directive regarding the safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits (C(2016) 2031 final).  Delegated Regulation (plus Annexes) supplementing the MiFID II Directive as regards organisational requirements and operating conditions for investment firms and defined terms (C(2016) 2398 final). In addition, the FCA published a new webpage setting out the findings from a thematic review of inducements and conflicts of interest. The FCA explains that, in 2015, it carried out a thematic review about benefits provided and received by firms that carry out MiFID business, and firms that carry out regulated activities relating to retail investment products. The FCA is now publishing its key findings from that review. See our briefing for more information. Navigating Regulatory Compliance Investment Management Update – May 2016 1.3 Asset Land Investment v FCA On 20 April 2016, the UK Supreme Court issued its judgment in the case of Asset Land Investment plc v FCA [2016] UKSC 17. In its judgment, the Supreme Court confirmed that Asset Land had been operating an unauthorised collective investment scheme in the course of operating a land bank which involved the selling of small plots of land to investors at hugely inflated prices. It found that, although investors were the legal owners of their individual plots of land, in reality, the arrangements of the scheme were such that the individual plots sold to investors were managed as a whole, the investors did not have control over their investments and Asset Land was the central operator of the scheme. The case confirms that the court continues to take a purposive view of the definition of a collective investment scheme in section 235 of the Financial Services and Markets Act 2000. The FCA has published a press release welcoming the judgment as well as a further press release about land banking schemes and next steps. 1.4 Loan origination As part of the ongoing work on the Capital Markets Union, on 12 April 2016, ESMA published an opinion, addressed to the European Parliament, the Council of the EU and the European Commission, on the necessary elements for a common EU framework for loan origination by investment funds. The European Commission intends to consult on establishing a common EU approach to loan origination by funds in the second quarter of 2016 and asked ESMA to provide input on the key issues on which the consultation could focus. In the opinion, ESMA sets out its views on elements such as the authorisation of loan-originating funds and their managers (AIFMs), eligible investors, organisational requirements and leverage. The opinion takes into account the different bespoke frameworks currently in place in several member states, which mean that funds operating cross-border must comply with different requirements. The Annex to the opinion maps national practices in this area. A common European framework is expected to reduce the potential for regulatory arbitrage, and in turn facilitate the take-up of loan origination by investment funds. Navigating Regulatory Compliance Investment Management Update – May 2016 Impact # Topic Type Headline Date Summary Link to more information 1. MiFID II /Market Abuse FCA: Other Policy Development Update – Issue 32 01/04 A few dates to note in this latest issue:  Mid 2016: Implementation of MiFID II – CP 2.  Spring 2016 Policy proposals and Handbook Changes related to the Implementation of the Market Abuse Regulation.  TBC: PS to CP15/35 Markets in Financial Instruments Directive II Implementation – Consultation Paper I, PS to CP15/43. Policy Development Update – Issue 32 2. Market Abuse ESMA: Q&A ESMA Updates MAD Q&A 01/04 Update to Question 3 on investment recommendation; specifically on the definition of recommendation in Article 1(3) of the Commission Directive 2003/125/EC on the fair presentation of investment recommendations and the disclosure of conflicts of interest (Investment Recommendations Directive). ESMA Updates MAD Q&A 3. CRD IV FCA: Proposed Approach Countercyclical Buffer Rate for the UK 04/04 The FCA set out their proposed approach to the interaction between their capital planning buffer and the capital buffers required under the CRD IV during the transition period from 1 January 2016 to 1 January 2019. Countercyclical Buffer Rate for the UK 4. EMIR ESMA: Q&A ESMA Updates EMIR Q&A 04/04 The only change to the previous version of the Q&A is a new question and answer on the population of the "clearing obligation" field in trade reports (TR Question 42). ESMA Updates EMIR Q&A 5. MiFID II ESMA: press release ESMA not to exempt ETD under MiFID II 04/04 ESMA sees no need to temporarily exclude exchange traded derivatives from non-discriminatory access to central counterparties and trading venues. ESMA Not to Exempt ETD under MiFID II Nil Fines Nil New Directives 2 High Impact Announcements 2 Speeches 6 Finalised Policy Navigating Regulatory Compliance Investment Management Update – May 2016 Impact # Topic Type Headline Date Summary Link to more information 6. General FCA: Business Plan FCA publishes 2016/17 Business Plan 05/04 The Business Plan outlines seven priority themes which will guide how the FCA will use its flexible resources and provide additional focus for the core activities of the organisation. The seven themes are: pensions, financial crime and antimoney laundering, wholesale financial markets, advice, innovation and technology, firms’ culture and governance, and the treatment of existing customers. FCA publishes 2016/17 Business Plan 7. EMIR ESMA: amended draft RTS ESMA proposes oneday margin period of risk for CCP client accounts 05/04 ESMA sent its amended regulatory technical standards under EMIR for endorsement to the EC. The RTS detail the margin period of risk (MPOR) for CCP client accounts. The amended RTS would allow EU-based CCPs to margin on a one-day MPOR basis. ESMA: amended draft RTS 8. EMIR ESMA: amended draft RTS ESMA proposes amendments regarding access, aggregation and comparison of data 05/04 ESMA published amended RTS dealing with the access, aggregation and comparison of data across trade repositories. This is to ensure higher quality of data, to enhance the access to data by authorities and to allow for the comparability and aggregation of data across trade repositories. ESMA: amended draft RTS 9. UCITS ESMA: Q&A ESMA updates UCITS Q&A 05/04 The Q&A includes a new question and answer on UCITS investment in UCITS feeder funds. ESMA updates UCITS Q&A 10. AIFMD ESMA: Q&A ESMA updates AIFMD Q&A 05/04 The Q&A includes a new question and answer on notification relating to additional investment in existing Alternative Investment Funds. ESMA updates AIFMD Q&A 11. Trading FCA Speech Electronification of trading 06/04 Speech by Edwin Schooling Latter, Head of Markets Policy, FCA, delivered at the FIX 2016 EMEA Trading Conference. It focuses on how the FCA views the increasing electronification of trading, its implications and consequences. Electronificatio n of trading 12. UCITS ESMA: Discussion Paper UCITS share classes 06/04 The DP describes the nature of share classes, the reasons for their existence and their key elements. It builds on the feedback received from ESMA’s first discussion paper from December 2014. In this new DP, ESMA puts forward a revised, principles-based approach. The consultation closes on 6 June 2016. See the Eversheds briefings on the new April 2016 DP and the December 2014 DP for more information. UCITS share classes 13. Governance FCA: Thematic Review Meeting Investors’ Expectations 07/04 The FCA published a report setting out the findings of a thematic review it has carried out into whether, and how, asset managers are meeting investors' expectations (TR16/3). The FCA found that asset managers are generally taking the right steps to ensure they manage funds as they say they will. But while most funds in the sample are investing in line with their stated strategy, the FCA did find examples of unclear product descriptions and inadequate governance or oversight. See our briefing on the Thematic Review for more information. Meeting Investors’ Expectations Navigating Regulatory Compliance Investment Management Update – May 2016 Impact # Topic Type Headline Date Summary Link to more information 14. PRIIPS ESMA: Final Draft RTS ESAs finalise KIDs for PRIIPS 07/04 The Joint Committee of the European Supervisory Authorities (ESAs) has published its final draft RTS on key information documents (KIDs) for PRIIPs. It is intended that the proposed KIDs provide retail investors for the first time across the EU with simple and comparable information on investment products in the banking, insurance and securities products. ESAs finalise KIDs for PRIIPS 15. MiFID II EC: Delegated Directive EC adopts Delegated Directive supplementing MiFID II Directive 07/04 The European Commission adopted its Delegated Directive under MiFID II regarding the safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits (that is, inducements). Notably this includes final Level 2 measures for:  The safeguarding of clients’ financial instruments and funds  Product governance obligations for investment firms manufacturing or distributing financial instruments  The provision or reception of inducements EC adopts Delegated Directive supplementin g MiFID II Directive 16. MiFID ESMA: Q&A ESMA publishes new Q&A on CDFS and other speculative products 08/04 ESMA has published a new Q&A document on the application of MiFID to the marketing and sale of financial contracts for difference and other speculative products to retail clients (such as binary options and rolling spot forex). ESMA publishes new Q&A on CDFS 17. General FCA: Speech Innovate Finance Global Summit Speech 11/04 Speech by Christopher Woolard, FCA Director of Strategy and Competition, delivered at the Innovate Finance Global Summit focussing on the FCA’s regulatory sandbox. He states that the FCA will accept applications on 9 May 2016. The firms that are successful will be able to test out their innovative ideas without immediately incurring all the normal regulatory consequences. The FCA also published the following documents relating to the regulatory sandbox:  Sandbox eligibility criteria  Default standards for sandbox testing parameters Innovate Finance Global Summit Speech 18. Trading FCA: Ban FCA censures and bans former RBS LIBOR submitter 12/04 The FCA has banned Paul White from performing any function in relation to any regulated financial activity and publicly censured him. Were it not for Mr White’s serious financial hardship, the FCA would have fined him £250,000. This is the FCA’s fourth public action against a trader for manipulating LIBOR submissions, and follows fines and bans in early 2015 for senior executives for LIBOR compliance failures. FCA censures and bans former RBS LIBOR submitter 19. Loan Origination ESMA: Opinion ESMA opinion on loan origination 12/04 ESMA has published an opinion addressed to the European Parliament, the Council and the Commission on the necessary elements of a common EU framework for loan origination by investment funds. The European Commission intends to consult on this issue in the second quarter of 2016 and asked ESMA to provide input on the key issues. ESMA opinion on loan origination Navigating Regulatory Compliance Investment Management Update – May 2016 Impact # Topic Type Headline Date Summary Link to more information 20. Data Protection EP: Formal approval European Parliament approves data protection reform package 14/04 The European Parliament formally approved the EU's general data protection reform package, bringing to a close nearly four years of work overhauling the EU's data protection rules. The package comprises the General Data Protection Regulation (GDPR) (which will replace the Data Protection Directive (95/46/EC)), and a Data Protection Directive for the police and criminal justice sector (which will replace the Framework Decision for the police and criminal justice sector (2008/977/JHA)). The GDPR will come into force on the 20th day following its publication in the OJ and the Directive will come into force on the day following its publication in the OJ. European Parliament approves data protection reform package 21. Trading FCA: Occasional Paper Occasional Paper No. 16: Are highfrequency traders anticipating the order flow? 15/04 The FCA published occasional paper 16, in which two members of the FCA's Chief Economist's Department consider whether high-frequency traders (HFTs) are anticipating the order flow. The paper's authors have also published a related article on the FCA's Insight website. Occasional Paper No. 16 22. MiFID II FCA: Thematic Review Inducements and conflicts of interest thematic review: key findings 18/04 On 18 April 2016, the FCA published a new webpage setting out the findings from a thematic review of inducements and conflicts of interest. The FCA explains that, in 2015, it carried out a thematic review about benefits provided and received by firms that carry out MiFID business, and firms that carry out regulated activities relating to retail investment products. The FCA is now publishing its key findings from that review. See our briefing for more information. Inducements and conflicts of interest thematic review: key findings 23. Advice FCA: Speech The regulation of advice – recommendations post FAMR 20/04 The FCA has published a speech given by Tracey McDermott on the regulation of advice following publication of the financial advice market review (FAMR) recommendations. Ms McDermott announced the timing of a number of FCA initiatives to take forward the FAMR recommendations:  The FCA's advice unit will be open from May 2016.  The FCA has started work on the Financial Services Compensation Scheme (FSCS) funding review. The FCA will engage with the industry over summer 2016 through bilateral meetings and an industry working group. This will be followed with a consultation in autumn 2016. Ms McDermott touched on the retail distribution review (RDR), reiterating that the FAMR recommendations do not signal a reversal of the changes brought about by the RDR. The regulation of advice – recommendati ons post FAMR 24. CIS FCA: Case Supreme Court dismisses appeal in Asset Land Investment v FCA 20/04 The Supreme Court issued its judgment confirming that Asset Land had been operating an unauthorised collective investment scheme (CIS) in the course of operating a land bank which involved the selling of small plots of land to investors at hugely inflated prices. Supreme Court Judgment Navigating Regulatory Compliance Investment Management Update – May 2016 Impact # Topic Type Headline Date Summary Link to more information 25. Pensions FCA: Consultation Paper Secondary annuity market – proposed rules and guidance 21/04 The FCA has published a consultation on its proposed rules and guidance for the secondary annuity market, which is due to start in April 2017. The consultation is open until 21 June 2016. Secondary annuity market CP 26. Market Abuse FCA: Consultation Paper MAR Sanctions 22/04 The FCA has published a CP 16/13 setting out its proposals to make changes to its Decision Procedure and Penalties Manual (DEPP) and Enforcement Guide (EG) to implement the Market Abuse Regulation. The consultation is open until 22 May 2016. MAR Sanctions 27. Pensions FCA: Policy Statement PS16/12: Pension reforms 25/04 In this PS the FCA reports on the main issues arising from Consultation Paper 15/30 (Pension reforms – proposed changes to our rules and guidance) and publishes the final rules and guidance. PS16/12: Pension reforms 28. MiFID II EC: Delegated Regulation EC adopts Delegated Regulation supplementing MiFID II Directive 25/04 The European Commission adopted a Delegated Regulation (plus Annexes) supplementing the MiFID II Directive (2014/65/EU) as regards organisational requirements and operating conditions for investment firms and defined terms (C(2016) 2398 final). The Delegated Regulation is based on final technical advice on the MiFID II Directive that ESMA provided to the Commission in December 2014 EC adopts Delegated Regulation supplementin g MiFID II Directive 29. MiFID II ESMA: Response ESMA publishes response to Commission Green Paper on Retail Financial Services 26/04 ESMA has published its response to the European Commission’s Green Paper on Retail Financial Services. This response should be considered in the broader context of ESMA’s response to the European Commission’s Capital Markets Union Green Paper. ESMA Response 30. Markets FCA: Report Measures to improve the effectiveness of UK primary listed debt markets 27/04 The FCA published a report proposing a series of measures aimed at enhancing the UK’s debt listing regime. FCA Report 31. Market Abuse FCA: Policy Statement PS16/13: Implementation of the Market Abuse Regulation 27/04 In PS16/13, the FCA summarises the responses it has received to its November 2015 consultation paper on policy proposals and Handbook changes relating to the implementation of MAR (CP15/35). The revised provisions and guidance to the Handbook set out in Appendix 1 will come into force on 3 July 2016 at the same time as EU MAR will apply. PS16/13: Implementati on of the Market Abuse Regulation 32. Trading ESMA: Press Release ESMA update on reporting structured finance instruments information under the CRA Regulation 27/04 ESMA published a press release in which it provides an update in relation to the requirement under the CRA Regulation for issuers, originators and sponsor entities to report information in respect of structured finance instruments (SFIs) to ESMA. Given various issues, ESMA does not expect to be in a position to receive the information related to SFI from reporting entities from 1 January 2017. ESMA expects that proposed Securitisation Regulation, which is currently being considered by the European Parliament and the Council of the EU, will provide clarity on the future obligation regarding reporting on SFIs. ESMA: Press Release Navigating Regulatory Compliance Investment Management Update – May 2016 Impact # Topic Type Headline Date Summary Link to more information 33. Benchmarks EP: adoption EP approves adoption of Benchmark Regulation The European Parliament approved by a large majority in plenary the adoption of the proposed Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Benchmark Regulation). The next step is for the Benchmark Regulation to be formally adopted by the Council, which is expected in May 2016. It will then be published in the OJ and enter into force on the day after its publication. EP approves adoption of Benchmark Regulation 34. FSCS FCA: Policy Statement PS16/14: Financial Services Compensation Scheme – Changes to the Compensation sourcebook 29/04 The FCA published a PS on amendments to the Compensation sourcebook (COMP), which governs the operation of the Financial Services Compensation Scheme (FSCS). The changes contained in the rules that form part of this PS will come into effect on 29 April 2016. PS16/14:4Fin ancial Services Compensation Scheme 35. Trading ESMA: Press Release ESMA publishes results of EU central counterparties stress test 29/04 ESMA has published the results of its first EU-wide stress test exercise regarding Central Counterparties (CCPs). The results of the test shows that the system of EU CCPs can overall be assessed as resilient to the stress scenarios used to model extreme but plausible market developments, however ESMA has included recommendations addressed to the NCAs of CCPs. 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