Welcome to our monthly Investment Management Regulatory Update. In addition to our register of relevant regulatory developments in the past month, we note four additional themes which stand out from the crowd.
This week, Eversheds launched the BREXIT hub. Here you can find our publications on Brexit and what it may mean, the issues of interest to businesses and details of our client events programme. An electronic brochure has also been produced for easy download and retrieval.
Top 4 themes in regulatory developments
Following last month’s publication on good practice on liquidity risk management and oversight, the FCA published an occasional paper on liquidity in the UK corporate bond market. The FCA presents evidence on the evolution of liquidity in the UK corporate bond market for the period 2008–2014. They found that there is little evidence of liquidity having a larger effect on bond spreads now than a few years ago. They also claim that the regulatory interventions that have been introduced since the financial crisis did not result in less liquidity in normal times and did not result in liquidity being more ‘flighty’ when shocks of a mild nature hit the system.
David Lawton, Director of Markets Policy and International, FCA gave a speech this month where he touched on the issues mentioned in the occasional paper but also mentioned the systemic risks of investment funds set out by the FSB and ISOSCO, which were:
- the possible mismatch between the liquidity of fund investments on the one hand and the terms and conditions for the redemption of fund units on the other;
- the high levels of leverage within (certain) investment funds;
- the operational risk challenges in transferring investment mandates from a fund manager in a stressed condition to another manager;
- the securities lending activities of asset managers and funds; and
- the potential vulnerabilities of pension funds and sovereign wealth funds
2. The Budget
The FCA’s intervention in the area of liquidity are overshadowed by the continuing legislative rumblings surrounding MiFID II and the new requirements for pre-trade transparency for certain fixed income markets. The European Commission let the European Parliament know that it had rejected three of the twenty eight standards proposed by ESMA. One of the three rejections relates to rules for greater transparency in bond markets. The Commission is concerned that the definition of liquidity were too wide. This would result in too many types of bonds would have been caught by the pre-trade disclosure requirements and those in turn may have impacted the extent of liquidity in the market. We await ESMA’s response.
For many investment managers and those servicing funds, the 2016 Budget may be seen as containing a wider than expected range of measures, including:
- significant extensions to the ISA allowance, together effectively with a subsidy equivalent in value to giving basic rate tax relief for investing in the Lifetime ISAs for under 40’s; the removal of withholding from interest distributions from 6 April 2017;
- a stamp duty land tax (SDLT) regime for property ACSs and seeding relief for ACSs and PAIFs from this summer; the reduction of the top rate of capital gains tax from 28% to 20%, although the reduction will not apply to carried interest or gains on residential property; and
- the rate of corporation tax will fall yet further, to 17% by 2020, and the Government will consult on fundamental changes to the rules for the use of carried forward losses. It will also introduce restrictions on interest relief from 1 April 2017 in common with many of the jurisdictions taking part in the OECD BEPS Project.
For further coverage of how the 2016 budget affects the sector, see our recent briefing.
3. Financial Advice Market Review
The Review’s main conclusion is that there is a clear need for regulatory and governmental intervention to help both consumers and industry benefit from new and more cost-effective ways of delivering high quality advice and guidance. The 28 recommendations fall into three areas: (1) affordability, (2) accessibility and (3) liabilities and consumer redress. In particular, the Review contains the following observations:
- HMT should consult on aligning the definition of advice to the MiFID (personal recommendation) definition;
- the FCA should provide guidance to firms in a variety of areas around streamlined advice and firms offering services that help consumers making their own investment decisions without a personal recommendation;
- amendments should be made to the TC Sourcebook; and
- the FCA should take steps to help ensure that firms and advisers are aware of the existing flexibility in the rules on adviser charging
There is also a significant degree of overlap between the review and the Budget, for example the review recommends that:
- HMT should explore options to allow consumers to access a small part of their pension pot before the normal minimum pension age, to redeem against the cost of pre-retirement advice; and
- HMT should explore ways to improve the existing £150 income tax and National Insurance exemption for employer-arranged advice on pensions.
This review is also overshadowed by MiFID II and the rules on inducements and financial advice (being a personal recommendation).
There have various key regulatory developments. In particular, a number of fundamental measures pursuant to EMIR either became effective or moved a step closer to being adopted.
On 1 March 2016, the European Commission adopted clearing obligation regulatory technical standards for credit default swaps including 5Y euro-denominated iTraxx Europe Main and iTraxx Europe Crossover classes. The European Parliament and Council will now have a one-month non-objection period (this can be extended by one month).
On 8 March 2016, the European Supervisory Authorities published a final draft regulatory standards (RTS) on risk-mitigation techniques for OTC-derivative contracts not cleared by a central counterparty (CCP). The draft RTS contain the applicable standards that set out the levels and type of collateral and segregation arrangements required to ensure the timely, accurate and appropriately segregated exchange of collateral. The RTS cover matters such as margin models, the eligibility of collateral to be used for margins, operational processes and risk-management procedures.
On 15 March 2016, the European Commission determined that the U.S. Commodity Futures Trading Commission (CFTC) has the equivalent requirements as the EU in regulating CCPs.