A compact summary of the most recent regulatory developments relevant to the UK asset management industry. This issue includes details of the situation for financial services rules and regulations during the Brexit implementation period; the management of liquidity risk for collective investment schemes; the possible impact of the Money Market Fund Regulation developments on euro-denominated money market funds; and developments for PRIIPs KIDs.
BLOCKCHAIN: European Commission observatory and forum
The European Commission has launched an “observatory and forum” to highlight key developments in blockchain technology, promote European actors and reinforce European engagement with stakeholders involved in blockchain activities. The Commission plans to produce a FinTech action plan in the spring.
BREXIT: open letter to businesses
The Department for Exiting the EU has published an open letter to business leaders confirming that the current status quo for rules relating to, inter alia, financial services will be maintained during the implementation period. The letter adds that a registration system for new arrivals to the UK from the EU will be put in place, but there will be no new barriers to prevent EU citizens from taking up employment in the UK during this period.
EU WORK PROGRAMME: Bulgarian Presidency publishes its work programme
The Bulgarian Presidency of the EU has published its work programme covering the period 1 January to 20 June 2018. The new Presidency will prioritise work on the Capital Markets Union, including legislative proposals on clearing obligations and derivative reporting, and will encourage debate on deepening Economic and Monetary Union.
LIQUIDITY: IOSCO reports on risk management for collective investment schemes
The International Organization of Securities Commissions (IOSCO) has published two final reports which should be read together. The first sets out recommendations for liquidity risk management for collective investment schemes. This replaces its 2013 report and contains 17 recommendations as well as additional guidance for securities regulators.
The second report covers good practices and issues for open-ended fund liquidity and risk management and illustrates how various jurisdictions regulate liquidity risk practices. It also provides good practices for liquidity risk management throughout the entire life cycle of a fund and outlines scenarios in which an asset manager may use liquidity management tools to manage liquidity issues in certain funds.
MONEY MARKET FUNDS REGULATION: Commission letter on implementation
With regard to ESMA’s Money Market Fund (MMF) Regulation, the Commission has responded to a question raised in ESMA’s covering letter on the use, under the regulation, of the reverse distribution mechanism, often referred to as ‘share cancellation’ or ‘share destruction’, confirming ESMA’s view that this mechanism is not compatible with the MMF Regulation.
This could have a considerable impact on the ability of Euro-denominated money market funds to maintain a stable NAV. Many of such funds have used share cancellation methods to deal with negative interest rates and the Institutional Money Market Funds Association has suggested they will now find it “operationally impossible to offer funds with negative yield currencies that use a stable price”.
ESMA is now considering possible next steps with a view to promoting convergent application of the MMF Regulation across the EU.
PRIIPs: FCA statement on the KID
The Financial Conduct Authority (FCA) has published a statement relating to concerns raised about performance scenarios in the key information document (KID).
Under the Regulation for packaged retail and insurance-based investment products (PRIIPs) PRIIPs manufacturers have to prepare and publish a stand-alone, standardised document (the KID) for each of their PRIIPs. The KID contains information on risks, performance scenarios, costs and other pre-contractual information and must be accurate, fair, clear and not misleading. The PRIIPs regulatory technical standards (RTSs) set out how information in the KID should be calculated.
The FCA said it understood that some firms are concerned that, for a minority of PRIIPs, the performance scenario information required in the KID may appear too optimistic and so has the potential to mislead consumers. There may be a number of reasons for this including the strong past performance of certain markets, the way the calculations in the RTSs must be carried out, or calculation errors.
Where a PRIIP manufacturer is concerned that performance scenarios in one of its KIDs are overly optimistic, and risk misleading investors, the FCA agrees that it may provide additional explanations to put the calculation in context and explain its concerns to investors.
Firms with such concerns should consider how to address them, for example by providing additional explanation in their communications with clients.
PRIIPs: FCA enforcement instrument
As part of Handbook Notice 51, the FCA has published the Enforcement (Packaged Retail and Insurance-based Investment Products Regulations 2017) Instrument 2018. This sets out how the FCA will exercise its powers under PRIIPs.