In this Sidley Update, we cover, among other things, the UK Financial Services and Markets Bill 2022-23 (the Bill), the UK Financial Conduct Authority’s (FCA) latest Perimeter Report, new rules on financial promotion of high-risk investments and reforms to the appointed representatives (AR) regime. On the EU side, we cover the latest on the EU Sustainable Finance Disclosure Regulation (SFDR), the EU Alternative Investment Fund Managers Directive (AIFMD), the EU Markets in Financial Instruments Directive II (MiFID II), the European Market Infrastructure Regulation (EMIR), and the EU Investment Firms Directive/Regulation (IFD/R).

1. UK — HM Treasury

2. UK — FCA Updates

3. EU — ESG


5. EU — MiFID II

6. EU — EMIR and MiFIR


1. UK — HM Treasury

Financial Services and Markets Bill 2022-23

On 20 July 2022, HM Treasury published the Bill together with explanatory notes. The Bill supplements HM Treasury’s work on the Wholesale Markets Review and the Future Regulatory Framework Review (discussed in our March 2022 Update and December 2021 Update, respectively) and aims to address, among other things, issues that have arisen as a result of the UK’s departure from the EU.

We have set out below some aspects of the Bill that are of relevance to investment managers.

  • Retained EU Law. The Bill revokes retained EU law relating to financial services and enables HM Treasury and the financial services regulators (i.e., the FCA, the Prudential Regulation Authority (PRA), and the Bank of England (BoE)) to replace it with legislation designed specifically for UK markets.
  • MiFID II framework. The Bill reforms the legislative framework governing the UK’s capital markets. In particular, the following changes to the MiFID II framework are proposed:
    • removing the share trading obligation (STO) (HM Treasury notes that the STO has failed to increase transparency in share trading)
    • replacing the pre-trade transparency waiver regime and removing the double volume cap; the Bill grants the FCA new rule-making powers to determine under which circumstances pre-trade waivers are available and any conditions that are to be attached to their use
    • aligning the derivatives trading obligation (DTO) with the clearing obligation (CO) under the Markets in Financial Instruments Regulation (MiFIR) and EMIR, respectively
    • granting the FCA new rule-making powers to develop a post-trade transparency regime
    • revoking the requirement for the FCA to apply position limits to all commodity derivative contracts that are traded on a relevant trading venue and economically equivalent over-the-counter (OTC) contracts and transferring responsibility for setting position limits from the FCA to trading venues
  • Designated Activities Regime (DAR). The Bill creates a DAR. The DAR will be modelled (broadly) on the UK’s regulated activities regime and enable HM Treasury to designate certain activities related to financial markets, instruments, products, or investments in order to bring them into regulation. Activities likely to be covered by the DAR include entering into derivative contracts, engaging in short selling in relation to specified financial instruments, and offering securities to the public. Where an activity has been designated, anyone conducting that activity will be required to follow the rules for that activity unless they are exempt.
  • Critical Third Parties regime. The Bill will establish a framework for the designation of critical third parties (CTP). The Bill grants HM Treasury the power to designate certain third parties as “critical” (thereby requiring such persons to be authorised) based on the materiality of the services they provide to authorised firms and the number and type of firms that use their services. The regime is intended to reduce the risk of systemic disruption, and, as such, a service provider will only be designated as a CTP if failure or disruption to its services would pose a financial stability or confidence risk to the UK financial markets.
  • Regulatory gateway for approving financial promotions. The Bill establishes a regulatory “gateway,” which authorised firms must pass through before being able to approve the financial promotions of unauthorised firms. Any authorised firm wishing to approve the financial promotions of unauthorised firms will first need to obtain the permission of the FCA. The FCA will also be able to place limitations on the types of promotions firms will be able to approve by, for example, restricting firms to approving financial promotions in their field of expertise.
  • Stablecoins. The Bill will bring activities facilitating the use of certain stablecoins, where used as a means of payment, into the UK regulatory perimeter.
  • Formerly authorised persons. The Bill empowers the FCA and the PRA to take action against firms that are no longer authorised (provided they were authorised persons on or after 20 July 2022) for misconduct while they were authorised. Currently, except in certain specific circumstances, the FCA and the PRA are unable to take disciplinary action against formerly authorised firms.
  • New economic growth and international competitiveness secondary objectives. The Bill grants the FCA and the PRA a new secondary objective to advance long-term UK economic growth and international competitiveness.

2. UK — FCA Updates

FCA Perimeter Report 2021/22

On 19 July 2022, the FCA published its 2021/22 Perimeter Report. The 2021/22 report highlights a number of potential perimeter issues, including:

  • Overseas Persons Exclusion (OPE). The FCA is concerned that the scope of the UK’s OPE permits third-country firms to operate UK-focused businesses without sufficient regulatory oversight. It notes that the way services are provided and accessed has evolved significantly since the introduction of the OPE. In particular, the nature and scale of activity that can be done in the UK without a permanent place of business has increased over time. As such, greater information requirements and powers along with greater visibility and oversight of firms using the OPE would be beneficial, as would greater clarity on when a regulated activity is being carried on “in the UK.” HM Treasury is expected to publish a consultation paper on the OPE later this year.
  • Financial promotions regime. The FCA is concerned that unauthorised persons are increasingly relying on exemptions in the Financial Promotion Order relating to “high net worth” and “sophisticated” investors to market high-risk investments. The FCA notes that the threshold for such exemptions is significantly lower than the threshold used in other comparable jurisdictions. There is also no requirement for firms to check that consumers meet the relevant criteria to self-certify as “high net worth” or “sophisticated.” As such, the FCA recommends that the thresholds for these exemptions and the ability for consumers to self-certify should be reviewed. (See next item.)

FCA policy statement on strengthening financial promotion rules for high-risk investments and firms approving financial promotions

On 1 August 2022, the FCA published its policy statement PS22/10: Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions.

Under the stronger rules, firms approving and issuing marketing must have appropriate expertise, and firms marketing some types of high-risk investments will need to conduct better checks to ensure that consumers and their investments are well matched.

Firms also need to use clearer and more prominent risk warnings, and certain incentives to invest, such as “refer a friend bonuses,” are now banned.

As part of its Consumer Investments Strategy, the FCA want to reduce the number of people who are investing in high-risk products that do not reflect their risk appetite.

This follows concerns that a significant number of people who invest in high-risk products do not view losing money as a risk of investing and invest without understanding the risks involved.

These new rules build upon the FCA’s more assertive and interventionist approach to tackling poor financial promotions, reducing the potential for unexpected consumer losses.

The new rules will not apply to cryptoasset promotions. Once the government and Parliament confirm in legislation how crypto marketing will be brought into the FCA’s remit, the FCA will publish final rules on the promotion of qualifying cryptoassets.

FCA policy statement on AR regime

On 3 August 2022, the FCA published Policy Statement PS22/11: Improvements to the Appointed Representatives regime, containing proposed amendments to the AR regime. PS22/11 follows consultation paper 21/34 and, in general, implements the proposed amendments as consulted on, as discussed in our December 2021 Update.

In summary, principal firms will be required to (among other things):

  • notify the FCA at least 30 calendar days before appointing an AR
  • provide information on their existing ARs to the FCA within 60 days of rules coming into force
  • ensure, before appointing an AR and on an ongoing basis, that an AR’s activities do not result in an undue risk of harm to consumers or market integrity, including where the principal and AR are part of the same group.
  • provide details on any financial non-regulated activities their AR(s) perform(s)
  • notify the FCA of their intention to provide “regulatory hosting” services, where applicable, in advance; the FCA is not, however, imposing any additional rules or restrictions on firms that provide such services
  • annually review information on ARs’ activities, business, and senior management and prepare a self assessment document at least once a year, covering how they meet the requirements of the policy; firms will be permitted to meet the annual review requirement by integrating associated processes and reporting into existing internal reporting, if in doing so they can continue to meet expected standards

The proposed changes will generally take effect from 8 December 2022 following a four month implementation period.

3. EU — ESG

ESAs’ report on the extent of voluntary disclosure of principal adverse impact under the SFDR

On 28 July 2022, the Joint Committee of the European Supervisory Authorities (the ESAs) published its first annual report on the extent of voluntary disclosure of principal adverse impact (PAI) under the SFDR.

Article 18 of the SFDR requires the ESAs to take stock of the extent of voluntary disclosures in accordance with Article 4(1)(a) and Article 7(1)(a) of the SFDR and submit annually a report to the European Commission on best practices and make recommendations towards voluntary reporting standards.

The ESAs’ report found that:

  • The extent of compliance with voluntary disclosures varies significantly across jurisdictions and financial market participants (FMPs). However, it was not possible to draw conclusions in terms of the differences across FMPs based on size, nature, and scope of activities.
  • The disclosures for FMPs that do not take into account adverse impact of investment decisions on sustainability factors under Article 4(1)(b) of the SFDR are lacking in detail, and FMPs largely fail to provide clear reasons for why they do not do so, with insufficient information as to whether and when they intend to consider such adverse impacts.
  • There is an overall low level of disclosure of the degree of alignment with the objective of the Paris agreement, with disclosures on the alignment being vague and high level.

The report highlights some examples of best practices shared by EU national competent authorities (NCAs) and contains a set of recommendations for NCAs to ensure appropriate supervision of FMPs’ practices to determine whether supervisory entities comply with disclosures under Article 4 of the SFDR.

The report does not cover disclosures under Article 7(1) of the SFDR as it is expected that FMPs will start applying those by 30 December 2022.

EU Corporate Sustainability Reporting Directive

Non-EU companies with a significant presence in the EU or with securities listed on an EU-regulated market will become subject to new EU rules on corporate sustainability disclosures (the Corporate Sustainability Reporting Directive, or CSRD). The text of the CSRD has now been agreed by the EU institutions. The CSRD is expected to become EU law later this year. Once implemented into the national law of EU member states, its requirements will be phased in from 2024. For further detail on the CSRD, see our Update EU Corporate Sustainability Reporting Directive — What Do UK- and U.S.-Headquartered Companies Need to Know?


ESMA publishes updated Q&A on AIFMD

On 20 July 2022, ESMA published updated Q&A in respect of AIFMD.

ESMA confirms that when the marketing of an alternative investment fund (AIF) or UCITS is performed by a third-party distributor (rather than the relevant AIFM or UCITS management company), the responsibility for ensuring that marketing communications comply with the requirements of the regulation on the cross-border distribution of collective investment funds (CBDF Regulation) lies with the AIFM or the UCITS management company irrespective of whether there is a contractual relationship with a third-party distributor or not. For further detail on the CBDF Regulation, see our Update EU AIFMD — New Rules on the Cross-Border Distribution of Funds From August 2021 — Implications for Non-EU Managers.

5. EU — MiFID II

ESMA publishes updated Q&A on MiFIR

On 19 July 2022, ESMA published updated Q&A in respect of market structure topics under the EU MiFIR.

ESMA has added new Q&As confirming orders that are executed through trading functionalities that offer automated managing of orders (e.g., automatically redirecting unexecuted portions of orders to other venues or slicing orders prior to execution) do qualify as algorithmic trading. Thus, firms trading through such functionalities should be considered as engaged in algorithmic trading and comply with Article 17 of MiFID II and Regulatory Technical Standards (RTS) 6.

6. EU — EMIR and MiFIR

ESMA Consultation Paper on draft RTS on CO and DTO

On 11 July 2022, ESMA published a consultation paper containing a draft RTS amending the scope of both the CO and the DTO under Article 5(2) of EMIR and Article 32 of MiFIR, respectively.

The draft RTS proposes additional classes of OTC derivatives to include within the scope of the CO and DTO. In particular, the proposals for the CO include: (a) the introduction of the overnight indexed swap (OIS) class referencing TONA (JPY); and (b) the expansion of the maturities in scope of the CO for the OIS class referencing SOFR (USD). For the DTO, ESMA is proposing the introduction of certain classes of OIS referencing €STR (EUR), which have shown a substantial increase in liquidity recently.

These changes complement the first set of changes developed also in the context of the benchmark transition from the Euro Overnight Index Average (EONIA) and the London Interbank Offered Rate (LIBOR) in the interest rate derivative market.

Stakeholders are invited to respond to the consultation by 30 September 2022, and ESMA will finalise the draft RTS by the end of 2022.


EBA final report on criteria for exempting investment firms from liquidity requirements under IFR

The EU IFR imposes mandatory liquidity requirements on all relevant EU investment firms. However, small and non-interconnected investment (SNI) firms may be exempted from liquidity requirements by their NCAs.

On 29 July 2022, the European Banking Authority (EBA) published a final report containing guidelines specifying the criteria under which NCAs may exempt SNI firms from the IFR liquidity requirements. The guidelines specify the:

  • investment services and activities provided by investment firms eligible for the exemption;
  • criteria for the exemption; and
  • guidance for NCAs when granting and withdrawing the exemption.

The guidelines will apply two months after their issuance date, which is yet to be determined.

The EBA guidelines do not apply in the UK, but it will be interesting to see if the UK decides to provide similar guidelines for UK investment firms subject to the UK Investment Firm Prudential Regime (IFPR) (as to which, see our Update UK Investment Firms Prudential Regime — 10-Step Plan for Investment Managers).

EBA final report containing draft RTS on Pillar 2 add-ons for investment firms under IFD

On 21 July 2022, the EBA published a final report on draft RTS relating to Pillar 2 add-ons for EU investment firms under the EU IFD.

The draft RTS, set out in Chapter 3 of the final report, clarifies how NCAs should measure risks or elements of risks (e.g., operational/IT risks) that EU investment firms face or pose to others, which are not covered or not sufficiently covered by the own funds requirements under the IFR. The draft RTS is relevant for Class 2 and Class 3 investment firms and aims to ensure a consistent and proportionate application of supervisory practices across the EU.

The draft RTS will be submitted to the European Commission for endorsement before being published in the Official Journal of the European Union. The RTS will come into force 20 days after publication in the Official Journal of the European Union.

The RTS does not apply to UK firms under the IFPR.

Final report on joint ESMA and EBA guidelines on SREP under IFD

On 20 July 2022, the EBA and ESMA published their final report on joint guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) for EU investment firms under the IFD.

The SREP enables NCAs to form a view on the business model and risk profile of EU investment firms as well as their overall viability and sustainability. As part of the SREP, NCAs may set EU investment firms additional own funds requirement and apply other supervisory measures as necessary.

The guidelines specify common procedures and methodologies for SREP proportionate to the different sizes and business models of EU investment firms and the nature, scale, and complexity of their activities. In particular, EU investment firms are classified into four distinct categories, which translate into different frequency, depth, and intensity of the assessments and the engagement of the NCAs.

The guidelines will apply two months following their translation into the official EU languages and publication on the EBA and ESMA websites.

The guidelines do not apply to UK firms under the IFPR.