In this issue: FCA Statement on passporting during the Brexit implementation period; ESMA address on Capital Markets Union; Brexit and delegation; and ESA Review; ESMA releases new guidelines on stress testing for money market funds and The FCA’s approach to supervision and enforcement: consultation documents.

28.03.2018 FCA Statement on passporting during the Brexit implementation period

The FCA has issued a Statement welcoming the agreement reached on the terms of an implementation period that will apply following the UK’s withdrawal from the EU. The implementation period will operate from 29 March 2019 until the end of December 2020, during which time European Union law will remain applicable in the United Kingdom.

FCA confirmed that firms and funds will continue to benefit from passporting between the UK and EEA during the implementation period. Obligations derived from EU law will continue to apply and firms must continue with implementation plans for EU legislation that is still to come into effect before the end of December 2020.

The Government has committed to providing for a Temporary Permission Regime.

Firms and funds passporting into the UK

A Temporary Permissions Regime will enable relevant passporting firms and funds to undertake new business falling within the scope of their existing permissions, enable them to continue performing their contractual rights and obligations, manage existing business and mitigate risks associated with a sudden loss of permission.

FCA expects that firms and funds that will be solo-regulated by the FCA will need to notify FCA of their wish to benefit from the regime.

Firms and funds passporting into the EEA

The implementation period will permit firms and funds to continue to benefit from passporting between the UK and EEA until the end of December 2020. FCA recommends that UK firms and funds passporting into the EEA discuss with their relevant EU regulator(s) the implications of a transitional period for their contingency planning.

The Prudential Regulation Authority and the Bank of England issued similar statements.

20.03.2018 ESMA address on Capital Markets Union; Brexit and delegation; and ESA Review

Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), delivered the keynote address at the BVI Annual Reception 2018 in Brussels on the topic of ‘CMU, Brexit and ESA review – What’s next?’

On Brexit and the issue around ESMA’s work on delegation, he stated that financial centres in the EU27 should be free to compete based on the particular strengths they can offer relocating firms but in all cases the EU rulebook should be consistently applied. Maijoor emphasised that ESMA was not looking to question, undermine or put in doubt the delegation model, which was a key feature of the investment funds industry. He confirmed that the flexibility to organise centres of excellence in different jurisdictions has contributed to the industry’s success. “Delegation is not a dirty word”.

But ESMA does seek to address the risk of letterbox entities and lack of substance. Maijoor stated that ESMA’s published opinions on this subject simply clarified what this meant in practice and what factors have to be taken into account when assessing whether there is sufficient substance.

On costs, charges and MiFID II, he stated that he believed that the changes to cost transparency are already having a positive impact.

In relation to PRIIPs, on the question of whether to include disclosure of transaction costs, Maijoor stated that he thought it was only fair that investors be fully informed about something that could have a material impact on their returns. On the methodology for calculation, He stated that ESMA maintains the view that the methodology is sound and that negative transaction cost figures should be extremely rare.

On the CMU and the ESA review, Maijoor acknowledged that some Member States and parts of the industry have been critical about certain aspects but he stressed that legal and supervisory frameworks play a fundamental role in avoiding excessive risk taking in financial markets, and therefore a strong CMU project needs to be accompanied by strong EU-wide and national supervision.

21.03.2018 ESMA releases new guidelines on stress testing for money market funds

The European Securities and Markets Authority (ESMA) has released guidelines on article 28 of the Money Market Fund (MMF) Regulation. These guidelines relate to stress testing scenarios.

The purpose of the guidelines is to ensure common, uniform and consistent application of the MMF Regulation by establishing common reference parameters for the stress test scenarios. The guidelines will be updated at least once a year to reflect market developments.

ESMA uses the guidelines to focus on: the language of article 28; types of stress test scenarios; and common reference parameters.

ESMA indicates that both historical and hypothetical scenarios can be used. For historical scenarios, managers should vary the time window to ensure a wide range of tests. Managers can also deploy aggregated stress testing or reverse stress testing.

Common reference parameters are listed for a number of stress test scenarios including: shifting interest and exchange rates; hypothetical levels of redemption; and hypothetical macro systemic shocks. In addition, appendix 1 provides a practical example of stress testing whilst combining various factors.

21.03.2018 The FCA’s approach to supervision and enforcement: consultation documents

The FCA has published two consultation documents setting out its approach to supervision and enforcement. These are the latest in the FCA’s commitment to publish approach documents, which explain how the FCA conducts its main activities and provide transparency on the FCA’s decision-making. The closing date for responses to the consultations is 21 June 2018. The FCA will publish the final versions of the two approach documents later this year.

Approach to supervision

The FCA explains how and why it supervises firms and individuals, focusing on:

• the FCA’s supervisory principles (including its risk-based approach, two-way communication with consumers, firms and individuals, and its focus on culture and governance);

• how the FCA prioritises its supervision work across retail and wholesale markets according to the greatest risk of harm; and

• how the FCA identifies and diagnoses harm, addresses actual and potential harm and how the FCA evaluates the impact of its intervention.

The FCA emphasises that it intends to take a more pre-emptive and forward-looking approach when engaging with firms. The FCA also believes that it can take prompt and incisive action once harm has been identified, due to its intelligence-driven and data-led approach.

Approach to enforcement

As regards enforcement, the FCA clarifies that its overriding principle is to ensure the FCA conducts investigations in an open-minded and consistent way, to achieve fair and just outcomes in response to misconduct. The document sets out:

• how the FCA identifies and assesses misconduct, including the use of market data and information from firms;

• the purpose of investigations and the FCA’s statutory powers, as well as the safeguards for individuals and firms under investigation;

• the remedies and sanctions available to the FCA where there has been a contravention (which includes criminal offences and breaches of FCA Handbook rules and principles); and

• how the FCA measures its performance and evaluates its enforcement approach.

The FCA states that it is starting to review the whole of its Enforcement Guide and plans to publish a consultation paper in 2019. The FCA also aims to publish a consultation paper later this year following the review of its Penalties Policy.