Market Watch 63

The FCA has published Market Watch 63 setting out its expectations of market conduct in the context of increased capital raising events and alternative working arrangements due to the COVID-19 pandemic. Alongside the Market Watch, the FCA has also published Primary Market Bulletin 28 which provides an update for listed companies on an extension to the timetable for publication of half-yearly financial reporting.

The European Securities and Markets Authority (ESMA) has issued a consultation paper on guidelines on outsourcing to cloud service providers. The draft guidelines are intended to help firms identify, address and monitor the risks that may arise from their cloud outsourcing arrangements (from making the decision to outsource, selecting a cloud service provider, monitoring outsourced activities to providing for exit strategies).

The European Banking Authority (EBA) has published a roadmap setting out its intentions concerning the mandates given to it under the Investment Firm Directive (IFD) and the Investment Firm Regulation (IFR).

The EBA’s mandates under the IFD and IFR cover a broad range of areas including 18 regulatory technical standards, 3 implementing technical standards, 6 sets of guidelines, 2 reports, the requirement for the EBA to maintain a list of capital instruments and a database of administrative sanctions, and a number of notifications in various areas.

Section 3 of the roadmap provides an overview of the timeline for its mandates. The EBA has grouped its work in terms of, first, the deadlines set in the IFR/IFD and, second, the area of the mandate. With this in mind, EBA mandates have consequently been grouped into the following thematic areas: (i) thresholds and criteria for investment firms to be subject to the Capital Requirements Regulation; (ii) capital requirements and composition; (iii) reporting and disclosure; (iv) remuneration and governance; (v) supervisory convergence and the supervisory review process; and (vi) mandates concerning environmental, social and governance aspects. 

The European Commission (Commission) has published a report assessing the application and scope of the Alternative Investment Fund Managers Directive (AIFMD). The report is prepared in accordance with Article 69 of the AIFMD. The Commission is required to review the application and scope of the AIFMD with an emphasis on the experience acquired in applying the Directive.

The EBA has outlined its roadmap for the implementation of the new regulatory framework for investment firms and launched a public consultation on its first set of regulatory deliverables on prudential, reporting, disclosures and remuneration requirements.

The roadmap outlines the EBA’s work plan for each of the mandates laid down in the IFR and IFD and clarifies the sequencing and rationale behind their prioritisation. 

A significant number of mandates have been given to the EBA under the IFD and the IFR. The mandates cover a broad range of areas related to the prudential treatment of investment firms. These include 18 RTS, 3 implementing technical standards (ITS), 6 sets of guidelines, 2 reports, and the requirement for the EBA to maintain a list of capital instruments and a database of administrative sanctions, and a number of notifications in various areas. Overall, the mandates are divided into four phases, mostly in accordance with the legal deadlines.

The first consultation paper on prudential requirements includes three draft RTS on the reclassification of certain investment firms to credit institutions, five draft RTS on capital requirements for investment firms at solo level, and one draft RTS on the scope and methods of prudential consolidation for investment firms at group level.

The second consultation paper on reporting requirements and disclosures, includes draft ITS on the levels of capital, concentration risk, liquidity, the level of activities as well as disclosure of own funds; and draft RTS specifying the information that investment firms have to provide in order to enable the monitoring of the thresholds that determine whether an investment firm has to apply for authorisation as a credit institution.

The third and fourth consultation papers on remuneration requirements include one draft RTS on the criteria to identify all categories of staff whose professional activities have a material impact on the firm’s risk profile or assets it manages (‘risk takers’); and one draft RTS specifying the classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration of risk takers.

The consultations run until September 4, 2020.

The EBA will hold a public hearing, which will take place via conference call on the following dates:

• June 30, 2020, from 11:00 to 13:00 CET, for the consultation paper on the classification of investment firms as credit institutions and capital requirements; and
• June 30, 2020 from 14:00 to 16:00 CET for the consultation papers on supervisory reporting and disclosure and variable remuneration requirements.

The Commission has published the long-awaited draft level 2 measures incorporating sustainability issues and considerations into the EU financial services regulatory framework, including the UCITS Directive, AIFMD, MiFID II, Solvency II Directive, and the Insurance Distribution Directive (IDD). The draft delegated acts also aim to clarify a number of implications resulting from the Regulation on sustainability-related disclosures in the financial services sector (Disclosure Regulation).

In terms of MiFID II, a draft delegated act introduces a new definition of “sustainability preferences” into Delegated Directive 2017/593, referring to a client’s or potential client’s choice as to whether a financial instrument that has as its objective sustainable investments or a financial instrument that promotes environmental or social characteristics as defined in the Disclosure Regulation should be integrated into their investment strategy. In addition, the definitions of “sustainability risks” and “sustainability factors” under the Disclosure Regulation would be introduced into the Delegated Directive. A draft delegated act amending Delegated Regulation 2017/565 on organisational requirements also introduces the definitions of “sustainability preferences”, “sustainability risks” and “sustainability factors” into the Delegated Regulation. Under the draft delegated act, investment firms will be required to consider sustainability risks when establishing, implementing and maintaining risk management procedures which identify the risks relating to the firm’s activities, processes and systems.

The draft Commission Regulation amending the UCITS Delegated Directive (2010/43/EU) and the draft Commission Regulation amending the AIFMD Delegated Regulation ((EU) 231/2013) introduce the definitions of “sustainability preferences”, “sustainability risks” and “sustainability factors” definitions into the level 2 measures, as well as the concept of ‘material adverse impact’ on the value of investments.

ESMA has issued a public statement confirming that it has renewed its decision to temporarily require the holders of net short positions in shares traded on an EU regulated market to notify the relevant member state competent authority (NCA) if the position exceeds 0.1% of the issued share capital. ESMA considers that its renewed measure will maintain the ability of NCAs to deal with any threats to market integrity, orderly functioning of markets and financial stability at an early stage, allowing them and ESMA to timely address such threats in case of signs of market stress.

The FCA has published Discussion Paper 20/2: Prudential requirements for MiFID investment firms (DP20/2).

The government supported the overall goals of the IFR/IFD and in the Chancellor’s statement in the budget the government confirmed its intention to legislate for a UK regime. The FCA proposes in DP20/2 to introduce a UK regime that will achieve similar intended outcomes as the IFR/IFD whilst taking into consideration the specifics of the UK market. DP20/2 is intended to help that analysis.

The FCA states that investment firms should be aware of the scale of the change the IFD/IFR represents. In addition to various less material changes compared to the existing prudential regime for investment firms, major changes described in DP20/2 include:

• An update to the initial capital required for authorisation.
• Changes to the rules on the definition of capital.
• New own funds requirements, including the introduction of the K-factor approach.
• New rules on prudential consolidation, group risk and concentration risk.
• Applying liquidity requirements to all investment firms.
• A new approach for investment firm’s internal risk and prudential assessments, and the supervision of those requirements.
• New requirements on remuneration policies.
• Changes to reporting and disclosure requirements.

The FCA notes that considerable amounts of detail remain outstanding including the necessary UK legislation being in place to ensure that investment firms will be regulated under a new domestic regime similar to the IFR/IFD rather than the on-shored CRD IV / CRR.

The IFR/IFD contain mandates for regulatory/implementing technical standards and guidelines. The FCA states that in due course it might refer to the content of such measures in its rules depending on the government’s approach to the UK regime.

The deadline for comments on DP20/2 is September 25, 2020. 

There was published in the Official Journal of the EU (OJ), Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088. The Regulation enters into force following the twentieth day following its publication in the OJ. The date of application is set out in Article 27.

ESMA has published the official transactions of its guidelines on reporting to competent authorities under Article 37 of the Money Market Fund (MMF) Regulation.

NCAs to which the guidelines apply now have two months in which to notify ESMA whether they comply or intend to comply with them.

The guidelines apply to NCAs and MMFs and managers of MMFs within the meaning of the MMF Regulation. The objectives of the guidelines are to establish consistent, efficient and effective supervisory practices and to ensure the common, uniform and consistent application of Article 37 of the MMF Regulation and the Implementing Regulation on reporting. In particular, they aim to provide guidance on the contents of the fields of the reporting template included in the Annex of the Implementing Regulation on reporting.

There was published in the OJ the Delegated Regulation that the Commission adopted on May 7,  2020 amending Delegated Regulation (EU) 2016/1675 which supplements the Fourth Anti-Money Laundering Directive by identifying those third countries that have strategic deficiencies in anti-money laundering and countering the financing of terrorism (AML / CFT) regimes that pose significant threats to the financial system of the EU.

Article 1 of the Delegated Regulation amends Delegated Regulation (EU) 2016/1675 by removing the following in the table under the point “I. High-risk third countries which have provided a written high-level political commitment to address the identified deficiencies and have developed an action plan with FATF”: Bosnia-Herzegovina, Guyana, Lao People’s Democratic Republic, Ethiopia, Sri Lanka and Tunisia.

Article 2 of the Delegated Regulation makes amendments to the Annex to Delegated Regulation (EU) 2016/1675, the table under the point “I. High-risk third countries which have provided a written high-level political commitment to address the identified deficiencies and have developed an action plan with FATF”. The updated list refers to the following: Afghanistan, Bahamas, Barbados, Botswana, Cambodia, Ghana, Iraq, Jamaica, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Pakistan, Panama, Syria, Trinidad and Tobago, Uganda, Vanuatu, Yemen, Zimbabwe.

The Delegated Regulation comes into force on the twentieth day following its publication in the OJ. However, the new list of jurisdictions in Article 2 does not come into force until October 1, 2020.

The FCA has announced the name of its new data collection platform which replaced Gabriel. The new platform is called RegData. The FCA explains that since April, firms have been registering for RegData through a one-off activity when accessing Gabriel.

The FCA explains that it will be moving firms and their users to RegData in groups to minimise the impact this has on them. Firms’ moving dates will be determined by the nature of their reporting obligations and reporting schedules. Firms will not be able to access RegData until they and their users’ data have been moved from Gabriel. The FCA will email firms’ principal user and associated users three weeks before their moving date, with reminders five days and one day to go. Compliance consultants will receive reminders for every firm their user account is currently associated with in Gabriel.

IOSCO consultation report – The use of artificial intelligence and machine learning by market intermediaries and asset managers

The International Organisation of Securities Commissions (IOSCO) has issued a consultation report ‘The use of artificial intelligence and machine learning by market intermediaries and asset managers’.

The consultation report proposes guidance to assist IOSCO members in providing appropriate regulatory frameworks to supervise market intermediaries and asset managers that utilise artificial intelligence (AI) and machine learning (ML).

The proposed guidance consists of six measures that reflect expected standards of conduct by market intermediaries and asset managers using AI and ML. Although the guidance is not binding, IOSCO members are encouraged to consider these proposals carefully in the context of their legal and regulatory frameworks. IOSCO members and firms should also consider the proportionality of any response when considering these proposals.

An annex to the consultation report summarises how a number of regulators are addressing the challenges created by AI and ML.

The deadline for comments on the consultation report is October 26, 2020.

PRA Dear CEO letter on managing climate-related financial risk

The Prudential Regulation Authority (PRA) has issued a Dear CEO letter in which it states that firms should have fully embedded their approaches to managing climate-related financial risks by the end of 2021. This means that by the end of 2021, firms should be able to demonstrate that the expectations set out in ‘Supervisory Statement 3/19: Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’ (SS3/19) have been implemented and embedded throughout their organisation as fully as possible. In doing this, firms should take a proportionate approach that reflects their exposure to climate-related financial risk and the complexity of its operations.