SM&CR statement of responsibilities & Brexit: This week in regulation


The speed read

  • Guidance on statements of responsibilities under SM&CR published
  • FCA consults on improving the approach to funds investing in illiquid assets
  • FCA signs memorandum of understanding with Hong Kong regulator on the mutual recognition of funds
  • FCA consults on proposals for leaving the EU without establishing an implementation period

Guidance on statements of responsibilities under SM&CR published

As the extension of the Senior Managers and Certification Regime (SM&CR) draws nearer, the FCA has published guidance for firms preparing statements of responsibilities and responsibilities maps.

The guidelines should be applied in a risk-based and proportionate manner, taking in to account the size, nature and complexity of the firm.

The Statement of Responsibilities is designed to clearly outline the responsibilities and accountabilities of each Senior Manager within a firm. It should contain sufficient information, without excessive detail and be a self-contained document. The FCA has set out relevant key questions for every section of the Statement of Responsibilities for firms to consider.

Firms are also required to maintain a responsibilities map to show how they are managed and governed. The questions cover those applicable to all firms and those specifically for firms in groups.


FCA consults on proposals for leaving the EU without establishing an implementation period

The FCA has published a consultation to ensure that in the event the UK leaves the EU without an implementation period, there is a robust regulatory regime from day one.

This is part of the FCA’s commitment to planning for a wide range of scenarios.

Proposed changes to the Handbook and Binding Technical Standards (BTS)

CP18/28 outlines the FCA’s proposals for amending its Handbook and BTS to reflect the UK’s position outside of the EU, in line with the Government’s proposed legislative changes.

For the most part, the FCA is proposing straightforward changes to update references to:

  • EU legislation
  • UK law relating to, or referring to, the EU
  • EU institutions and concepts
  • The European Economic Area (EEA).

The paper also outlines proposals to amend a number of BTS which would not function effectively post-Brexit. These include provisions which affect:

  • Credit rating agencies (CRAs): The Credit Rating Agencies Regulation (CRAR) will be incorporated into UK law and CRAs will be required to register with the FCA and to submit information on all ratings issued.
  • Fund management: Replacement of references to EU legislation with their UK counterparts.
  • The registration and application of trade repositories: Amendments to the format and details of registration applications.
  • MiFID/ MIFIR: Each provision will include a definition of its scope and application.
  • Short selling: Disclosure amendments.
  • Capital requirements: Interpretive guidance will be issued on the anticipated approach firms should take when reporting and disclosing capital requirements based on concepts related to the EU.

Registering as a trade repository

Upon the UK’s exit from the EU, the FCA will become the UK regulator for trade repositories. To facilitate the smooth transition of the regime, the Treasury has published a draft Statutory Instrument (SI) which includes two registration regimes for firms – a conversion regime to allow established UK trade repositories to convert their registration into registration with the FCA, and a temporary registration regime for UK legal entities which are part of the same group as a trade repository with an existing ESMA registration. If a firm doesn’t fall in to either of these categories, its application will be assessed in line with standard procedures within the regulations which govern trade repositories.

Temporary authorisations regime for data reporting service providers

The Treasury has published a draft Statutory Instrument (SI) to allow MiFID authorised EEA Data Reporting Service Providers (DRSPs) to apply for temporary authorisation to provide data reporting services in the UK in the event of no implementation period post-Brexit.

DRSPs will be required to apply for temporary authorisation, to the FCA’s Market Data Processor (MDP) system and pay the appropriate fee. Relevant firms are required to notify the FCA no later than 30 working days before exit day (29th March 2019) if they wish to apply for temporary permission and the notification window is expected to open in early 2019. Firms should apply as soon as possible as MDP conformance testing can take between six and eight weeks, depending on the firm’s onboarding requirements.


FCA consults on improving the approach to funds investing in illiquid assets

Following the announcement of the UK referendum on EU membership in June 2016, a number of property funds had to temporarily suspend trading as investors simultaneously attempted to withdraw their funds. This has raised concerns around the potential for consumer harm arising from open-ended funds investing in illiquid assets, particularly in stressed market conditions.

The event raised a number of questions around the effectiveness of the different approaches to liquidity management and how to balance the interests of investors looking to redeem their holdings, with those wishing to remain.

Following a market investigation, the FCA has concluded that the use of suspensions and other liquidity management tools work as intended and that a major overhaul of the regulatory framework isn’t required. However, the regulator is consulting on additional requirements around the suspension of dealings and measures to improve both liquidity risk management and disclosure.

Suspension of dealings in units

The FCA intends to introduce new rules that require authorised fund managers to suspend dealings in NURS units where the Standing Independent Valuer (SIV) expresses material uncertainty about the value of immovable assets that account for at least 20% of the scheme property.

These requirements will also apply to where at least 20% of their scheme property is invested in funds which have suspended trading due to material uncertainty.

Improving liquidity risk management

To address shortcomings in fund managers’ contingency plans, the FCA intends to introduce new rules to require all fund managers to create and maintain contingency plans for exceptional circumstances. These plans should include:

  • How the fund manager would respond to a liquidity risk crystallising
  • The range of liquidity tools and arrangements they may deploy, the operational challenges associated with each tool and the potential impact on investors
  • Communication plans for internal and external stakeholders

The FCA has also provided guidance around how certain liquidity tools can, or should, be used in different situations.

Increasing disclosure

To minimise the risk of retail clients investing in unsuitable funds, the liquidity risks associated with funds investing in inherently illiquid assets (FIIAs) should be clearly signposted, with a prescriptive risk warning included as part of every financial promotion aimed at retail investors. Fund managers will also be obliged to detail the nature of the liquidity risks and the tools and arrangements in place to mitigate them within the prospectus.

These proposals are designed to increase consumer protection by:

  • Improving confidence and participation in the markets
  • Making the impact of illiquidity more transparent so consumers are better informed
  • Ensuring they get a fair price when selling their investments market integrity.

The FCA is proposing to apply these remedies to a new category of . A fund would be classed as a FIIA if one of the following criteria applies:

  • A Non-UCITS Retail Scheme (NURS) which has disclosed its aim of investing at least 50% of their scheme property in illiquid assets
  • NURSs which have invested at least 50% of their scheme property in illiquid assets for at least three consecutive months out of the previous twelve, whether this intention has been disclosed or not.


FCA signs memorandum of understanding with Hong Kong regulator on mutual recognition of funds  

The FCA has entered into a memorandum of understanding (MoU) with Hong Kong’s Securities and Futures Commission (SEC) which will enable eligible Hong Kong public funds and UK retail funds to be distributed in the other’s market.

As well as establishing a streamlined process, the MoU outlines a framework for regulatory cooperation and the exchange of information for mutual benefit. This is part of the FCA’s commitment to ensuring open financial markets and fostering greater international cooperation.

To mark this announcement, the FCA’s Executive Director of Supervision, Megan Butler delivered a speech on the importance of international cooperation at the Pan Asian Regulatory Summit 2018.

She opened her speech by highlighting that it is a difficult time for global policy making. Historically, the importance of cross-border cooperation has been recognised but the geo-political uncertainty is leading many to question the security of this approach.

Ms Butler believes it is imperative that we don’t end up with fragmented regulation and that the best route to economic security is to build upon existing work to strengthen international engagement.

The MoU between the FCA and SEC will provide investors with access to a more dynamic market, enabling them to benefit from greater diversification of their portfolios. The FCA also expects the agreement to cut UK recognition time for Hong Kong funds from around six months to two, thanks to the streamlined process now in place.

The FCA’s objective is not to increase the competitiveness of the UK, it is to make sure financial markets works well for UK consumers. Well-functioning, clean and safe global markets do generally create an environment which is attractive to both investors and firms. Global cooperation is also essential to tackle issues such as the threats presented by emerging technologies, financial crime and political instability.

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