Rules for asset management following FCA study and the latest developments in Brexit: This week in regulation…


The speed read

  • Second set of rules published following FCA’s asset management market study
  • General standards and communication rules for the payment services and e-money sectors published
  • The latest on Brexit
  • Investment scam data prompts FCA warning
  • Misconduct, scams and fraud

Second set of rules published following FCA’s asset management market study 

New guidance and rules have been published following the FCA’s asset management market study. Evidence was found of weak price competition in a number of areas of the industry, resulting in lower returns for savers, investors and pensioners.

The new rules run alongside existing guidance that was established in 2018, which ensures fund managers act as agents of investors in their funds. Now consumers are able to understand more about how their money is managed and are able to make better investment decisions as a result.

This is what fund managers need to do:

  • Make investment policies and fund objectives clear to investors to make them more useful
  • Explain how investors should assess the performance of a fund, including explaining any benchmarks used. Benchmarks must be reported consistently too
  • Present a fund’s past performance against each benchmark used as constraint on portfolio construction or as a performance target (if past performance is presented)
  • Calculate performance fees based on the scheme’s performance after the deduction of all other fees

“We’re working to make competition work better in the asset management market and protect those least able to actively engage with their investments.” said the FCA’s Christopher Woolard.


General standards and communication rules for the payment services and e-money sectors published

The FCA has published a policy statement outlining the changes to its Handbook to introduce general standards and communication rules for the payment services and e-money sectors. These changes include:

  • Extending the application of the Principles for Businesses to certain payment service providers (PSPs) and e-money issuers
  • Extending the application of certain communication rules and guidance contained within the Banking Conduct of Business Sourcebook, Chapter 2 (BCOBS 2) to communications made to payment service and e-money customers
  • Introducing new rules and guidance on the communication and marketing of currency transfer services. These will be applicable to payment services and the issue of e-money involving currency conversion.

The regulator also has new powers to extend the rules made under FSMA so that they also apply to activities regulated under the Payment Services Regulations (PSRs 2017) and the Electronic Money Regulations (EMRs 2011).

The rules and guidance will come into force on 1st August 2019.


The latest on Brexit 

Trade Repositories (TRs) and reporting counterparties

After announcing that the FCA will regulate TRs in the event of a no-deal Brexit, the regulator has reminded firms of their requirements. TRs wanting to do business in the UK will have to register/be recognised by the FCA. UK based TRs with ESMA registration can convert to keep a presence in the UK and legal entities that are part of these TRs can apply for temporary registration. The FCA will ensure that all TRs are registered and operational from exit day.

To be compliant from exit day, UK reporting counterparties must be connected to a registered/recognised TR.

The FCA said it will publish detailed guidance on the matter shortly.


FCA states how it would use temporary transitional power

The Treasury has drafted legislation that allows regulators to make transitional provisions if the UK leaves the EU without a deal.

The FCA could delay or phase in changes to requirements under the EU (Withdrawal) Act 2018 for up to two years from exit. The regulator intends to do this to allow firms to remain compliant and assist with them adjusting to post-exit requirements.

There are some areas where it would be inconsistent with the FCA’s statutory rights to use temporary transitionary power. Firms in these circumstances will need to prepare now as there will be no implementation period.

Here are the scenarios where firms need to prepare to comply now:

  • Firms and connected persons subject to the MiFID II transition reporting regime
  • Firms that need to report to the European Market Infrastructure Regulations (EMIR)
  • EEA Issuers with securities traded or admitted to trading on UK markets
  • Investment firms subject to the Bank Recovery and Resolution Directive with liabilities governed by an EEA State
  • EEA firms wishing to use the market-making exemption under the Short Selling Regulation
  • Firms that plan to use credit ratings issued or endorsed by FCA-registered credit ratings agencies after exit day
  • UK originators, sponsors, or securitisation special purpose entities of securitisations they wish to be considered simple, transparent, and standardised (STS) under the Securitisation Regulation


MiFID transparency calculations

On the 5th February, ESMA published a statement on the use of UK data in its databases and the performance of MiFID II calculations in the EU27 if a no-deal Brexit occurs. In this case, the FCA will not be sending UK trading data to ESMA. By the end of February 2019, the regulator expects to set out its approach to using its temporary powers to operate MiFID II in the UK.


FCA agrees MoUs with ESMA and EU

The FCA has agreed Memoranda of Understanding (MoUs) with ESMA and EU regulators that cover the cooperation and exchange of information in the event of the UK leaving the EU without a deal or implementation period. These are:

  • A multilateral MoU covering supervisory cooperation, enforcement and information exchange between the EU and EEA National Competent Authorities (NCAs)
  • A MoU with ESMA that covers the supervision of Credit Rating Agencies and TRs.


Investment scam data prompts FCA warning

The FCA has warned the public to be vigilant against scammers, following data from Action Fraud that reveals £197 million was lost in 2018 – an average of £29,000 per victim.

The most common cases of fraud involved shares, bonds, forex and crypto currencies by firms not under the FCA’s authorisation. Fraudsters are also switching up their methods, moving away from cold calling towards online. Many use professional looking websites, emails and social media channels to add to the illusion.

Over half of those who checked the FCA’s warning list had been contacted online by potential fraudsters, up from 45% the year before, but the regulator is still keen to raise awareness and increase vigilance. Find out more here.


Misconduct, scams and fraud

A former fund manager has been fined £32,000 for his conduct regarding an Initial Public Offering (IPO) and a placing. The individual was found submitting orders as part of a book build for shares and then attempting to contact competitor firms to influence them in capping share prices. The FCA found that he had risked market integrity and the book build itself by using collective power, lacking due skill, care and diligence in the process.

Meanwhile, a fraudster has been sentenced to two years in prison and 300 hours of unpaid work after being found guilty of four charges relating to fraud, misleading customers and illegally operating an unauthorised investment scheme worth over £500,000.

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