HMT to retain Temporary Transitional Powers for UK Regulators for two years from 1 January 2021

It was confirmed yesterday by HM Treasury (HMT) in a statement to Parliament that it will retain the UK regulators’ “Temporary Transitional Power” (TTP), which was introduced as part of the UK Government’s no-deal contingency planning legislation, and shift its application such that it is available for use by the regulators for a period of two years from the end of the Transition Period.

HMT’s statement reminded Parliament that:

  • while, in general, the same laws and rules [as apply presently in relation to financial services] will apply at the end of the Transition Period, HMT recognises it will be important, irrespective of the agreement that is reached between the EU and UK, for the regulators to have the flexibility to smooth any adjustments to the UK’s regulatory regime for financial services at the end of the Transition Period; and
  • the purpose of the TTP is to allow the Bank of England (BoE), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to phase in changes to UK regulatory requirements so that firms can adjust to the UK’s post-Transition Period regime in an orderly way, in line with the objectives already set by Parliament.

While this outcome is in line with market expectations, it is nonetheless reassuring for UK firms and other market participants to have confirmation, at a time of particular uncertainty, that the UK regulators will retain this flexibility for the medium term. There is no indication of any extension to the separate Temporary Permissions Regime (TPR) for EU financial institutions currently passported in/into the UK.

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Katherine Dillon
Katherine Dillon
Of Counsel, London
+44 20 7466 2522
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789

PRA and FCA publish guidance on key workers in financial services

On 19 March, the UK Government published guidance requesting that schools and other educational institutions provide limited care for children whose parents have roles that are critical to the COVID-19 response. This includes parents working in certain financial services roles that are essential to the functioning of the economy (referred to as “key financial workers” or “KFWs“).

The PRA and FCA and have now published their own guidance on this topic setting out the steps that firms should take in relation to identifying KFWs.

Identifying KFWs

  • A KFW is any individual who fulfils a role which is necessary for the firm to continue to provide (i) essential daily financial services to consumers, or (ii) ensure the continued functioning of markets.  The guidance provides a list of example KFWs (PRA) (FCA).
  • KFWs could work for any categorisation of financial institution (e.g. dual or solo regulated, payment service providers, market infrastructure providers).
  • Firms are best placed to identify their KFWs; they should start by identifying the firm’s activities, services or operations which are essential to services in the real economy or financial stability and then identify the individuals essential to support those functions.
  • The PRA/FCA expects that most firms will have a limited number of KFWs.

Outsourced functions

  • When considering KFWs, firms should also identify any critical outsource partners that are essential to the continued provision of services, even if these are not financial services firms.

 Process

  • The PRA/FCA recommends that the Chief Executive Officer Senior Management Function (SMF1) (or, if not applicable, an equivalent senior member of the management team) is accountable for ensuring an adequate process so that only roles meeting the KFW definition are designated.
  • Firms should consider issuing letters to all individuals identified as KFWs as evidence of their status.

Our general briefing on COVID-19 – Key Issues for Employers is available here.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789

COVID-19: Short selling restrictions and other reporting developments in the EU

SHORT SELLING REGULATION

During this unprecedented period of disruption, the European Securities and Markets Authority (ESMA) and other national regulators have taken various extraordinary steps to address the risks faced by financial markets in the EU.

In the past week, ESMA has issued a decision amending the notification threshold for net short positions under the EU Short Selling Regulation (SSR), with some local regulators also imposing temporary prohibitions on short selling transactions. While there has not been any change in the way that the underlying legislation operates, the practical impact of these steps will restrict activity in some markets. Firms involved in short selling need to adjust for the increased transparency obligations.

 1. ESMA – new short thresholds

On 16 March, ESMA published its decision to lower the threshold at which persons who hold net short positions in companies whose shares are admitted to trading on an EU regulated market must report to national regulators to 0.1% of the issued share capital (down from 0.2%).

This lower threshold applies automatically across all EU countries. It will be in place for three months, although ESMA may extend this. Certain exemptions continue to apply, including:

  • net short positions arising from market making and stabilisation activities; and
  • net short positions held in shares admitted to trading on an EU regulated market where the principal venue for the trading of the shares is located in a third (ie non-EU) country.

 2. National regulators –  temporary bans on short selling

In addition to the new EU-wide lowered reporting threshold, national regulators in certain EU jurisdictions have implemented temporary restrictions on any short selling of securities admitted to trading on regulated markets in their jurisdictions (both new and increasing net short positions). A summary table showing the relevant jurisdictions and duration of each prohibition is below:

Jurisdiction National regulator public statement Date prohibition imposed Prohibition imposed until
France AMF 18 March 16 April
Belgium FSMA 17 March 17 April
Spain CMNV 17 March 17 April
Austria FMA 18 March 18 April
Greece HCMC 17 March 24 April
Italy CONSOB 18 March 18 June

Generally, those short selling transactions undertaken by market makers are exempt, and special provisions apply to index-related instruments. However, as these prohibitions are applied on a national (not EU-wide basis) firms will need to confirm the scope and application of the bans in each of the relevant jurisdictions.

 3. Position in the UK

The FCA has applied ESMA’s amendment to the reporting threshold for net short selling positions (i.e. lowered it to 0.1%). However, following a statement from the FCA last week, firms should continue reporting data in the UK using the previous threshold until further notice, while the FCA makes the necessary technological changes in how it receives the data.

The FCA has not as yet implemented any specific restrictions on short selling in shares admitted to trading in the UK[1]. In a number of recent statements, the FCA noted that it has never initiated an outright ban on short selling UK shares under SSR, and would set a high bar on imposing any such ban, but could not rule out that this might become appropriate in certain circumstances.

While the FCA’s statements do not suggest that a ban on short selling on shares admitted to UK regulated markets is imminent, firms should continue to monitor regulatory statements on this topic, as changes may be imposed on short notice.

 4. Non-EU markets

Firms should note that non-EU markets might have their own short selling reporting requirements/restrictions and monitor these accordingly.

DELAYS TO SECURITIES FINANCING TRANSACTIONS REGULATION (SFTR) REPORTING REQUIREMENTS

ESMA postpones implementation of reporting under SFTR

On 18 March, ESMA postponed the Securities Financing Transactions (SFT) reporting obligation start date from 13 April 2020, in light of COVID-19 disruption on wider implementation projects.

Trade repositories are also not required to be registered by 13 April 2020. All relevant parties (including trade repositories, entities responsible for reporting and investment firms) should be prepared for compliance by 13 July 2020, when the next phase of the reporting regime begins.

[1]       With the exception of imposing a one day ban on certain Spanish and Italian securities following a request from CNMV and CONSOB on 13 March 2020.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Nick May
Nick May
Partner, London
+44 20 7466 2617
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633

FCA review of outsourcing by life insurers

This post was first published on our Digital TMT and Sourcing Notes blog.

On 4 March 2020 the Financial Conduct Authority published a short set of findings from its review of outsourcing in the UK life insurance sector. Despite the review’s narrow scope, the FCA’s findings are readily applicable to other outsourcing contexts, so regulated firms outside the life insurance sector should be aware of these. Continue reading

FCA publishes information for firms on COVID-19

The FCA has published information for firms on COVID-19. Communication with the FCA will be key as the situation evolves, and we recommend that firms regularly monitor the FCA’s website for news and developments.

Firms are expected to:

  • take reasonable steps to ensure they are prepared to meet the challenges coronavirus could pose to customers and staff, particularly through their business continuity plans;
  • be clear and transparent, and provide strong support and service to customers during this period (being flexible to meet retail customers’ needs in unusual times is a core theme); and
  • manage their financial resilience and actively manage their liquidity, and report to the FCA immediately if they believe they will be in difficulty.

The FCA is taking this opportunity to provide some high level guidance and to remind firms of their obligations as the consequences of this pandemic unfolds before us. For example, reminding firms to report their concerns to the FCA, notwithstanding existing reporting obligations on regulated firms. The COVID-19 situation is unprecedented and has already caused significant impacts on the financial system globally. It is encouraging that the FCA appears to be taking steps to assist firms, and themselves, to prepare for any future uncertainty arising from this situation.

The information published includes guidance on the following key areas:

  • Regulatory change – The FCA is reviewing its own work plan so that it can delay or postpone activity which is not critical to protecting consumers and market integrity in the short-term. Immediate actions include: extending the closing date for responses to open consultation papers and Calls for Input until 1 October 2020; rescheduling most other planned work; and scaling back the programme of routine business interactions. The FCA does not elaborate on other areas of impact, so we will have to wait and see whether this includes, for example: enforcement investigations, processing day-to-day authorisations or change in control approvals, and issuing market studies etc.
  • Impact on consumers – The FCA welcomes the flexibility some firms have introduced to support customers. Firms should notify the FCA when going beyond usual practices to support their customers so the FCA can consider the impacts and offer support as appropriate. The FCA also reminds firms of their obligations to deal with customer complaints promptly.
  • Mortgages – The FCA is encouraged by the actions of some lenders in granting flexibility on mortgage repayments to protect customers, and will be discussing with the industry and updating the approaches which mortgage providers may take for assisting customers in the coming days.
  • Unsecured debt products – Firms are encouraged to show greater flexibility to customers in persistent credit card debit. In light of the challenges customers are currently facing, until 1 October 2020 these customers should be given longer to respond to communications from their providers, which means their card will not automatically be suspended if escalation measures are offered by their provider (and not responded to) after 36 months of persistent debt.
  • Access to cash – Firms should ensure vulnerable customers are protected when accessing their banking services online or over the phone, particularly for the first time, and should remind customers to be aware of fraud and protect their personal data.
  • Insurance products – The FCA supports firms offering travel insurance in making consumers aware of the scope of their cover and any exemptions which may apply. This information should be made available online in a clear and concise way and consumers should have access to call centres. For health insurance, the FCA expects firms to make clear any time period restrictions when consumers take out a new policy.
  • Operational resilience – The FCA expects all firms to have contingency plans in place to deal with major events and that the plans have been tested. Firms should consider whether their contingency plans are appropriate to the conditions which are currently unfolding and that these have been tested appropriately. Firms should also take all reasonable steps to meet the regulatory obligations which are in place to protect their consumers and maintain market integrity. For example, if a firm has to close a call centre, requiring staff to work from other locations (including their homes), the firm should establish appropriate systems and controls to ensure it maintains appropriate records.
  • Market trading and reporting – As firms are moving to alternative sites and working from home arrangements, the FCA wants them to consider the broader control environment in these new circumstances. Three particular areas are highlighted:
    • Call recording: Firms should make the FCA aware if they are not able to meet call recording requirements; and take mitigating steps (eg enhanced monitoring, or retrospective review).
    • Submission of regulatory data: If firms experience difficulties with submitting their regulatory data, the FCA expects them to maintain appropriate records during this period and submit the data as soon as possible. Where firms have concerns, they should contact the FCA as soon as possible.
    • Market abuse: Firms should also continue to take all steps to prevent market abuse risks (including enhanced monitoring or retrospective reviews). The FCA will continue to monitor for market abuse and, if necessary, take action.

Other considerations:

Short selling

On 17 March 2020, the FCA also temporarily prohibited short-selling of 129 financial instruments under Articles 23 (1) and 26 (4) of the Short-selling Regulation (SSR), following a decision made by another EU national competent authority (NCA). This prohibition lasted until the end of yesterday’s trading day and followed a similar prohibition which took effect during the trading day of 13 March 2020.

The FCA has also confirmed that it will lower the thresholds for the notification of short selling positions under the SSR. This follows the decision of the European Securities and Markets Authority (ESMA) on 16 March 2020 to temporarily require the holders of net short positions in shares traded on an EU regulated market to notify the relevant NCA if the position reaches or exceeds 0.1% of the issued share capital. The amendment will require changes to be implemented to the FCA’s technology so firms should continue to report according to the previous thresholds until further notice.

Senior managers / conduct

In light of the unprecedented nature of the current situation, the senior management of firms may find themselves having to make immediate and difficult decisions. Therefore, senior managers will want to pay close attention to being able to show that “reasonable steps” were taken and ensuring that appropriate records are maintained which document decisions and the rationale.

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Benedicte Perowne
Benedicte Perowne
Senior Associate, London
+44 20 7466 2026
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Katie McGrory
Katie McGrory
Associate, London
+44 20 7466 2669
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789

FCA highlights its areas of concern in financial services markets in Sector Views 2020

On 18 February, the FCA published its Sector Views for 2020.  Described as its view of how the markets it regulates are performing, this “performance” is inevitably framed by its role as the UK’s conduct regulator.  Sector Views also looks at how the financial environment is changing, through a range of different lenses – the FCA’s objectives, macroeconomics, the political environment, and societal and technological developments. Continue reading

LIBOR transition: FCA sets out its expectations for asset managers

The FCA has set out its expectations for asset management firms in a recent ‘Dear CEO’ letter (the Letter), confirming that such firms should be taking proactive steps now, and should be in no doubt that they have a “responsibility to facilitate and contribute to an orderly end to LIBOR”.

This letter follows on from the suite of documents published by the FCA and Bank of England (BoE), together with the Working Group on Sterling Risk Free Reference Rates (RFRWG) earlier this year (see our blog post for more information).

Next steps

Asset management firms should:

  • Reflect on the messages and act – do not wait for instructions from clients. The FCA has noted that this is a market event and solutions will be market-led. Firms should not expect or base their transition plans on future regulatory relief or guidance or legislative solutions.
  • Take immediate action to develop and execute an appropriate LIBOR transition plan where you have LIBOR exposures (if a transition plan has not already been prepared). This may include revising Senior Managers’ Statements of Responsibilities. Your transition plan must be board approved and supervised.
  • Inform the FCA immediately if the Board considers that a barrier to transition is “insurmountable” or if preparations will not be completed in time.
  • Monitor the FCA’s Transition from LIBOR’s webpage for further updates.


FCA, BoE and RFRWG targets have a “direct read across” for asset management firms

The papers published in January set out a series of targets over the course of 2020 (and early 2021) for banks and other relevant firms to meet to ensure the smooth transition from LIBOR. In the Letter, the FCA sets out how some of these targets apply to asset management firms.

It may be necessary to change the services and products offered

The Letter makes clear that firms will need to consider what products and services they offer their clients and how LIBOR may impact them.

For example, managing the transition for products such as funds, collective investment schemes and/or segregated mandates which reference LIBOR may involve offering new products that reference alternative rates; or amending existing products to include fall-back provisions or replacing LIBOR with alternative rates.

Where asset management firms invest in products which reference LIBOR, such as bonds, loans, swaps and structured products, firms may need to invest in different instruments, or engage with issuers and counterparties to convert outstanding instruments to alternative rates.

Senior management should be appropriately involved

The FCA and PRA wrote to banks in 2018 to ensure Senior Managers were identified who would oversee the implementation of the transition from LIBOR (Dear CEO Letter on firms’ preparations for transition from LIBOR to risk-free rates published in September 2018).

This Letter confirms that Senior Managers at asset management firms also need to have oversight of the transition process, and firms need to be clear on who has accountability for managing each aspect of the transition. Statements of Responsibility may need to be updated to include responsibilities arising from firms’ transition plans.

Even if firms have little or no LIBOR exposure, the FCA expects Boards to test this view periodically.

Firms must still manage conflicts of interest

The Letter makes clear that while transitioning clients from LIBOR, all clients should be treated fairly and should have their interests upheld throughout the process. Conflicts of interest must be mitigated or managed appropriately, and clients should not be exposed to unpredictable or unreasonable costs, losses or risks.

What to consider when preparing transition plans

The FCA considers that firms’ transition plans should be prepared across business functions, and based on engagement with wider transition efforts in the market. Firms will need to fully understand and quantify how their operations are vulnerable to LIBOR cessation (the FCA acknowledges that LIBOR is embedded in a wide range of systems), consider how LIBOR exposures can be addressed, and ensure that clients are kept updated.

Progress throughout execution of the transition plan should be monitored to ensure exposures are decreasing over time to meet the necessary targets.

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Nish Dissanayake
Nish Dissanayake
Partner, London
+44 20 7466 2365
Nick May
Nick May
Partner, London
+44 20 7466 2617
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633
Patricia Horton
Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789

No change to the FCA’s approach to enforcement and penalties

On 12 February, the FCA’s Executive Director of Enforcement and Market Oversight, Mark Steward, delivered the keynote address at the City & Financial Global Investigations and Enforcement Conference in London. This was Mr Steward’s second speech in as many weeks, – the previous one, on 6 February, was concerned with market integrity and the FCA’s strategic approach to market regulation (see our blog post on that speech here). This latest speech focused more broadly on the FCA’s approach to enforcement.

In this article, we explore the implications for firms of some of the key messages of the speech. Continue reading