FCA finalises plans to improve functioning of equity secondary markets

3 May 2023

The FCA has today published its policy statement and final rules (PS23/4) on improvements to equity secondary markets.  This forms part of the Wholesale Markets Review (WMR) conducted by the FCA and HM Treasury (HMT) and follows a consultation in July 2022 (see our blog post here). The changes also support the objectives set out in the FCA’s Strategy 2022‑2025 and its recent business plans which include a commitment to strengthen the UK’s position in wholesale markets.

The final rules have been published at the same time as proposed reforms to the UK listing regime (see our blog post here).

Changes since CP22/12:

  • The proposals relating to waivers from pre-trade transparency and tick size have not changed since the consultation.
  • Some changes have been made to the proposals relating to post-trade transparency including amendments to the content of post-trade transparency, specifically to the scope of exemptions and to reporting flags. The FCA has also allowed a longer implementation period of 12 months. The FCA has decided to keep the ‘entity level’, rather than ‘asset-class’, designation proposals in relation to the new designated reporter regime (DRR) which will replace the current MiFID system for the reporting of trades. Under the DRR, firms will be able to elect to register themselves, at entity level, as designated reporters (DRs) by notifying the FCA, regardless of their systematic internaliser (SI) status. However, to address concerns raised by some sell-side firms, the FCA has now provided an option for DRs to bilaterally agree, explicitly and in advance, which party would fulfil the reporting obligations.

Timing: The changes to waivers from pre-trade transparency and to the tick size regime apply immediately. To allow firms with sufficient time to make the necessary changes to their IT systems and internal processes, the implementation period for the requirements relating to post-trade transparency and the DRR has been extended by 6 months and will apply from 20 April 2024.

Plans for further work:

  • Deferral for ETF transactions priced at NAV – The FCA will consult ‘at the earliest opportunity’ to amend Article 15 of RTS 1 to introduce a new deferral for transactions in exchange traded funds (ETFs) executed at NAV. The implementation timeline for the new deferral will be aligned with the other changes in post-trade transparency set out in the PS.
  • Alignment between trade reporting and transaction reporting flags – Some of the flags being amended are also part of the information reported by firms for transaction reporting purposes. Some respondents have commented that not aligning the changes between the flags used for trade reporting and those required for transaction reports may increase the complexity for firms’ reporting systems. The FCA will be considering policy options and will communicate its expectations for transaction reporting in due course.
  • UK market for retail orders – The consultation had sought views on whether the Retail Service Provider (RSP) system works well for retail clients and whether there are ways to improve best execution for retail orders while enhancing the efficiency and liquidity of public markets. The FCA will continue to discuss the RSP model with stakeholders and consider whether a more formal review would be appropriate. The FCA also reminds firms using the RSP model to take account of its expectations on the interaction between best execution and the RSP system.
  • Resilience to outages – The FCA plans to form a subcommittee of its Secondary Markets Advisory Committee to work on good practices for trading venues and investment firms in the event of a trading venue outage and may provide confirmation to industry guidance in due course. The FCA confirms that it plans to consult on the establishment of a consolidated tape (initially for bonds only) to enhance market resiliency during outages ‘in the near future’.

Divergence from EU rules:  The FCA acknowledges that divergence between requirements and standards in the UK and the EU, in particular in relation to post-trade transparency and trade reporting, will be a potential source of complexity and cost for some firms with operations in both UK and EU. However, it believes that the benefits will outweigh the potential costs arising from divergence.

Interaction with the Financial Services and Markets Bill:

  • The Bill implements the changes proposed following the WMR, as confirmed in the government’s response in March 2022, including amendments to the trading venues and SI regimes, removal of the double volume cap (DVC) and the share trading obligation (STO) in equity markets, as well as other proposals in the fixed income and derivatives markets and commodity derivatives markets, market data and reporting requirements. The Bill is currently still expected to be passed in H1 2023.
  • The reforms set out in the PS concern parts of the wholesale market regime the FCA already has the power to implement (because they relate to parts of the regime that are already set out in regulatory rules and guidance) and are not contingent on changes that are intended to be implemented via the Bill.
  • Generally, in the hope that a staggered approach will allow firms to absorb and respond to its proposals in a more manageable way, the FCA is implementing the WMR by consulting on topics in different stages. It intends to consult on other reforms covered in the WMR which are more closely linked to changes to legislation over the course of 2023.

 

Clive Cunningham
Clive Cunningham
Partner
+44 20 7466 2278
Marina Reason
Marina Reason
Partner
+44 20 7466 2288
Kelesi Blundell
Kelesi Blundell
Partner
+44 20 7466 7477
Patricia Horton
Patricia Horton
Professional Support Lawyer
+44 20 7466 2789

UK Government publishes an update on the UK Green Taxonomy and a consultation on bringing ESG ratings providers within the regulated perimeter

3 April 2023

On 30 March 2023, the UK Government published (i) its updated Green Finance Strategy (Strategy) and (ii) a consultation on the future regulatory regime for Environmental, Social, and Governance (ESG) ratings providers (Consultation). Both publications are part of a wider set of ESG-related publications such as the Powering Up Britain – Net Zero Growth Plan and Energy Security Plan (which we cover in more detail here) and the more recent consultation on addressing carbon leakage risk to support decarbonisation. Continue reading →

HM Treasury publishes draft statutory order regulating UK crypto marketing

31 March 2023

Overview

This week, the government published the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 (Order) along with an explanatory memorandum. This is the latest in a raft of measures enhancing the UK’s oversight of cryptoasset activities, raising consumer protection standards while providing greater certainty for business. The Order follows the government’s previous consultation back in July 2020 and later responses in January 2022 . Continue reading →

FCA publishes new Discussion Paper on updating and improving the UK regulatory regime for asset management

21 February 2023

In a nutshell:

Yesterday, the FCA dropped yet another discussion paper (DP 23/2, the DP); this one announcing that the FCA has turned its mind to further changes that might be needed to the regime governing the UK’s 2,600 asset managers. The context here is the forthcoming change in the UK’s regulatory framework and the FCA’s expanded remit that will flow from this and the eventual shift of firm-facing requirements from statute to regulatory rulebooks. Continue reading →

Need for caution in marketing cryptoassets (Moneybrain Ltd v The Financial Conduct Authority)

24 January 2023

Stablecoins, whose value is pegged to fiat currency, gold or other assets ostensibly to avoid the fluctuations typical of cryptocurrencies, have become increasingly popular. However, the crypto industry (including stablecoins such as TerraUSD and LUNA) has been experiencing prolonged distress, prompting regulatory concerns and an increased focus on consumer protection in this context.

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Diversity & Inclusion: FCA findings on firms’ approaches to D&I

15 December 2022

On 12 December 2022, the FCA published the findings from its qualitative research in respect of the diversity and inclusion (“D&I“) strategies and practices that regulated firms (“Firms“) currently have in place to improve D&I within their workforce (“FCA Review“).

Though the FCA Review does not amount to regulatory guidance on D&I, it does provide a clear picture of what the FCA’s expectations are when it comes to D&I; hence, the FCA encourages all regulated firms to consider the FCA Review when developing their own D&I strategies and practices.

In terms of background, it is worth noting that:

  • The FCA together with the PRA and the Bank of England (the “Regulators“) kick-started the discussion on improving D&I within financial services firms back in 2021 with the publication of a discussion paper (DP21/2). This discussion paper mapped out different policy options that the Regulators are considering to implement – though the future D&I rules and guidance will apply to all regulated firms, the discussion paper clarified that there will be no one size fits all approach to D&I (see our blog post here). The FCA has incorporated this approach to its FCA Review by selecting a diverse sample of Firms in its review;
  • The FCA is expected to publish its consultation paper on D&I in 2023. The FCA Review should be viewed as the last step before the publication of the relevant consultation paper, feeding into the relevant policy recommendations;
  • There is a separate FCA workstream on D&I that relates to rules applicable to premium and standard listed companies in respect to D&I on company boards and executive management (PS22/3; and see our blog post here).

Key takeaways from the FCA Review

Methodology: The FCA Review is based on two sets of data:

  • The FCA has collected data from a sample of 12 Firms – selection was based mainly on gender gap differences and the diverse nature of the Firm (e.g. banks, asset management companies, payment services providers, etc.). The FCA Review relies primarily on this sample.
  • In addition, following the publication of DP 21/2, the FCA undertook a voluntary survey of Firms to understand the type of D&I data that Firms were collecting. The relevant findings have been incorporated as an appendix to the FCA Review. Given its voluntary nature, the sample is self-selecting and hence any conclusions out of it are potentially less robust. However, the findings of this data analysis appear to broadly confirm the findings of the primary data analysis conducted by the FCA.

Key findings (weaknesses):

  • Gender representation has so far attracted most of the attention in D&I, whilst ethnicity started to pick up more recently;
  • There is a suggestion that a ‘compliance approach, rather than a genuine commitment to diversity and inclusion’ is driving some strategies – the FCA gave the example of firms which have focused almost exclusively on gender representation at senior levels because there are external targets and expectations for it;
  • Firms tend to address D&I concerns through lateral hirings at the senior management level, hence D&I at the junior and middle management level is lagging behind;
  • Firms do not have holistic D&I strategy and practices in place that include clear identification processes of the problem and challenges, as well as systematic monitoring procedures;
  • Data quality was correlated to D&I performance – Firms with better diversity data tended to have a better understanding of their position and were better placed to decide which actions to take;
  • Firms’ existing D&I practices show an overreliance on measures such as training, network groups and allyship. Other practices include: supporting career progression for staff returning to work; encouraging parental leave for both men and women; setting specific business area targets; extending the reach of entry level recruitment beyond elite universities; diverse shortlists; diverse interview panels; and anonymised CVs;
  • Firms’ senior managers were accountable for D&I through their pay and bonuses; however, it was unclear how these accountability structures work in practice;
  • Firms that are members of international groups are applying international group-wide D&I policies which, however, are not tailored to UK circumstances or characteristics.

Next steps: Firms that were part of this review received written feedback letters from the FCA. The FCA plans to follow up with these Firms through its usual supervisory activities to assess how they have considered the FCA’s feedback.

In conclusion

The FCA Review does not in itself amount to new regulatory guidance. However, it does provide more clarity as to what the FCA expects from regulated firms in terms of D&I practices; and all regulated firms should take into consideration these findings when drafting their own D&I policies and structuring their D&I framework. Achieving a more diverse and inclusive financial services industry is an important part of the ESG priority the FCA has set out in its Business Plan for 2022 to 2025. The FCA also clearly views D&I as an essential part of its overall focus on improving decision-making and culture within firms. Firms should pay heed to the steer from the FCA on how it expects firms to engage with the D&I agenda.

Please reach out to us if you wanted to discuss this topic. HSF can provide support with managing D&I risk and developing your D&I framework.

HSF Resources

 

Clive Cunningham
Clive Cunningham
Partner
+44 20 7466 2278
Marina Reason
Marina Reason
Partner
+44 20 7466 2288
Kelesi Blundell
Kelesi Blundell
Partner
+44 20 7466 7477
Patricia Horton
Patricia Horton
Professional Support Lawyer
+44 20 7466 2789
Ioannis Asimakopoulos
Ioannis Asimakopoulos
Associate
+44 20 7466 3510

Express consent needed for collateral use of Mutual Legal Assistance material in FCA civil proceedings

28 November 2022

The High Court has declined to strike out civil proceedings brought by the Financial Conduct Authority (FCA) in respect of alleged market abuse, even though it found that the FCA had made impermissible collateral use of material obtained through mutual legal assistance (MLA) requests without first obtaining the consent of the relevant overseas authorities.

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