COVID-19: Temporary bans on short selling in the EU come to an end

Those national regulators in the EU which had put in place temporary restrictions on any short selling of securities admitted to trading on regulated markets in their jurisdictions have all confirmed that the prohibitions will not be extended. However, firms should be aware that ESMA’s temporary lower net short reporting threshold will remain in force until 16 June.

National regulators – end of temporary bans on short selling

The regulators in France, Belgium, Spain, Austria and Greece have confirmed that the bans on short selling will not be extended and will expire at 11.59 pm on 18 May. The Italian regulator has also confirmed it will end the prohibition one month earlier than its original 18 June deadline at 11.59pm 18 May (in line with the other jurisdictions).

The below summary table sets out the details of each jurisdiction’s prohibition.

Jurisdiction Latest national regulator public statement Date prohibition imposed Prohibition imposed until
France AMF 18 March 18 May
Belgium FSMA 17 March 18 May
Spain CNMV 17 March 18 May
Austria FMA 18 March 18 May
Greece HCMC 17 March 18 May
Italy CONSOB 18 March 18 May

ESMA – Lower net short reporting threshold still in place

While local regulators now plan to lift the bans on short selling, ESMA has confirmed that 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%) will remain in place until 16 June.

More information about the measures put in place can be found at our previous blogpost available here.

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

ESMA proposes changes to MiFID II inducements and costs and charges disclosure regimes

On 1 April 2019 the European Securities and Markets Authority (ESMA) published its final report to the European Commission (EC) setting out its technical advice on the impact of the inducements and costs and charges disclosure requirements under MiFID II (Directive 2014/65/EU).

ESMA expresses some concerns over the efficacy of the current inducements disclosure regime and proposes some changes designed to improve clients’ understanding of inducements. ESMA considers but rejects certain more fundamental changes, including the introduction of a more general inducements ban and the creation of a new sub-category of sophisticated retail clients.

ESMA finds that the costs and charges disclosure regime generally works well and helps investors make informed investment decisions, but recommends that certain requirements should be scaled back for eligible counterparties and professional clients.

Disclosure requirements for inducements under Article 24(9) MiFID II:

Overall, ESMA finds that the impact of the MiFID II inducement disclosure rules has not been as positive as expected and has not facilitated the development of independent investment advice (with clients remaining reluctant to pay separately for such advice).

In terms of specific changes proposed, ESMA recommends that the EC take the following steps to improve client understanding of inducements:

  • clarify that the ex-ante and ex-post disclosures (where applicable) should always be made on an ISIN-by-ISIN basis;
  • introduce the obligation to include a simple, consistent explanation of the meaning of “inducements” (for instance, third-party payments) in all inducements disclosures; and
  • strengthen the MiFID II requirements around quality enhancing services by requiring firms to notify clients of the specific services the firm could be benefitting from (but reject the introduction of a closed list of quality enhancing services without further market impact assessment).

Other key areas considered by ESMA in the report are as follows:

  • A complete ban on inducements for all MiFID investment services was considered but not recommended at present. Instead, ESMA recommends that the EC assesses the potential impact of a ban and possible mitigating measures, including by consideration of more extensive inducements bans introduced in the UK and the Netherlands.
  • It is not appropriate for a new category of clients (“sophisticated retail clients”) to be created for the purposes of the inducements regime.
  • Placing agent fees or underwriting fees should only be disclosed where the firm also, respectively, provides an investment service to the investor buying the financial instruments it is placing, or sells the financial instruments issued to investors in addition to underwriting.
  • For level playing field reasons, the disclosure requirements should be extended beyond MiFID financial instruments to capture comparable investment products (in particular certain insurance products).
  • Further analysis of potential measures to tackle investor protection issues arising in bank-led closed-distribution models is recommended.

Costs and charges disclosure requirements under Article 24(4) MiFID II:

On costs and charges, ESMA is of the view that the disclosure regime generally works well, and helps investors make informed investment decisions. The main change recommended by ESMA is the reduction of mandatory disclosures for eligible counterparties and professional clients, as follows:

  • Eligible counterparties should be allowed to opt out of the entire costs and charges disclosure regime, and the obligation to provide the illustration of the impact of costs on return should never apply.
  • Professional clients should be given flexibility to opt out of the costs and charges regime entirely for investment services other than portfolio management and investment advice.
  • For retail clients or professional clients receiving portfolio management and investment advice services, the existing regime should continue to apply (subject to recommended clarifications).
  • ESMA once again rejects the creation of a sub-category of retail clients for “sophisticated retail clients”, as described above.

With regard to the current regime, ESMA believes this has proven effective so should remain in place, subject to certain recommended amendments:

  • Certain ESMA Q&As should be incorporated into the MiFID II Delegated Regulation (2017/565/EU) to foster convergence across member states.
  • Ex-post disclosures should show both total costs and costs on an ISIN-by-ISIN basis (but with more optionality for portfolio management clients). Implicit costs should be included.
  • Firms should monitor and track clients’ portfolios on a day-to-day basis so that they can show actual costs incurred by a client in ex-post disclosures as accurately as possible.
  • For telephone transactions requested by the client, where not possible to provide the ex-ante costs disclosure before the completion of transactions, disclosures may be provided immediately afterwards.
  • As with the inducements rules, the costs and charges disclosure regime should be harmonised across MiFID instruments and other substitutable products (e.g. insurance).
  • Electronic communications should become the default “durable medium” for communicating with clients (rather than requiring consent to electronic disclosure). Personalised client consent to best execution and conflicts of interest policies should also be abolished provided that they are freely available on the firm’s website.

Potential impact on firms:

The implementation of the changes recommended by ESMA will require legislative action by the EC. No indicative timetable is given and under current circumstances this could take some time to implement. The EC may also reject or diverge from the technical advice in various respects, or commission further review. It is also unclear whether and in what respects these recommendations or any subsequent legislative revisions at EC level may be taken forward by the UK.

Nevertheless, investment firms should be aware of this technical advice, as the changes recommended could, if taken forward, impact the ways in which firms communicate with and apply the rules to their client base, and the information they are required to gather and provide to clients, both for MiFID instruments and other comparable investment products. The advice also gives some indicators of ESMA’s expectations on points such as ISIN-level inducement disclosures and disclosure of implicit costs.

Firms should also be aware of ESMA’s rejection of a more flexible regime for sophisticated retail clients that cannot be opted up to professional status, and alive to the possibility that certain key areas remain under consideration, including the possibility of a more extensive inducements ban.

 

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

Katie McGrory

Katie McGrory
Associate, London
+44 20 7466 2669

COVID-19: Pressure Points: FCA issues ‘Dear CEO’ letter with update to retail firms (UK)

The Financial Conduct Authority (FCA) has issued a ‘Dear CEO’ letter (the letter) with an update on key issues in light of COVID-19 to firms providing services to retail investors. In addition to the measures it has taken with the Bank of England (BoE) and HM Treasury (HMT), the FCA has considered many requests for forbearance and regulatory adaptations from firms and trade associations, some of which are discussed further below. The FCA has implemented a “significant package of reprioritisation and deprioritisaion of regulatory work” to allow firms to concentrate on their COVID-19 response efforts and protecting their consumers and has indicated that it will continue to update its approach in response the crisis.

The FCA will generally look favourably on forbearance requests for changes which support firms and consumers (some of which it will have the power to make immediately; others which may require co-ordination between the FCA and other UK Government or European agencies), and will only consider requests where there is a genuine need to help consumers or which, for example, would support the FCA’s response to the crisis.

Next steps for firms:

  • In light of the impact of COVID-19 on firms’ operational resilience, the FCA re-emphasised its expectations for firms to focus strongly on supporting and serving consumers and small businesses during this time. The FCA also expects firms to be actively managing their own financial resources/resilience (and in particular liquidity), with firms notifying the FCA immediately if they expect to face financial difficulties.
  • Where firms are re-directing resources due to reduced levels of staff, they should have regard to the FCA’s strong focus on consumer protection. Firms should consider documenting how these decisions are made, with the aim of allocating resources to achieve consumers protection as far as possible during this time.
  • Firms should keep up-to-date with developments by regularly checking the FCA’s website to ensure they are aware of the regulations and rules which continue to apply to them. Firms should also remain vigilant of scams which are increasingly prevalent during the COVID-19 crisis; both the FCA and National Crime Agency have released warnings on rising fraud levels and firms have a responsibility to ensure that consumers are protected.
  • Firms may also wish to consider making use of dialogue between trade associations and the FCA where appropriate to raise prevalent operational challenges with the FCA.

Key areas of focus:

In addition to the above, the FCA sets out in the letter its approach to a number of key issues to help firms manage their response to the crisis:

  • Financial resilience – The FCA has already published guidance on financial resilience and prudential issues. Importantly, the FCA has clarified that government loans cannot be used to meet capital adequacy requirements as they do not meet the definition of capital. Firms therefore need to ensure that they have other appropriate funding available to meet their capital adequacy requirements, if necessary.
  • Flexibility for client identity verification – Whilst firms must continue to comply with their obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) to verify clients’ identities, they can be flexible with how they achieve this. The MLRs and Joint Money Laundering Steering Group guidance already provide that client identity verification can be carried out remotely, and outline appropriate safeguards and checks which firms can implement to assist with verification – some examples are given by the FCA. Firms can also consider seeking additional verifications once restrictions on movement are lifted.
  • Flexibility over best execution reports – The FCA and the European Securities and Markets Authority (ESMA) have both published clarification for firms on best execution obligations in the current climate (the ESMA public statement is available here). The FCA expects firms to continue to meet their best execution obligations, including on client order handling, taking into account current market conditions when determining the relative importance of execution factors. Firms may wish to consider using different types or orders to execute client orders and manage risk during market volatility.

Following ESMA’s guidance, the FCA will not take enforcement action where a firm:

    • does not publish its RTS 27 report by 1 April 2020, provided it is published no later than 30 June 2020; or
    • does not publish RTS 28 and Article 65(6) reports, provided they are published by 30 June 2020.
  • Flexibility over 10% depreciation notifications – Firms will not be required to inform investors in every instance where the value of their portfolio or leveraged position falls by 10% or more in value. Instead, until 1 October 2020, the FCA has confirmed that it will not take enforcement action provided that a firm:
    • has issued at least one notification to retail clients within a current reporting period notifying them that their portfolio has decreased in value by at least 10%; and
    • subsequently provides general market updates online, through other public channels, and/or generic, non-personalised client communications; or
    • chooses to cease providing 10% depreciation reports for any professional clients.

In what is currently a highly volatile market, firms may wish to think about adopting this new approach which could ease the impact of repeated communications on consumers and the operational burden on themselves, or using email or phone calls to notify clients as opposed to written notifications.

  • Pause on implementation of measures – The FCA’s policy statement on pension transfer advice has been delayed until Spring 2020 and follow-up work on assessing the suitability of retirement income advice has been paused. Rules on investment pathways and platform switching provisions have already been made; these have been referred to the FCA Board for further consideration. Ongoing work with firms providing defined benefit transfer advice will continue.

 

Clive Cunningham

Clive Cunningham
Partner, London
+44 20 7466 2278

Susannah Cogman

Susannah Cogman
Partner, London
+44 20 7466 2580

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

Cat Dankos

Cat Dankos
Regulatory Consultant, London
+44 20 7466 7494

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

[This post was last updated on 16 April 2020 to reflect the extensions to the temporary bans on short selling by EU national regulators]

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 Latest national regulator public statement Date prohibition imposed Prohibition imposed until
France AMF 18 March 18 May
Belgium FSMA 17 March 18 May
Spain CMNV 17 March 18 May
Austria FMA 18 March 18 May
Greece HCMC 17 March 18 May
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 (including any subsequent clarificatory guidance which may be published).

 3. Position in the UK

The FCA has applied ESMA’s amendment to the reporting threshold for net short selling positions (i.e. lowered from 0.2% to 0.1%). However, in a statement made by the FCA on 17 March 2020, firms were told to continue to report data in the UK using the previous threshold until further notice, while the FCA made the necessary technological changes in how it receives the data. Since then, the FCA has confirmed that the required changes have been made and that it will be ready to receive notifications at the lower threshold from 6 April 2020. Firms are not required to amend and resubmit notifications submitted to the FCA between 16 March 2020 and 3 April 2020. Firms should make best efforts to report at the lower threshold from 6 April 2020. Firms should contact the FCA if they are unable to amend their systems by this date.

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 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

MiFID II/MiFIR Review

Two years after MiFID II and MiFIR started to apply, the MiFID review process has begun, with both the European Commission and the European Securities and Markets Authority (ESMA) having recently published consultations on the framework.

European Commission consultation

The European Commission has launched a public consultation on the review of the MiFID II/MIFIR regulatory framework.  This consultation uses a questionnaire format divided into two main sections.  The first section covers general questions on the overall functioning of MiFID II/MiFIR, with the second section covering specific questions on “priority” and “non-priority” topics (see below). Continue reading