UK/EU Investment Management Update (March 2024)
5. UK — Securitisation Regulation
11. EU — Market Abuse Regulation (MAR)
FCA commits to improving pace and transparency of enforcement cases
On 27 February 2024, the FCA published a statement committing to carrying out enforcement cases more quickly as the organisation seeks to increase the deterrent impact of its enforcement actions.
In its statement, the FCA noted that it will focus on a streamlined portfolio of cases, aligned to its strategic priorities where it can deliver the greatest impact. The FCA will also close cases where no outcome is achievable more quickly.
As part of the new approach, the FCA has published a consultation paper on plans to be more transparent when an enforcement investigation is opened.
Under the proposal, the FCA plans to publish updates on investigations as appropriate and be open about when cases have been closed with no enforcement outcome. The moves are a step change from the current process where investigations are announced only in very limited circumstances.
Stakeholders are invited to provide feedback on the proposals during the consultation period, which is open until 16 April 2024.
FCA discusses enforcement approach
On 27 February 2024, Therese Chambers, joint Executive Director of Enforcement and Market Oversight at the FCA, delivered a speech on the FCA’s enforcement approach at City and Financial Global’s Market Abuse and Market Manipulation Summit.
In her speech, Chambers underscored the primary objective of the FCA’s enforcement work, which is to deter harm and to protect consumers and markets. In the markets context, this is achieved by delivering assertive action on market abuse and reducing and preventing financial crime.
The speech referred to the FCA’s consultation on increasing transparency in its enforcement investigations. By being more open about its investigations, the FCA intends to show to the market what they expect, how others have gone wrong, and the way forward. Further, publicising FCA investigations will reassure firms as to whether they are on the right track (and they can pivot if they are not) and reassure the public that the FCA is on the case.
Chambers also highlighted other enforcement tools in the FCA’s arsenal, including business restrictions and the “use it or lose it” approach the FCA has taken towards firms with unused regulatory permissions, and that the FCA will prioritise compensation to consumers over fines where the FCA considers that the right thing to do.
Fraudulent investment scheme — conviction
On 19 February 2024, the FCA published a press release noting that Guy Flintham pleaded guilty to fraud, following a prosecution brought by the FCA.
Between January 2016 and November 2021, Flintham, based in Blackburn, Lancashire, defrauded around 240 investors by making false representations to persuade them to invest approximately £19 million in an investment scheme operated by him.
Flintham made a number of fraudulent claims to investors, including about how the scheme was operated and the profits they could and were making via the scheme. He falsified documents to support some of his claims.
Sentencing will take place on 26 April 2024.
Market abuse (insider trading) — ex-Goldman Sachs trader jailed for 22 months
On 15 February 2024, the FCA published a press release noting that a former Goldman Sachs analyst was found guilty of six counts of insider trading and three counts of fraud and sentenced to 22 months in prison. Mohammed Zina, 35, was convicted following a 12-week trial at Southwark Crown Court.
The FCA commenced criminal proceedings against Mohammed Zina in February 2021. The offences took place between 15 July 2016 and 4 December 2017 and involved Zina’s dealing in the following stocks using inside information relating to potential mergers and acquisitions his employer was working on: ARM Holdings, Alternative Networks, Punch Taverns, Shawbrook, HSN, and Snyder’s Lance.
The total profit from the alleged insider dealing was approximately £140,000. The fraud charges were related to three personal loans obtained from Tesco Bank, totalling £95,000, which Zina had used to fund his insider trading. Mohammed Zina was found guilty of six counts of insider trading and three counts of fraud.
Financial promotions — FCA fines and bans LC&F director
On 13 February 2024, the FCA published the final notice it had issued to Floris Jakobus Huisamen, a former director of London Capital and Finance plc (LC&F). The FCA had fined Huisamen £31,800 and banned him from performing any function relating to any regulated financial activity for his role in signing off on misleading financial promotions concerning minibonds.
LC&F used financial promotions to market minibonds to retail investors that presented a misleading picture of the minibonds and made them appear a far more attractive investment than they were. Investors were not told about the true nature of the minibonds, including the presence of hidden charges and the high-risk and unsustainable nature of the lending being carried out by LC&F.
The final notice relates to Huisamen’s conduct between February 2017 and December 2018. During that period, he was the CF10 compliance oversight controlled function holder at LC&F and played a key role in the signoff process for confirming that LC&F financial promotions complied with the financial promotion rules. The FCA found that Huisamen recklessly signed off on LC&F’s information memoranda, brochures, and website as compliant even though he was aware of clear risks that they were not compliant.
Huisamen failed to obtain evidence of the claims being made, allowed promotions that gave a misleading impression that the minibonds were regulated by the FCA, and continued to approve promotions even when he became aware of inaccurate claims. The FCA concluded that Huisamen was not fit and proper because he lacks integrity and that he poses a risk to consumers and to the integrity of the UK financial system.
FCA takes action against misleading ads and promotions
On 14 February 2024, the FCA published a press release detailing its actions and concerns in relation to financial promotions.
In 2023, the FCA took action against misleading financial advertisements and promotions, resulting in over 10,000 of them being withdrawn or changed, an increase of 17% compared to the previous year. In addition, the FCA also published 2,285 alerts to inform consumers of potential scams, a notable increase from the 1,800 alerts it published in 2022.
The FCA has also been using regulatory powers in relation to new rules on cryptoassets advertising (set out in policy statement PS23/6) to combat illegal cryptoasset promotions to UK consumers, with 450 consumer alerts specifically concerning this issue being published in Q4 2023.
The FCA also noted its growing concerns over financial product promotions on social media, especially those endorsed by influencers targeting younger demographics.
Separately, the FCA reminded firms that as of 7 February 2024, authorised firms must obtain permission to approve financial promotions for unregulated entities (the regulatory gateway — as mentioned in our October 2023 Update). This requirement aims to ensure that firms endorsing financial promotions possess the necessary competence and expertise.
The regulatory gateway is underpinned by the Consumer Duty, which came into force in July 2023. The Consumer Duty requires firms to demonstrate that they are providing consumers with information that helps them to make effective and informed decisions about financial products and services.
FCA surveys financial advisers about ongoing services and the Consumer Duty
On 15 February 2024, the FCA published a statement relating to the application of the Consumer Duty, noting that it had surveyed around 20 of the largest UK financial adviser firms concerning their delivery of ongoing services, for which their clients continue to be charged after advice has been given.
In its survey, the FCA asks whether firms have assessed their ongoing services in response to the introduction of the Consumer Duty and whether they have made any changes as a result.
The survey also asks for data on the number of clients due a review of the ongoing suitability of the advice as part of the service, how many received that review, and how many paid for ongoing advice but whose fee was refunded as the suitability review did not happen.
The FCA is collecting this information to assess what, if any, further regulatory work it may undertake in this area. The FCA anticipates providing a further update having considered the firms’ responses.
The survey follows a “Dear CEO” letter sent to financial adviser firms in December 2022, where the regulator had indicated it would undertake some cross-firm work in this area. In the letter, the FCA had set out its concerns that advice firms were not adequately considering the relevance, nature, and costs of these ongoing services for all their clients.
A further Dear CEO letter sent to firms in the consumer investments sector sent in January 2023 explained how advice firms should approach the incoming Consumer Duty. In a Consumer Duty webinar with firms in December 2023 (covered in our Sidley Update of February 2024), the FCA flagged concerns that it appeared some consumers may be paying for a service, such as an annual review, but not receiving it.
In 2021, the FCA published a strategy to support a thriving consumer investment market. The data-gathering exercise announced by the FCA on ongoing services forms part of that work to raise standards so people can invest with confidence. Central to that strategy is ensuring that people can access advice if they need it and have trust in the services they are offered.
FCA publishes report on Consumer Duty implementation
On 20 February 2024, the FCA published a report on the implementation of the Consumer Duty, following its review in January 2023 of firms’ Consumer Duty Implementation Plans, covered in our Sidley Update of February 2023. The review highlights good practice and areas for improvement that the FCA identified across a range of firms, active in various markets and products.
The FCA urges firms to consider these findings and continue to make improvements in line with good practice. Firms that identify gaps should take steps to address these.
The FCA highlighted target outcomes it wants to achieve through the Consumer Duty. These outcomes and key points the FCA noted as being areas for improvement are set out below:
- Culture, governance, and monitoring: The FCA wants consumers to have confidence in retail financial services markets, with healthy competition based on high standards and firms focused on delivering good customer outcomes.
- Firms need to ensure that the focus on good customer outcomes is understood at all levels, in their strategies, leadership, and people policies, and not confined to a compliance exercise.
- Some firms were not sufficiently proactive; the Consumer Duty requires firms to proactively identify and address issues and risks of harm.
- Consumers in vulnerable circumstances: The FCA wants vulnerable consumers to have outcomes as good as other consumers’ outcomes.
- Firms should be able to identify where particular groups of customers — especially those that are vulnerable — receive poorer outcomes than other customers and take action to address this.
- Firms should not ask consumers to repeatedly disclose their personal circumstances when passed among teams. Firms should consider the impact of being asked to disclose or evidence their personal circumstances on a consumer’s mental well-being.
- Products and services: The FCA wants consumers to be sold products and services that are designed to meet their needs, characteristics, and objectives.
- The FCA expect firms in the same distribution chain to share relevant information with one another. This will help firms to quickly address issues to prevent consumer harm and deliver good outcomes.
- Firms must understand that they might have a role in a distribution chain, what that role is, and what it means for their responsibilities.
- Price and value: The FCA wants consumers to get products and services that offer fair value.
- Firms must show that products offer fair value to retail customers. The FCA rules and guidance set out factors that firms must consider to assess whether a product or service provides fair value.
- Firms should not charge customers for a service they are not benefiting from.
- Firms should share sufficient information to enable other firms in the distribution chain to properly assess value to the end retail customer or understand what the firm is doing when it considers whether a product does not provide fair value.
- Consumer understanding: The FCA wants consumers to understand the information they are given and make timely and informed decisions.
- Firms should not undermine customers’ trust by pushing products or services that are too high-risk or complex for them.
- Firms should be clear with customers about what charges apply and when. One way to improve customer understanding is to provide worked examples of product and service costs.
- Consumer support: The FCA wants consumers to be provided with support that meets their needs.
- Firms should train staff well enough to have complex conversations with customers. The FCA expects firms to train their staff to an appropriate level so they can support good outcomes for their customers.
- Firms should have sufficiently robust systems to protect and help consumers from loss of investments, savings, or personal data due to fraud or cyberattacks.
Government asks regulators to review AI policing
On 15 February 2024, the UK government announced that it had asked various UK regulatory authorities to publish an update by 30 April 2024 on how they will police AI.
The Department for Science, Innovation, and Technology Secretary of State and the Economic Secretary to the Treasury sent a letter (the AI Letter) to the FCA, among other authorities, to set out in their update their strategic approach to AI and the steps they are taking in line with the expectations in the UK government’s March 2023 AI White Paper, published in March 2023.
The annex to the AI Letter sets out information the government considers would be useful to be addressed in the regulator’s updates. In particular, regulators are asked to set out how AI applies to their regulatory responsibilities and how they are adopting the AI White Paper’s five principles, including concrete examples of actions taken. These principles are i) safety, security, and robustness; ii) appropriate transparency and explainability; iii) fairness; iv) accountability and governance; and v) contestability and redress. Regulators will have to enforce those principles, tailoring them to the context in which AI is used.
The regulators have also been asked to outline a summary of guidance they have, or plan to issue in relation to the AI principles, and to outline their current capabilities and efforts in addressing the emerging risks posed by AI.
The FCA’s response to the government’s letter should serve as a useful forecast of how the FCA intends to approach its regulation of AI risks to the UK financial services industry over the coming years as it develops a framework consistent with the principles set out in the AI White Paper.
5. UK — Securitisation Regulation
UK Securitisation Regulations published
On 30 January 2024, the Securitisation Regulations 2024 (UKSR) were published with an accompanying explanatory memorandum. As discussed in our Sidley Updates of August 2023 and September 2023, the UKSR creates the new legislative framework for regulation of securitisations in the UK.
Importantly, the UKSR grants the FCA and Prudential Regulation Authority (PRA) rule-making powers with respect to so-called “firm-facing requirements” (including due diligence, risk-retention, and transparency requirements). Those rules will apply to FCA-authorised and PRA-authorised firms, respectively. In addition, the FCA’s rules will apply to unauthorised firms that carry on certain activities in relation to securitisations (which are referred to as “designated activities” in the UKSR). Each of the FCA and PRA consulted on their respective rulebooks in 2023. The FCA has said that it expects to publish the policy statement containing its rules in Q2 2024.
The explanatory memorandum to the UKSR explains that HM Treasury intends to lay a second statutory instrument in 2024, which will contain outstanding matters not covered in the UKSR. This is expected to include the due diligence requirements for occupational pension schemes as well as requirements relating to the establishment of securitisation special purpose entities.
The commencement of most of the provisions in the UKSR will not take effect until the retained UK law version of the EU Securitisation Regulation is repealed and the FCA and PRA’s rules come into force. These events are expected to take place simultaneously in Q2/Q3 2024.
FCA report on reducing and preventing financial crime
On 8 February 2024, the FCA published a report providing an update on its progress in the fight against financial crime and looking ahead to identify areas of focus in the coming year.
The report provides details on the FCA’s efforts over the past year in three particular areas:
- Fraud
- The FCA’s work to tackle fraud includes issuing warnings, engaging social media influencers to educate them on financial promotions, and persuading search engines to tackle illegal financial promotions and scams.
- In 2023, the rate of growth of investment fraud slowed significantly. In 2022, the number of victims grew by 28% and the amount of losses by 53%. By the end of 2023, this had reduced significantly; overall losses were down 40% with the number of investment fraud victims growing slightly, by 4.3%.
- Anti-Money-Laundering (AML) and sanctions
- The FCA developed and rolled out a synthetic data sanctions testing tool to test over 90 firms and published the results in September 2023 (for further detail, see our October 2023 Update).
- In 2023, 40% of Annex I AML applications were rejected, withdrawn, or refused, along with over 88% of crypto registrations.
- The FCA conducted and published multifirm reviews, including on money-laundering controls related to cash through the post office, to share its expectations of how firms should ensure that their controls are proportionate to the risk.
- The FCA also worked with the Office for Professional Body Anti-Money Laundering Supervision to drive improvements in the 25 Professional Body Supervisors for anti-money-laundering in the legal and accountancy sector.
- Working with firms
- The FCA has sought to regularly engage the private sector through their associations, through public-private structures such as the Joint Money Laundering Intelligence Taskforce, and directly through publishing findings from reviews to give the industry feedback to help firms improve their controls.
Looking forward, the FCA identified the following four key areas of focus, including the FCA’s outlook, and suggested courses of action for firms to take in respect of each topic:
- Data and Technology. Technology is transforming fraud and money-laundering detection, but cybercrime is increasing in scale, sophistication, and impact as AI becomes more widespread.
- Firms must ensure that systems and controls keep up with the increasing sophistication of criminal groups and should use the advances in technologies to help prevent financial crime.
- Questions that firms’ boards may wish to ask themselves:
- Does my firm know how criminals are likely to be using new technology to target our customers and business? Does my firm have a way of keeping updated on new techniques or typologies?
- How is my firm keeping updated with good practice? Is my firm targeting investment in technology and data to address our firm’s and customers’ key financial crime risks?
- How is my firm measuring the outcomes we are achieving here?
- If my firm is using third-party technology to detect, is the technology calibrated to the risks my firm faces and its customer base?
- Collaboration. One of the key factors in successfully reducing financial crime is for firms and wider partners to work collaboratively.
- The FCA strongly encourages firms and cross-sector partners to participate in data-sharing initiatives and explore the latest advances in data-sharing technology to improve collaboration. This will result in a more informed view of economic crime threats.
- The FCA strongly encourages firms and cross-sector partners to participate in data-sharing initiatives and explore the latest advances in data-sharing technology to improve collaboration. This will result in a more informed view of economic crime threats.
- Consumer Awareness. Raising consumer awareness is essential to combatting financial crime.
- Questions that firms’ boards may wish to ask themselves:
- Is my firm raising awareness among our customers of the fraud risks relevant to the business we do with them?
- Are we using/being consistent with the language/approaches proposed by public bodies or our association?
- Are we getting feedback? How do we know if it is working?
- Questions that firms’ boards may wish to ask themselves:
- Metrics — Measuring Effectiveness. Measuring the effectiveness of fraud and money-laundering prevention will allow firms to be clear on the impact their interventions are having.
- Firms should be able to measure their own effectiveness at preventing financial crime through using outcomes and metrics. The FCA encourages firms to consider how their interventions could contribute towards a reduction in overall rates of financial crime.
- Questions that firms’ boards may wish to ask themselves:
- What metrics are the board getting on the firm’s outcomes on tackling financial crime?
- How are these metrics tied to activities or work programme metrics and budgets?
- How does the firm compare with its peers?
FCA discusses improvements to UK listing rules
On 6 February 2024, in a speech at the Westminster Business Forum, Clare Cole, Director of Market Oversight at the FCA, spoke about the regulator’s December 2023 consultation paper on revisions to the UK’s listing rules (CP23/31).
In light of a number of businesses in recent months choosing to list in the U.S. rather than the UK, the proposed reforms are a timely attempt to encourage a more diverse range of companies to list and grow on UK markets. According to Cole, these will be the most wide-ranging and consequential reforms to the UK’s capital markets in over three decades. The final rules should be published in the summer, with implementation following shortly afterwards.
Cole listed several concerns with the present UK regime that disadvantages UK-listed companies when competing on the global merger-and-acquisition stage, including processes that increase issuer and shareholder costs; stifling of innovation; and a lack of evidence of valuation premiums on the UK market despite additional standards.
She also summarised key elements of the proposals under CP23/31, which include:
- replacing the “Premium” and “Standard” listing segments with a new, consolidated, single category for commercial companies;
- reshaping the significant transactions regime to no longer require burdensome FCA-approved circulars and prior shareholder approval of transactions below reverse takeover levels, while focusing on timely and effective disclosure by issuers to promote engagement;
- rationalising the related party transaction regime similarly to remove prescribed shareholder votes, while retaining independent checks and balances such as the “Fair and Reasonable” opinion from sponsors and the role of independent directors; and
- alleviating sunset clauses on dual class shares structures, and enabling a wider range of pre-initial public offering (IPO) participants to hold such shares in issuers post-IPO and thus remain part of the issuer’s exciting growth story.
The proposed changes aim to give the “choice back to issuers, investors, and markets, rather than the regulator,” adding that reforms to the UK’s prospectus and public offer infrastructure are also underway. The deadline for proposals regarding sponsor competence as outlined in CP23/31 is 16 February 2024, and the consultation period for the remainder of the proposed reforms closes on 22 March 2024.
Tax case: First-tier Tribunal in BCG UK LLP and Others v HMRC: Disposal of LLP “capital interests” taxed as income
On 23 January 2024, the First-tier Tribunal (FTT) concluded in its recent judgment that payments made to partners in a UK limited liability partnership (LLP) upon the disposal of certain LLP interests that were described as “capital interests” in fact fell to be taxed at higher UK income tax rates. A UK company (BCG Ltd) had previously transferred its business into an LLP (BCG LLP), and alongside the transfer of the business into the BCG LLP structure the UK individuals who previously participated in certain equity-based awards in the U.S. parent company of BCG Ltd (BCG Inc) had those equity awards replaced with new interests in BCG LLP, which were designated as “capital interests” (LLP Capital Interests). The economic entitlement of the LLP Capital Interests was not variable by reference to the profits of BCG LLP, the LLP Capital Interests were separate to and not affected by the actual capital contributions made by the individuals to BCG LLP, and the value of the LLP Capital Interests in BCG LLP in fact directly linked to changes in the value of the shares in BCG Inc (replicating the economic effect of the prior equity awards). Upon relevant realisation events (e.g., retirement of a partner), the UK individuals would dispose of their LLP Capital Interests to BCG Ltd (as the corporate member of BCG LLP), and in practice these payments were commonly made by BCG LLP itself out of retained and undistributed income. The taxpayers sought to claim UK capital gains tax treatment for the proceeds paid upon disposal of their LLP Capital Interests, at lower rates of UK tax than would have been applicable to income payments. HM Revenue & Customs (HMRC) challenged this treatment on several grounds.
The FTT did not accept HMRC’s argument that disposal payments with respect to the LLP Capital Interests should be taxed as allocations of underlying profits of BCG LLP on the basis that the LLP Capital Interests were not actually part of the BCG LLP profit-sharing arrangements and the LLP “mixed membership” rules did not apply, on the facts, to reallocate any profits of BCG Ltd to the individual partners.
The FTT agreed with HMRC, however, that these disposal payments should be taxed as either “miscellaneous income” or under the “sales of occupational income” rules. The “miscellaneous income” rules can tax income derived from any source not otherwise subject to income tax under UK tax rules. In this context, the FTT held that the LLP Capital Interests did not truly represent interests or a share in the capital of BCG LLP (i.e., in the assets or goodwill of BCG LLP) and that the payments were in fact in the nature of income and derived from the provisions of the LLP agreement. This led the FTT to conclude that disposal proceeds for the LLP Capital Interests should be taxed as miscellaneous income. The fact that the entitlement of the LLP Capital Interests fell to be determined by reference to the value of certain capital assets that were not assets of BCG LLP (i.e., the shares in BCG Inc) was not sufficient to obtain capital treatment for the relevant payments.
The FTT further agreed with HRMC that these disposal payments could also have been taxed under the “sales of occupational income” rules, on the basis that (in the FTT’s view) the implementation of the structure involving the LLP Capital Interests had originally been driven by a tax avoidance motive (a condition for these rules to apply).
The FTT’s decision ultimately went in favour of the taxpayers, but this was on procedural grounds related to the process and timing for HRMC assessments in the UK. In substance, this case provides a useful insight into the UK tax treatment of interests in an LLP that are described as being “capital” in nature. An LLP structure in which UK partners are entitled to some form of “capital” interest should be carefully assessed and may be open to HMRC challenge on a number of grounds. LLP interests that genuinely afford the partners an entitlement to the capital assets of the LLP may fall to be taxed as capital for UK tax purposes, but HMRC’s recent success in bringing forward challenges to LLP structures and arguments around the “miscellaneous income” rules in particular means that these arrangements require significant caution for taxpayers.
UK budget update
On 6 March 2024, the UK government published its spring budget for 2024. The budget brought relatively few changes that directly affect investment managers operating in the UK. The biggest headlines were reserved for the announcement that the UK’s “non-domiciled” tax regime is to be abolished, such that long-term UK tax residents can no longer keep their non-UK income and gains outside the UK tax net if they do not remit to the UK. The UK government proposes to introduce an alternative regime under which new arrivals to the UK would have four years in which no UK tax would be due on offshore income and gains (even if remitted to the UK), after which all UK residents would be taxed on a worldwide basis. This change may affect certain individuals based in the UK who are currently claiming the non-domiciled remittance basis for UK tax on offshore income and gains. Full details of the changes and transitional provisions are yet to be released.
More prosaically, some reductions in the “main band rate” of employee and self-employed National Insurance Contributions were announced, which may relieve some pressure to offer pay increases to staff whose remuneration does not significantly exceed the upper threshold of £50,270.
Council of the European Union adopts AIFMD II
On 26 February 2024, the Council of the European Union (the Council) formally adopted new rules amending AIFMD II, following the publication of the final text of the directive on 10 November 2023 (as mentioned in our December 2023 Update).
The directive also modernises the framework for undertakings for collective investment in transferable securities, that is, plain-vanilla EU-harmonised retail investment funds, such as unit trusts and investment companies.
The directive will shortly be published in the EU’s Official Journal and will enter into force 20 days later. EU Member States will have 24 months after the entry into force to transpose the rules into their national legislation.
We will shortly be publishing a detailed Update on the final AIFMD II text. For a discussion of the initial Commission proposal, please see our Sidley Update, EU AIFMD II — Implications of the Commission Proposal.
The Council adopts new rules to strengthen market data transparency
On 20 February 2024, the Council adopted a new directive and regulation (the MiFID/MiFIR Review package), which amend MiFID II and MiFIR, as part of an initiative to give investors better access to the market data necessary to invest in financial instruments and increase the global competitiveness of the EU’s capital markets and ensure a level playing field.
Key changes under the new directive and regulation include the establishment of a framework for an EU-wide consolidated tape, and a ban on payment for order flows, as mentioned in our Sidley Updates of August 2023 and February 2024.
The MiFIR Review package also amends the rules on commodity derivative position limits, including provisions to provide greater transparency with regard to the trading activity of commodity derivatives and derivatives of emission allowances, and clarifying the application of position management controls of trading venues to commodity derivatives and derivatives of emissions allowances.
ESMA deprioritises Regulatory Technical Standards (RTS) 28 reports pending new MiFID II framework
On 13 February 2024, ESMA issued a public statement regarding investment firms’ reporting obligations under MiFID II in light of the MiFID/MiFIR Review package.
Under the revised MiFID II requirements, among other amendments, firms are no longer required to produce detailed annual reports on trading venues and execution quality under Article 27(6) MiFID II (RTS 28 reports). This obligation is being deleted as the MiFID review found that RTS 28 reports are hardly read and are of limited utility for investors.
The reporting obligation officially remains in place pending the transposition of the new MiFID rules into Member States’ national laws over the next 18 months. However, ESMA’s statement clarifies that in the meantime, it expects National Competent Authorities (NCAs) not to prioritise supervisory actions enforcing RTS 28 reports.
Firms are nonetheless reminded of the importance of adhering to the best execution requirements under both the current and amended MiFID frameworks.
11. EU — Market Abuse Regulation (MAR)
ESMA issues warning about posting investment recommendations on social media
On 6 February 2024, in an effort to raise awareness about requirements under the EU MAR, ESMA published a warning (and accompanying video) for people posting investment recommendations on social media. The warning is aimed at financial influencers, professionals, experts, and anyone else who might recommend investments on social media.
MAR defines an “investment recommendation” in broad terms. As such, in the context of social media, the definition encapsulates any post or video in which a person gives advice or ideas, directly or indirectly, about buying or selling a financial instrument, even if the person uses “non-technical” language.
Any person making investment recommendations is subject to MAR’s general requirements, including obligations to identify the details of the producers of the recommendation; present the recommendation objectively, distinguishing facts from opinions and confirming the reliability of sources; and clearly disclose any conflicts of interest.
In addition, MAR imposes further obligations on professional/expert recommenders such as that they must summarise the methodology behind their recommendations, provide risk warnings and disclose any position above 0.5% in the issuer of the recommended securities.
ESMA warns that non-compliance with these rules may lead to civil or criminal sanctions from EU NCAs, including monetary penalties of up to €500,000 for natural persons and up to €1 million for legal persons.
Institutions reach agreement on improvements to EMIR 3.0
On 7 February 2024, the Council and the Parliament reached a provisional political agreement on further improvements to EMIR 3.0.
The proposed changes aim to make the EU clearing landscape more attractive and resilient by, among other things, streamlining and shortening supervisory processes, such as authorisation and validation procedures; improving consistency between rules; strengthening supervision of central counterparties (CCPs); and requiring market participants of substantial systemic importance (who are subject to a clearing obligation) to have an operationally active account at an EU CCP.
The inter-institutional agreement is now subject to approval by the Council and the Parliament before it can be formally adopted and enter into force.
Stage set for ESG rating regulation
On 5 February 2024, the Council and the Parliament reached a provisional agreement on the final text of a new regulation on ESG rating activities. The proposed regulation hopes to boost the reliability and comparability of ESG ratings by strengthening the transparency and integrity of ratings providers and preventing conflicts of interest. The overall objective is to increase investors’ confidence in EU sustainable investment products.
The new rules will bring ESG ratings providers under the authority and supervision of ESMA and make them subject to transparency requirements as to the methodology and information sources behind their ratings. For more detail and commentary on the new regulation, see our Update, Implications of the European Commission’s June 2023 Sustainable Finance Package.
The regulation must now pass through the EU formal adoption procedure and will apply 18 months after entering into force.
Updated Q&As on key pieces of financial services legislation
On 2 February 2024, ESMA updated several of its online Q&As on legislation including MiFIR, EMIR, and MiCA.
In particular, the updated MiFIR Q&As make clarificatory amendments to a Q&A on how to report personal identification information (PII) for EU individuals in transaction reporting submissions. ESMA has now removed the UK from this Q&A and therefore clarified that the UK should be treated as any other non-EU country, so the first line of PII for UK individuals should be a passport number rather than a national insurance number.
The updated EMIR Q&As tackle several questions related to transaction reporting under updated technical standards in preparation for the forthcoming go live of EMIR Refit reporting from 29 April 2024, on which see generally our recent Update, 2024 European Market Infrastructure Regulation Refit — Changes to the EMIR Reporting Regime.
The MiCA Q&As clarify questions on topics including the grandfathering of passporting and other rights, the prohibition of benefits in return for routing client orders, and practical details around Article 60 notifications.
ESMA launches twin consultations on new MiCA guidelines
On 29 January 2024, ESMA opened two consultations on proposed guidelines under MiCA, one regarding reverse solicitation and one on the classification of cryptoassets as financial instruments.
Firstly, ESMA is seeking input on draft guidance concerning the application of the reverse solicitation exemption to the provision of cryptoasset services by a third-country firm. The proposed guidelines emphasise that the exemption is narrow and exceptional, applicable only when such service is initiated at the exclusive initiative of a client.
Meanwhile, ESMA’s other consultation paper seeks input on proposed guidelines that intend to provide market participants and NCAs with clear conditions and criteria for whether cryptoassets qualify as “financial instruments,” by reference to the definitions and classes of financial instruments set out in MiFID II.
The consultations are open to comments from stakeholders until 29 April 2024, and ESMA expects to publish a final report in Q4 2024.
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