UK/EU Investment Management Update (April 2022)

1. Sanctions (War in Ukraine)

2. UK — Anti-Money Laundering (AML)

3. UK — Investment Firms Prudential Regime (IFPR)

4. UK — MiFID II

5. UK — Cryptoassets

6. EU — AML

7. EU — Market Abuse

8. EU — European Market Infrastructure Regulation (EMIR)

9. EU — ESG

10. EU — MiFID II

11. EU — CSDR

1. Sanctions (War in Ukraine)

UK — Chancellor calls on firms to stop investing in Russia

On 13 March 2022, the Financial Conduct Authority (FCA) published a statement in response to a call on firms from the Chancellor Rishi Sunak, to stop investing in Russia as part of the government’s plan to undermine the invasion of Ukraine.

The FCA notes that asset managers have begun depreciating Russian assets whilst others have announced their intention to divest themselves from such investments when it becomes viable to do so.

The FCA notes the challenges in disposing of Russian assets but reminds firms that when it is possible to sell such investments, firms should ensure that they meet requirements on entities that are subject to sanctions or connected to sanctioned entities.

Adoption of the Economic Crime (Transparency and Enforcement) Act 2022

On 15 March 2022, the Economic Crime (Transparency and Enforcement) Act (ECA) received Royal approval after being fast-tracked through Parliament in response to the war in Ukraine.

The ECA is separated into three parts:

• Part 1 focuses on the establishment of a register of overseas owners of UK land or leases and their beneficial owners. This levels the playing field with UK incorporated companies, which are already required to register such information.
• Part 2 expands provisions in relation to unexplained wealth orders.
• Part 3 amends and expands sanctions provisions. Notably, the ECA removes the requirement that people must have known or suspected that they breached sanctions law to receive a monetary penalty for such breaches.

Please see our Update UK Economic Crime (Transparency and Enforcement) Bill for a discussion on the ECA.

2. UK — Anti-Money Laundering (AML)

UAE added to UK high-risk countries list

On 28 March 2022, the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022 were adopted. This statutory instrument amends the list of countries the UK deems to be high risk for the purposes of enhanced customer due diligence requirements under Regulation 33(3) of the UK’s money-laundering regulations (the UK AML List). The United Arab Emirates (UAE) has been added to, whilst Zimbabwe has been removed from, the UK AML List

UK firms will need to apply enhanced due diligence measures when entering into business with UAE, Cayman, Malta, and the other jurisdictions on the UK AML List.

See the discussion in Section 6 (EU — AML) below on the more significant consequences of countries (including Cayman) being added to the equivalent EU AML List.

3. UK — Investment Firms Prudential Regime (IFPR)

FCA Amendments to MIFIDPRU

On 4 March 2022, the FCA published its quarterly consultation paper setting out proposed amendments to the (MIFIDPRU) section of the FCA Handbook, which implements the UK Investment Firms Prudential Regime (IFPR). As outlined in our January 2022 Update, the IFPR requires FCA investment firms and their parent undertakings that were not subject to the UK Capital Requirements Regulation (CRR) but who wish to count their existing instruments as own funds for the purpose of MIFIDPRU 3 to have submitted a MIFIDPRU TP 7 form to the FCA by no later than 1 January 2022.

In response to the limited number of MIFIDPRU TP 7 forms received to date, the FCA is now proposing to:

• extend the notification deadline from 1 January to 29 June 2022;
• allow firms and parent entities to update the terms of any non-MIFIDPRU 3-compliant capital instruments issued before 1 January 2022 to bring them into compliance;
• expand the scope of MIFIDPRU TP 7 to cover former IFPRU investment firms and former consolidating UK CRR parents that did not obtain UK CRR approvals; and
• update related Handbook guidance to explain the revised approach.

If the proposed amendments are adopted, the changes will not affect any firm or parent undertaking that has already submitted a valid MIFIDPRU TP 7 notification on or before 1 January 2022, and these notifications will continue to be valid in relation to the instruments specified in the notification.

For firms authorised before 1 January 2022, the transitional arrangements in MIFIDPRU TP 7 are relevant only to capital instruments that were issued before 1 January 2022. Any new class of capital instruments issued by a FCA investment firm thereafter will need the standard formal approvals and MIFIDPRU TP 7 is not available. The transitional arrangements will cease to be available for any firms on 29 June 2022. As such, the proposed amendments will operate for a limited time period.

4. UK — MiFID II

FCA fines GAM and former Investment Director Timothy Haywood

On 30 March 2022, the FCA published a press release stating that the FCA had fined asset manager GAM International Management Limited (GIML) £9,103,523 and Timothy Haywood £230,037, both for failing to adequately manage conflicts of interest.

GIML’s failure to manage conflicts of interest arose from three transactions, two of which were linked to Greensill Capital (UK) Ltd where Haywood was the investment manager at GIML making investment decisions.

Haywood received gifts and entertainment, including travelling on a Greensill private aircraft, but failed to record them in a timely manner with GIML. The FCA were unable to prove that Haywood’s investment decision-making was influenced by the gifts provided to him. However, the fact that the conflicts were not properly managed elevated the possibility that he may have been motivated to invest for his own gain.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said: “The FCA expects asset managers and their staff to be scrupulous in identifying and managing conflicts and their risks. This case should send a clear warning to the market.”

FCA proposes changes to research unbundling rules for UK AIFMs

The FCA’s quarterly consultation paper also includes proposed changes to research inducement rules for collective portfolio managers, that is, UK FCA-authorised alternative investment fund managers (AIFMs). As discussed in our December 2021 Update, the FCA recently made changes to research inducement rules for UK MiFID investment firms, which came into force on 1 March 2022. The FCA’s proposed amendments will bring requirements for UK AIFMs in line with those for investment firms, as follows:

• SME research. An exemption from the inducement rules will be introduced for small and midsize enterprise (SME) research below a market capitalisation of £200 million to reflect and address the potential market failure in the form of low levels of coverage in research. Under the exemption, research on firms below the market capitalisation of £200 million provided on a rebundled basis or for free, as well as corporate access, constitutes an acceptable minor non-monetary benefit for UK AIFMs.
• FICC research. Research on fixed income, currency, or commodity instruments (FICC) will be exempt from the inducement rules. The rationale is that FICC transactions are typically not paid for by an agency commission to the broker, but instead the broker earns its revenues from the spread (the gap between the bid and ask prices of an instrument). Therefore, the exemption for FICC research does not create the same opacity risks between transaction fees and research costs that arise for equity research.
• Independent research. An exemption from the inducements rules is being introduced for research provided by research providers that do not offer execution services or are not part of a financial services group that includes an investment firm offering execution services or brokerage services.
• Openly available research. The rules will clarify that written material openly available to any firm or the general public (who wish to see it) is considered to be an acceptable minor non-monetary benefit. This approach would mean investment managers would be able to access such material without restriction. The FCA states that it recognises that for many participants this may reflect existing industry practice.

5. UK — Cryptoassets

FCA Notice on Cryptoassets

On 24 March 2022, the FCA released a notice reminding all regulated firms of their existing obligations when they are interacting with or exposed to cryptoassets and related services. The FCA’s proposed primary areas of risk that firms should consider are as follows:

• Being clear with customers. To avoid consumer confusion in relation to cryptoasset services provided, firms are expected to ensure that consumers are able to distinguish elements of a business that are regulated and unregulated.
• Financial crime and registration of cryptoasset business. Firms need to ensure that where required, they are fully registered with the FCA and comply with the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017.
• Having appropriate systems and controls in place. Firms are expected to continually review whether any cryptoasset business they are involved with is listed on the FCA’s Unregistered Cryptoasset Business page and has sufficient due diligence and money laundering controls in place to manage the risks posed by customers.
• Assessing the risks. When analysing the risks posed by a customer whose funds derive from cryptoasset-related activities, the same criteria should be applied as would be for other sources of wealth. The FCA reminds firms of the 2018 Dear CEO letter, which gave firms guidance on how to achieve best practice where clients and customers may be using cryptoassets or providing services to customers offering cryptoassets.
• Prudential considerations. Firms subject to the IFPR have obligations (under MIFIDPRU 7) to assess and mitigate the potential for harm to clients, to the markets in which they operate, and to themselves, that could arise from all of their business.
• Custody considerations. The FCA reminds firms that where cryptoassets are specified investments (i.e., security tokens), firms carrying out regulated activities involving custody of such assets are likely to be subject to the FCA Client Assets Sourcebook to make sure adequate protection is provided for clients’ assets.
• Domestic and international engagement. The FCA will continue to work closely with regulator partners both international and domestic to make sure that digital regulation develops in an effective manner and balances innovation and competition, alongside orderly markets and consumer protection.

6. EU — AML

Cayman added to EU AML high-risk countries list

On 21 February 2022, the European Commission (Commission) adopted a Regulation regarding the EU list of third countries that have strategic deficiencies in their AML/counterterrorism financing regimes that pose a significant threat to the EU’s financial systems (EU AML List). Consequently, Cayman along with eight other jurisdictions has been added to the EU AML List, whilst four jurisdictions were removed from that list. The new EU AML list took effect on 13 March 2022.

The listing was widely expected as the Financial Action Task Force (FATF) had added Cayman to its own list of “jurisdictions under increased monitoring” in February 2021. Note that although Malta is also on the FATF increased monitoring list, and the UK AML List, it is not on the EU AML List.

EU firms will now need to apply enhanced due diligence measures when entering into business with Cayman or other jurisdictions on the EU AML List.

However, there are two further implications that flow from the addition of Cayman and other countries to the EU AML List, which go beyond a listing on the equivalent UK AML List (Cayman and UAE, for example, are on the UK AML List).

First, as discussed in our Update EU AIFMD II — Implications of the Commission Proposal (December 7, 2021), the Commission has proposed that if an alternative investment fund (AIF) or its AIFM is established in a third country on either the EU AML List of the EU list of non-cooperative jurisdictions for tax purposes (EU Tax List), then that AIF will no longer be able to be marketed into the EU under the national private placement regimes pursuant to Article 42 of the EU Alternative Investment Fund Managers Directive (AIFMD). (Cayman was placed on the EU Tax List in February 2020 but was moved off that list in October 2020).

AIFMD II is not expected to be implemented until the end of-2024 or early 2025, and it seems likely that Cayman will be removed from the EU AML List by that time. However, it will be important for Cayman not to be added back to either the EU AML List or EU Tax List at any time, as the result will be that Cayman AIFs would not be capable of being marketed to EU investors.

Second, the EU Securitisation Regulation (SECR) was amended in April 2021 so as to prohibit the establishment of a securitisation special purpose entity (SSPE) in any country that appears on the EU AML List or the EU Tax List. EU institutional investors (as defined in the SECR) have already taken the view that they are prohibited from investing in securitisation instruments issued by SSPEs established in Cayman or the other jurisdictions on the EU AML List. The result has been that many securitisation transactions that might otherwise have used Cayman SSPEs have established the SSPEs in alternative jurisdictions.

7. EU — Market Abuse

Disclosure of “inside information” ahead of newspaper publication is lawful only when “necessary” and “proportionate”

On 15 March 2022, the CJEU or Court published a press release, regarding a judgment of the Court that held that the disclosure of inside information by a journalist ahead of press is legal only when regarded as being “necessary” to practice the profession and when in line with the “principle of proportionality.”

A journalist had published two articles on the Daily Mail website reporting rumours about takeover bids for the shares of the companies Hermès (by LVMH) and Maurel & Prom. The prices indicated in that article were significantly higher than the prices of those shares on Euronext. That publication resulted in a considerable increase in the price of those shares. Shortly before the publication of those articles, purchase orders were made for the shares in question by certain British residents, who sold those shares once that Daily Mail publication had taken place. The French Autorité des marchés financiers française (Financial Markets Authority, France) imposed a fine of €40,000 on the journalist because he had told those British residents about the forthcoming publication of his articles and had thus disclosed “inside information” to them.

The cour d’appel de Paris (Court of Appeal, Paris, France) made a request for a preliminary ruling to the CJEU concerning the interpretation of the provisions of EU law on insider dealing.

The CJEU held that the disclosure of inside information for the purpose of journalism may be justified by virtue of the freedom of the press and the freedom of expression so long as it is necessary for the exercise of his or her profession and complies with the principle of proportionality.

8. EU — European Market Infrastructure Regulation (EMIR)

ESMA extends UK CCPs Recognition Decision

The UK central counterparties (CCPs) — ICE Clear Europe Ltd, LCH Ltd (as Tier 2 CCPs), and LME Clear Ltd (as a Tier 1 CCP) — were initially recognised and tiered by the European Securities and Markets Authority (ESMA) as third country CCPs on September 2020. The recognition decision was to apply for 18 months, until 30 June 2022.

CCPs play a crucial role in the derivatives and equities trading market. They primarily facilitate clearing and settlement services and reduce credit risk between parties in transactions. ESMA granted temporary recognition to the aforementioned three UK-based CCPs to minimise disruption in the derivatives and equities trade settlement in the European markets.

On 25 March 2022, ESMA announced its decision to extend the application of the recognition decisions under Article 25 EMIR (Regulation (EU) 648/2012) for the three recognised CCPs established in the UK. On 22 March 2022, and in alignment with the Commission Implementing Decision (EU) 2022/1742 adopted by the European Commission on 8 February 2022, the application of the recognition decisions and tiering determination decisions in respect of the three recognised UK CCPs were temporarily extended until 30 June 2025.

ESMA Fines REGIS-TR

On 24 March 2022, ESMA announced that it had fined trade repository REGIS-TR €186,000 for eight breaches of EMIR.
The breaches relate to:

• Data Integrity. REGIS-TR negligently failed to ensure the integrity of the data reported to it as it rejected data that the reporting parties had correctly reported.
• Direct and immediate access. REGIS-TR negligently provided regulators with incorrect reports outside of the specified time limit and failed to exclude data within those reports.

REGIS-TR was found to have made three further breaches; the reports that were provided to regulators were considered unreliable as they failed to verify the completeness of the data received by reporting parties.

9. EU — ESG

ESAs update supervisory position on SFDR

On 25 March 2022, the ESAs published an updated supervisory statement on the current interim period during which the Level 2 regulatory technical standards (RTS) under the EU Sustainable Finance Disclosure Regulation (SFDR) are yet to be implemented. The RTS are important for investment managers (and others financial market participants) as they set out the templates that are to be used by firms that are promoting Article 8 (“light green”) and/or Article 9 (“dark green”) products, including investment funds.

This updated statement from the ESAs replaces the supervisory statement published in February 2021.

In the updated statement, the ESAs clarify the following points.

• PAI reporting. The first principal adverse impact (PAI) information to be disclosed in accordance with the RTS should be made in a statement to be published by 30 June 2023, in respect of a reference period corresponding to the calendar year of 2022.
• Article 9 and Article 9 products — pre-contractual and periodic disclosures.
  • With respect to periodic disclosures for products, EU national competent authorities are encouraged to refer financial market participants and financial advisers to the requirements set out in the draft RTS of the final reports that were submitted to the European Commission on 4 February and 22 October 2021 during the interim period.
  • The periodic report required under Article 11(2) must be complied with in 2022 “irrespective of reference periods,” and “for periodic disclosures issued between 1 January 2022 and 31 December 2022, the draft RTS can be used as a reference.”

• Taxonomy alignment.
  
  • To comply with Article 5(b) of the Taxonomy Regulation (i.e., taxonomy alignment) (if applicable to the financial product), “an explicit quantification should be provided through the numerical disclosure as a percentage of the extent to which investments underlying the financial product are taxonomy-aligned.”
  • Information on taxonomy-eligible activities (as opposed to taxonomy-aligned activities) should not be provided for the disclosure of the extent to which investments underlying the financial product are in taxonomy-aligned economic activities. “… While estimates should not be used, where information is not readily available from public disclosures by investee companies, financial market participants may rely on equivalent information on taxonomy alignment obtained directly from investee companies or from third party providers.”

10. EU — MiFID II

ESMA Final Report on certain MiFID II remuneration requirements

On 19 July 2021, ESMA launched a consultation on draft guidelines regarding certain aspects of the MiFID II remuneration requirements. This consultation was triggered by the need to enhance clarity and to foster convergence in the implementation of the MiFID II remuneration requirements and replace the existing 2013 ESMA guidelines on the same topic.

As a large part of the specific requirements relating to remuneration policies and practices in the MiFID II framework comes directly from the 2013 guidelines, ESMA chose to build upon the text of the 2013 guidelines, which have been substantially confirmed, while those parts now incorporated into the MiFID II framework have been removed. Additionally, the new guidelines also incorporate the results of supervisory activities conducted by national competent authorities (NCAs) on the topic.

To build on the 2013 guidelines, the revised content has been reorganised and divided into the following sections:

• design of remuneration policies and practices;
• governance; and
• controlling risks that remuneration policies and practices create.

The new guidelines apply to NCAs and EU MiFID firms, from six months of the date of publication of the guidelines on ESMA’s website in all EU official languages.

Note that the new guidelines apply only to EU MiFID firms. UK MiFID firms are not subject to these guidelines, although UK MiFID firms are subject to the same MiFID II remuneration requirements, set out in SYSC 19F (Remuneration and performance management) of the FCA rules.

ESMA Final Report on MiFIR RTS 1 and RTS 2

On 28 March 2022, ESMA published its proposals for amending RTS 1 and RTS 2, which are the RTS specifying the pre-trade and post-trade transparency requirements for equity and non-equity instruments under EU MiFIR. This follows ESMA’s consultation paper of July 2021, although it takes forward only a targeted number of the issues addressed in that paper.

The proposals will make amendments to the existing RTS 1 and RTS 2 with regard to (i) large in scale (LIS) thresholds for trades in exchange-traded funds (ETFs), (ii) the legal provisions relating to non-price-forming transactions, (iii) the list of trading systems and of the connected pre-trade transparency requirements, (iv) the time of publication of transactions executed outside trading hours, (v) the date of application of ESMA transparency calculations, and (vi) the calculation of the standard market sizes. A number of technical updates to specific reporting fields and to certain flags are also proposed.

Of particular note to MiFID investment firms:

• Under the proposals, the existing pre-trade transparency waivers for LIS transactions would be increased for transactions in ETFs, from the current threshold of €1 million to a threshold of €3 million. This is to increase the amount of lit trading in ETFs. In the same vein, the minimum trade size for deferrals of post-trade transparency with respect to ETFs would be increased from €10 million to €15 million.
• The proposals would align the concept of a non-price-forming transaction with the transaction reporting requirements under MiFIR RTS 22, for the purposes of negotiated transaction waivers and the scope of the share trading obligation.
• Where deferrals of publication of transactions in equity instruments apply, trade information would need to be published by 9 a.m. market open, as opposed to noon local time as is currently the case.

ESMA anticipates making a second set of changes to the same RTS in the context of the ongoing MiFIR review but states that it considers these changes necessary to support the establishment of an EU consolidated tape.

The proposed amendments must now be reviewed by the European Commission prior to adoption.

11. EU — CSDR

European Commission proposal for amendments to the CSDR

Following on from the discussion on the Central Securities Depository Regulation (CSDR) in our January 2022 Update, on 16 March 2022 the Commission adopted a legislative proposal to amend certain aspects of the CSDR. In addition to a number of changes relating to the authorisation and supervision of CSDs, the Commission has, as anticipated, proposed amendments to the application of the mandatory buy-in (MBI) regime.

Under a new “two-step approach,” the Commission would have the power, but not the obligation, to adopt an implementing act bringing into force an MBI regime only in prescribed circumstances:

• the application of the existing cash penalty mechanism’s not having resulted in a long-term, continuous reduction of settlement fails in the EU;
• settlement efficiency in the EU’s not having reached appropriate levels taking into account the situation in similar non-EU markets; or
• the level of settlement fails in the EU’s having or being likely to have a negative effect on the financial stability of the Union.

The proposal is now subject to review by the Council of Members States and the European Parliament.