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The ELA is proud to welcome our newest member firm: LOGOS  in Iceland!


Financial Services Regulation 2022 - New Year briefing

Submitted by Firm:
Travers Smith LLP
Article Type:
Legal Update

View on Travers Smith website here.

The Alpha and Omega of Regulation (via Omicron)?

Having said goodbye to another year of headlines dominated by COVID-19, with a Christmas and New Year overshadowed by a mixture of good and bad news about Omicron, it's not yet clear what degree of optimism about the year ahead is justified.  At the very least, it is to be hoped that the World Health Organisation will not find it has to exhaust the Greek alphabet in naming any future new variants of concern. Despite the seemingly interminable global health crisis, however, the pace of change in the financial services industry has not slowed. If anything, there are even more changes and innovations than ever before: the coming year is arguably unprecedented in terms of the sheer volume of weighty developments.

And now that the UK is a year on from the end of the Brexit transition period, there is barely any talk these days about seeking "equivalence" with the EU; the focus is now on "divergence" and "deference". Indeed, if there is one theme that applies across all those regimes which the UK has "inherited" from the EU – and in relation to new ones going forward – it is the extent to which the UK is diverging from the bloc in reformulating UK regulation. Many things may, on the surface, look quite similar in terms of the supervisory preoccupations – but the detailed and practical application may be end up being very different.

Climate change and sustainability remains close to the top – if not at the top – of the agenda for many firms. The UK sustainability regime for asset managers and owners is starting to take shape: TCFD-aligned disclosure rules, both at the entity and product levels, are now in force for the largest asset managers and will apply to others from next year. High level proposals for a Sustainability Disclosure Regime that will "overlay" those rules which emerged towards the end of last year and will evolve and become more concrete through the course of 2022 and beyond, as will the UK Green Taxonomy. By contrast, the EU regime is more evolved in terms of application and detail, though even then delays to technical standards have contributed to considerable uncertainty. To a greater or lesser extent, divergence between the UK and EU seems inevitable. See Part 1: ESG and Sustainability.

As regards prudential regulation, the UK's Investment Firm Prudential Regime went live on New Year's Day: as with other large regulatory change projects of course, while there was much to be done by the implementation deadline, work did not stop then. Adjusting to the new regime as it beds down will present ongoing challenges for the regulator and the regulated alike. At the same time, UK banks became subject to a set of new rules implementing most of the Basel III  recommendations – but there will be still more to come under "Basel 3.1". EU banks are subject to the same recommendations, implemented via the Capital Requirements Regulation. Private equity and venture capital firms have a vested interest in how a section of these UK and EU rules are implemented and applied since they affect how banks must assign risk weights to private equity investments. Similar rules (in concept at least) may apply to insurance companies under the UK and EU versions of the Solvency II regime. See Part 2: Prudential regulation.

While the UK and EU share many of the same concerns when it comes to the regulation of investment funds, divergent approaches in terms of how to address them are already clear in terms of the granular detail . For instance, in relation to PRIIPs, the FCA has expressed quite trenchant views about what it sees as disfunctional aspects of the regime and is changing its rules and guidance, as well as the 'onshored' technical standards; the EU is also changing its version of the PRIIPs RTS, together with a modest extension to the "PRIIPs exemption" for UCITS managers. The UK has finished the statutory framework for its new Overseas Funds Regime which will enable non-UK retail funds (including EEA UCITS) to access the UK retail market, subject to an assessment of equivalence and recognition – the FCA will now be consulting on the rules to faciliate the regime. And the UK's new regime for Long-Term Asset Funds (LTAFs) is now in force – it remains to be seen whether and how this takes off.  In terms of alternative funds, the EU has set the legislative ball rolling with its proposed directive on changes to EU AIFMD (and EU UCITS Directive) (the so-called "AIFMD II" review). This will not come into force until 2024 at the earliest. However, the EU Cross Border Distribution of Funds regime is now up and running and will impact on marketing and pre-marketing of funds in the EU. None of this will apply in the UK, but UK and other non-EU managers seeking to market AIFs may be impacted by amendments to the NPPR regimes of individual Member States.  See Part 3: Investment funds.

The UK and EU MiFID II "ships" continue to sail in broadly the same general direction, but already there are discernible changes of course. Among other things, the UK has ditched the requirements for best execution reports, and proposes to remove the share trading obligation and double volume cap restrictions. Changes to the UK research and inducements rules take place in March. The EU is also planning amendments to the EU MiFID II regime, but by and large, none of the changes correlate with one another. See Part 4: MiFID II.

In terms of governance and outsourcing, the UK regulators are - not suprisingly after the last couple of years we have had - heavily focused on the operational resilience of FCA-authorised firms, banks, insurers and FMIs. They are also seeking to embed and enhance diversity and inclusion into the way that all financial services firms work and structure themselves. In the UK, EU and globally, outsourcing – and particularly outsourcing to the cloud – remains a consistent preoccupation of the supervisors. See Part 5: Governance and Outsourcing.

When it comes to AML/CTF both the UK and EU are proposing changes to their regimes. There will be changes to the UK Money Laundering Regulations and – after threatening it for some time – the EU will be negotiating a new, directly-applicable Regulation on AML/CFT and a Sixth Money Laundering Directive (MLD 6). Meanwhile, UK firms above a certain size will find themselves subject to the new economic crime levy, to be assessed in a levy year starting on 1 April 2022 and payable next year. See Part 6: Financial crime.

It has been an exciting year in the world of fintech, which began with the Kalifa Fintech Review highlighting the opportunity to create highly skilled jobs across the UK, boost trade, and extend the UK's competitive edge over other leading fintech hubs. The UK is continuing its exploratory and consultative work on digital assets and stablecoins, and the development of Central Bank Digital Currency, while the EU is pursuing the various legislative initiatives under its Digital Finance Strategy. These developments will impact on financial market infrastructures, payment institutions, other fintech firms and, ultimately, with the launch of digital money, businesses and households. See Part 7: Fintech.

The UK and EU are each reviewing their respective "versions" of the Securitisation Regulation – the UK will be pursuing its now familiar approach of making "targeted amendments" to tailor the regime for the UK market. Again, in terms of overall substance, the regimes will likely end up looking very similar to one another, but the detailed application may differ quite significantly. The EU Credit Servicers and Credit Purchasers Directive is now finalised and it is now up to EU Member States to transpose the measures into national law and apply them from 30 December 2023. The UK is not planning an analogous regime though UK firms which advise or manage funds investing in EU secondary credit will be indirectly affected by the EU changes. See Part 8: Markets and trading.

Financial markets infrastructure continues to be the focus of much attention on both sides of the English Channel (or, depending on your perspective, La Manche). The European Commission continues to express its dissatisfaction with the over-reliance in the EU on UK CCPs for some derivatives clearing activities. The time-limited equivalence decision for UK CCPs – originally designed to avoid a financial stability "cliff edge" – is due to expire on 30 June 2022. Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union has said she will be recommending an extension to that equivalence decision shortly – but only long enough for the EU supervisory system for CCPs to be revised to reduce the over-reliance on the UK. Aside from that, the EU CCP Recovery and Resolution Regime will largely kick in on 12 August 2022 while the Treasury has consulted on expanding the existing Banking Act resolution regime for UK CCPs. The Treasury also seems set on creating a version of the Senior Managers & Certification Regime (SMCR) for CCPs and other FMIs. The UK Payments Landscape Review is continuing and the Payment Systems Regulator has set out its policy statement on the New Payments Architecture; meanwhile, a review of the EU Payment Services Directive is coming. The mandatory buy-in framework under the EU settlement discipline regime has been postponed yet again (although we understand the cash penalty regime will come into force as scheduled on 1 February 2022), and beyond that we may be seeing a "CSDR REFIT" in the not-too-distant future as a result of the findings of the review of the EU Central Securities Depositories Regulation.  See Part 9: Financial market infrastructure.

Finally – and perhaps most fundamentally for UK firms and the overall shape of UK financial services regulation in the future – reforms arising out of the Financial Services Future Regulatory Framework Review will usher in a more regulator-led approach to rulemaking, with swathes of EU-derived legislation moving off the statute book and into rulebooks. While there will no doubt be complications, at the "coal face" it may at least be easier to find and navigate the applicable rules. The government has said its general intention is to amend, replace or repeal retained EU law "that is not right for the UK" and will be issuing proposals in Spring 2022. In looking at non-UK firms seeking access to the UK market, there will be an increasing use of regulatory deference, an international concept intended to be less hidebound and codified than the EU concept of equivalence. Less holistically, the Treasury is conducting a Wholesale Markets Review intended to untie some of the restrictions imposed on the wholesale secondary markets by the inherited MiFID II regime; in the retail sector, the FCA has proposed a significant new Consumer Duty which is looking like it may turn out to be a resource-heavy regulatory change project on a tight timetable for many firms that service that sector. That, together with the FCA's proposals for improving the UK appointed representatives regime and the financial promotions regime mean that, at the domestic level alone, there is much to do. And, against that backdrop, firms should expect the FCA to be a tougher, more proactive and more intrusive supervisor: led by Nikhil Rathi as Chief Executive, it has committed to being "more innovative, assertive and adaptive" and this is certainly consistent with our confidential experience of the way in which the regulator is already dealing with many of the firms it regulates.  As an example of this new approach, in December 2021, the FCA confirmed changes to its internal supervisory and enforcement process that will mean that many (but not all) decisions to issue statutory notices against firms or individuals will no longer be made by the Regulatory Decisions Committee but will be made by individual FCA staff members under the regulator's Executive Procedures instead – decision-making will be faster without, the FCA says, compromising the rights and protections of firms and individuals. See Part 10: UK financial services regulation.

So 2022 will be busier, more complicated and more challenging than ever, with firms having to face and adapt to the many changes affecting the industry, all against a backdrop of continuing global uncertainty. This time last year, after a Christmas in lockdown, we quoted the wartime leader Winston Churchill. This year, with the news see-sawing between the concerning and the encouraging, it seems fitting to quote him again:

"I am an optimist. It does not seem too much use being anything else."


ESG and sustainability

UK sustainability measures – prioritising the "E" in "ESG" in building the regime

The UK has continued to chart its own course on sustainability. Following Brexit, it did not implement the EU Sustainable Finance Disclosure Regulation regime (which started applying in the EU on 10 March 2021 (see EU ESG measures below for more details) and had only 'onshored' the most skeletal elements of the EU Taxonomy Regulation). Instead, it has sought to tailor a wide-ranging, domestic disclosure regime, albeit one based on international standards and with more than a nod to the EU regime.

The UK regime is still evolving, although the cornerstone has been laid and the rules governing the mandatory TCFD-aligned disclosure requirements are now in force for some of the very largest asset managers, with the first disclosures required next year. Most other UK asset managers will be subject to the regime from next year.

Divergence from the EU is inevitable (and, in truth, has already started). The question is, how divergent from one another, in substance, will the two regimes be when they are finalised (or, at least, more settled) and what will this mean for those firms and groups having to comply with either one or both of them in different scenarios?


TCFD-aligned mandatory climate-related disclosures: the "foundation stones"


WHAT IS THIS?  UK rules requiring firms to make mandatory climate-related disclosures in respect of sustainability.

WHO DOES THIS APPLY TO?  UK-authorised asset managers (UK MiFID portfolio managers, UK AIFMs, UK UCITS management companies, UK UCITS funds without an external management company, UK occupational pension schemes) and private market advisory firms.

WHEN DOES THIS APPLY? For asset managers with more than £50 billion AUM the rules came into force on 1 January 2022, with the first public disclosures required by 30 June 2023; for other asset managers with more than £5 billion AUM, the rules apply on 1 January 2023, with the first public disclosures required by 30 June 2024.

The aim, which was first announced in 2020 in line with the government's 2019 Green Finance Strategy, is to make certain climate-related disclosures, aligned with the principles and recommendations established by the Taskforce on Climate-related Financial Disclosures (TCFD), mandatory across the UK economy by 2025 at the latest.

Further details on the proposed regime emerged in 2021, first in the FCA's June consultation on its proposals for climate-related disclosures by asset managers and asset owners (i.e., insurers and FCA-regulated pension providers) and its separate consultation on enhancing climate-related disclosures by standard listed companies. We covered the asset manager consultation in our June briefing.

On 17 December 2021, the FCA published its Policy Statement and final rules. This confirmed much of the substance of what had been consulted on, although there were some changes in the light of feedback (which are identified in our summary below). For in-scope firms, the mandatory disclosures break down into entity level disclosures and product/portfolio disclosures.

For an overview of the "sister" policy statement that the FCA published on the same day relating to TCFD-aligned disclosures by issuers of standard listed shares or equity shares represented by certificates, see the briefing published by our Risk & Operational Regulatory team. For more information on sustainability more generally, see our Sustainable Business Hub.

Where are the new rules?

The new rules are set out in a new Environmental, Social and Governance sourcebook (ESG). There are some corresponding amendments to the Collective Investment Schemes sourcebook (COLL) and new and amended definitions in the Glossary. The rules came into force on 1 January 2022.

Scope: who is affected?

The new disclosure obligations apply to firms carrying on certain activities if those activities are carried on in relation to TCFD products (see below). In-scope firms in the asset management industry, therefore, are:

  • UK MiFID segregated portfolio managers;
  • UK UCITS management companies;
  • UK full-scope AIFMs;
  • Small authorised UK AIFMs (but see below);
  • Any firms in respect of "portfolio management".

As regards the last category, the term "portfolio management" has been given an extended meaning for the purposes of the ESG sourcebook: so, in addition to the regulated activity of discretionary portfolio management, it captures private equity and other private market activities consisting of either advising on investments or managing investments on a recurring or ongoing basis in connection with an arrangement the predominant purpose of which is investment in unlisted securities. The word "recurring" was added in the final rules, to reflect the fact that the services might be provided on a recurring but sometimes irregular basis over the life of the fund at certain points (for example, investment, divestment, and other lifecycle events). [Conceptually, the idea of advising on a recurring or ongoing basis is analogous to the new definition of "investment advice of an ongoing nature" which is a component of the term "assets under management" and an activity in respect of which a UK adviser arranger may have to calculate K-AUM for the purposes of the IFPR regime.] Note however that, although extended, the definition of "portfolio management" does not include sub-advisory/investment management services where they are "ad hoc" transactions.

Although this summary focuses on asset managers, it should be noted that certain asset owners are also in scope: insurers or pure reinsurers providing insurance-based investment products and SIPP operators or operators of stakeholder pension schemes.

Scope: who is exempt?

A firm is exempt from the disclosure requirements if, and for as long as, the assets under management or under administration are less than £5 billion. This threshold must be calculated on a three-year rolling average basis and must be assessed annually. On this basis, small authorised UK AIFMs – although technically in-scope – are likely to be exempt, except in a few rare cases. This AUM exemption threshold will be reviewed by the FCA after 3 years of disclosures.

OPS firms are effectively limited to on-demand product reporting only.

Scope: what is a "TCFD product" for the purposes of disclosure?

Disclosures for asset managers cover in-scope firms' asset management activities in respect of the following products:

  • Authorised funds – such as UCITS, QIS, NURS and UK LTIFs and LTAFs; note that each sub-fund of an umbrella scheme is considered to be a standalone TCFD product, but feeder funds are excluded;
  • Unauthorised alternative investment funds (AIFs) managed by a UK AIFM;
  • An agreement or arrangement under which the firm provides the client with "portfolio management" – as above, because of the extended meaning of that term, this will capture both discretionary portfolio management agreements (typically caught by UK MiFID) but also private equity and other private market activities under recurring or ongoing investment advisory arrangements.

Importantly, arrangements covering asset management activities in relation to non-AIF collective investment schemes, such as funds-of-one and deal-specific co-investment vehicles, are not TCFD products for these purposes and will therefore not be subject to the disclosure obligations.

Jurisdictional scope

The rules only apply to in-scope FCA-authorised firms for their TCFD in-scope business carried out from an establishment maintained by it in the UK, irrespective of where the clients, products or portfolio are domiciled. They do not apply to:

  • third-country branches of in-scope firms;
  • AIFs managed by non-UK AIFMs registered for marketing to UK professional investors under the UK's national private placement regime.

Despite that "UK only" scope, the FCA does allow firms to cross-reference to relevant climate-related disclosures made by a third party – for example, by an affiliate member of the group or even by a third-party portfolio manager to whom the firm has delegated investment management.

Data considerations

In response to feedback to the consultation, the final rules and guidance have been expanded in recognition of the fact that obtaining reliable data is likely to be an issue for the firms, at least at the outset. The rules now state that a firm must not disclose metrics or quantitative scenario analysis or examples where there are gaps in underlying data or "methodological challenges" which cannot be addressed by using proxy data or assumptions without the resulting disclosure, in the reasonable opinion of the firm, being misleading. However, the rules go on to say that the default expectation of the FCA is that firms will use proxy data or assumptions to address data gaps unless to do so will be misleading. The FCA is also of the view that data gaps and methodological challenges are only "transitional" and only likely to arise in certain asset classes (unhelpfully only referring by way of example to asset-backed securities and currencies).

Entity-level reporting - public

Entity-level reports must be published on an annual basis and no later than 30 June each calendar year. These must be published in a "prominent place" on the main website for the firm (for example, with a link from the homepage to ensure that the disclosures are easily accessible).

The entity report should cover disclosures in relation to all assets managed or administered that are in scope (see above). 

The TCFD entity report must include a compliance statement (signed by a member of senior management (although this does not need to be a senior manager under SMCR)) confirming that the disclosures comply with the relevant FCA requirements. 

As noted above under "Jurisdictional scope", the rules recognise that firms may be subject to disclosures at a group level (i.e., as part of a group report) or want to refer to disclosures made by another third party (e.g., a delegated portfolio manager). Consequently, a firm's TCFD entity report may, for instance, include hyperlinks or cross-references to climate-related disclosures that are consistent with the TCFD recommendations made by its group or a member of its group. However, where doing so it must explain in the TCFD entity report: (a) the rationale for relying on the group disclosure, (b) why the disclosure is relevant to assets managed or administered by the firm in relation to its TCFD in-scope business and (c) any material deviations between its approach under the TCFD recommendations and the disclosures contained in the group report. There is also another rule setting out a similar degree of conditional flexibility allowing firms to cross-refer or link to disclosures in other (non-group) third party reports.

In terms of content, the entity-level report must include the following matters:

  • Disclosures consistent with the recommendations and recommended disclosures of the TCFD.
  • Where a firm's approach to a particular investment strategy, asset class or product is materially different to its overall entity level approach to governance, strategy, or risk management under the TCFD recommendations, an explanation of this. (This requirement could give rise to some tricky considerations in the context of global securities offering laws.)
  • A brief explanation of how the firm's strategy under the TCFD recommendations has influenced decision-making and the process by which it delegates functions, selects delegates and relies on services or strategies or products offered or employed by third parties (including delegates). In instances of delegation, the delegating firm remains responsible for its own entity-level report. In guidance that has been added to the final rules, where the firm is making disclosures on transition plans as part these strategy disclosures and is headquartered in, or operates in, a country that has made a commitment to a net zero economy (e.g., the UK), it is encouraged to assess the extent to which it has considered that commitment in developing and disclosing its transition plan.
  • The firm's approach to climate-related scenario analysis and how the firm applies climate-related scenario analysis in its investment/risk-decision making process. If it is reasonably practicable, the firm must also provide quantitative examples to demonstrate its approach to climate-related scenario analysis.
  • A description of any targets the firm has set to manage climate-related risks and opportunities (including the KPIs the firm uses to measure progress against these targets). Alternatively, where a firm has not set any such targets, an explanation of why this is the case.

The TCFD entity report must include a statement signed by a member of senior management of the firm (who, as stated above, does not necessarily need to be a senior manager under the SMCR) confirming that the disclosures in the report (including any third party or group disclosures cross-reference in it) comply with the ESG sourcebook requirements.

Product-level reporting - public or on-demand

The rules draw a fundamental and significant distinction between "public TCFD product reports" and "on-demand TCFD product reports". Public reporting is required in relation to authorised funds, listed closed-ended investment funds (e.g., VCTs), insurance products (i.e., with-profits, linked funds, and pre-set investment portfolios) and listed unauthorised AIFs (including investment trusts). For many firms, therefore, portfolio/product level reports must be published on an annual basis in a "prominent place" on the firm's main website, no later than 30 June in each calendar year. The disclosures must also be published in the appropriate client communication which follows most closely after the annual reporting deadline of 30 June, such as the annual report or periodic client report.  

However, and importantly, public product disclosure is not required for other types of product, for instance in the context of discretionary portfolio management or AIFMs managing non-listed unauthorised AIFs. Instead, disclosures should be made available to clients upon request ("on-demand TCFD product reports") in order to satisfy the clients' own climate-related financial reporting obligations (the rule also extends to investors in an unlisted unauthorised AIF).  Firms would only be required to provide this information once in each annual reporting period; they would not be able to request data that precedes the start of the relationship. The on-demand report must be provided as at a single calculation date (the most recent calculation date for which up to date information is available) or as at an alternative calculation date agreed with the client.

The product disclosures (which are mandatory except to the extent otherwise stated) include:

  • A "baseline" set of core metrics based on a subset of the TCFD's recommendations (using the calculations set out in the TCFD Annex and having regard to the TCFD Guidance on Metrics, Targets, and Transition Plans) – after the first year, the report must include historical annual calculations of the above metrics. These baseline or core metrics are the only ones where the rules now mandate that the TCFD methodology must be used.
  • "As far as reasonably practicable", calculations for climate value-at-risk and metrics showing the climate warming scenario with which the product is aligned (e.g., by using an implied temperature rise metric) – in the consultation, this disclosure had been on a "best efforts" basis.
  • Any other metrics which the firm considers would be helpful for decision making and chooses to disclose.
  • Relevant contextual information – for instance, explaining how the metrics should be interpreted, whether any assumptions or proxies have been used, etc.
  • Key performance indicators used to measure progress against climate-related targets at product-level.
  • Disclosures in respect of governance, strategy, and risk management where these materially differ at product/portfolio level from those made at entity level.
  • A qualitative climate-related scenario analysis with more detail for portfolios with concentrated exposures or higher exposures to more carbon-intensive sectors. This is likely to be costly for firms (and the FCA acknowledges this) given the need to build the relevant capabilities and/or rely on inputs from third parties. The FCA encourages firms to make use of specialist service providers or industry guidance.

TCFD reporting - pension schemes

A working group of three trade associations – the Investment Association, the Association of British Insurers and the Pensions and Lifetime Savings Association – has finalised a Carbon Emissions Template designed to assist pension schemes meet their obligations under relevant Regulations and DWP Statutory Guidance, but also to help relevant asset managers and insurers fulfil their obligations under the ESG sourcebook, as outlined above.

Implementation timetable and transitional provisions

The rules are being introduced in two phases, depending on the size of the firm. The rules came into force on 1 January 2022 but, for asset managers that have an average amount of assets under management of less than £50 billion, there is a one-year transitional provision that disapplies the rules for one year until 1 January 2023.

This means that:

  • for the largest asset managers (i.e., those with AUM of more than £50 billion), the rules are now in force and there is a first publication deadline of 30 June 2023;
  • for the smaller asset managers (i.e., those with AUM of more than £5 billion but less than £50 billion), the rules will apply on 1 January 2023 and a first publication deadline of 30 June 2024.
  • asset managers with less than £5 billion relevant AUM will be exempt.

All subsequent entity-level and public product-level disclosures must be made by 30 June of each calendar year. Any subsequent on demand disclosures are to be made on a calculation date in accordance with the rules.


SDR and UK Green Taxonomy: the "second layer" of UK regulation


WHAT IS THIS?  An evolution of the UK disclosure regime, with the introduction of a new Sustainability Disclosure Regime and a new UK Green Taxonomy.

WHO DOES THIS APPLY TO?  A broad range of corporates, asset managers and asset owners – some suggestion that financial advisors may be brought into scope, depending on consultation.

WHEN DOES THIS APPLY? Unclear: for large asset managers mandatory disclosures under the new and extended regime may be required as from 2-3 years after the primary legislation enacting the requirements.

In October 2021, the proposed regulatory landscape was expanded further with the joint publication by three government departments of Greening Finance: A Roadmap to Sustainable Investing which added a further dimension to the UK regulatory landscape governing sustainable investing by setting out broad policy proposals as "UK alternatives" to the EU regime:

  • A new UK Sustainability Disclosure Requirements regime (SDR) designed to build on, and go beyond, the existing TCFD-aligned disclosures referred to above; and
  • A new UK Green Taxonomy resembling, at a high-level at least, the EU Taxonomy Regulation regime.

Our October briefing summarised the proposals and explored the potential impact for in-scope firms.

A couple of weeks later, as the Roadmap had indicated, the FCA published DP21/4, the first of its discussion papers on the new SDR regime, containing its proposals for the introduction of investment product labels reflecting sustainability classifications and a three-tiered system of sustainability disclosures that will build on the TCFD-aligned disclosures already consulted on. Our November briefing summarised the discussion points and noted that, while the FCA has said that it will take into account other initiatives around the world (including, for instance, the EU SFDR regime), even at the discussion stage there are differences. Just how divergent the UK and EU regimes prove to be when they settle remains to be seen. It is also not clear from the DP how SDR and the UK Green Taxonomy requirements will dovetail with the TCFD-aligned disclosures that are now finalised, or whether those rules will require further amendments within the first two or three years in order to accommodate the new requirements.

The deadline for providing comments on the discussion paper was 7 January 2022. A consultation paper – which will set out more concrete proposals based on feedback - is expected in Q2 2022.

The implementation timetable of the SDR and UK Taxonomy proposals outlined above, intended to "overlay" the TCFD-aligned disclosures covered in the previous item, is less specific at this stage and, as we mention below, may be dependent on international developments. The government's Greening Finance Roadmap suggested that, following the FCA's discussion paper (outlined above) and the consultation paper expected in Q2 2022, mandatory disclosure requirements incorporating taxonomy disclosures (which will need to be presented in a sustainability report to which the asset manager's annual report refers) will be introduced on a phased basis:

  • For funds with AUM of £5 billion or greater: 2-3 years after Royal Assent of the primary legislation implementing the "overlay" regime
  • For funds with AUM of £1 billion or greater: (at least) 3 years after Royal Assent of the primary legislation implementing the "overlay" regime.

According to the November 2021 Regulatory Initiatives Grid from the government and the UK regulators, the Technical Screening Criteria for the UK Green Taxonomy are due to be finalised by the end of 2022.


EU ESG measures


WHAT IS THIS?  EU rules requiring firms to make disclosures in respect of sustainability.

WHO DOES THIS APPLY TO?  Most provisions apply to EU portfolio managers, investment advisers, AIFMs and UCITS management companies.  However, some provisions also apply to non-EU firms marketing or distributing financial products in the EU and/or certain large or listed entities.

WHEN DOES THIS APPLY? Some provisions apply now with others due to follow over the next few years.

The EU's sustainability initiative continued in full force in 2021.  The EU Regulation on sustainability-related disclosures in the financial services sector (EU SFDR) came into force in March 2021 and the Taxonomy Regulation (and some supporting legislation) took effect on 1 January 2022.  The delegated legislation integrating sustainability into EU Alternative Investment Fund Managers Directive (EU AIFMD), EU Markets in Financial Instruments Directive II (EU MiFID II) and the EU UCITS Directive was also finalised and will come into force during 2022.

New proposals on reporting have also started their passage through the legislative process in the form of the Corporate Sustainability Reporting Directive (CSRD).

We discuss these proposals at a very high level below and further information can be found in the briefings referenced below as well as in our Sustainable Business Hub.

EU Sustainable Finance Disclosure Regulation

In March 2021, the EU SFDR came into force requiring firms to make disclosures on the integration of "sustainability risks" in their investment decision-making, the likely impact of such risks on investment returns and information on "principal adverse impacts" (PAIs).  EU SFDR applies to portfolio managers, alternative investment fund managers (AIFMs), UCITS management companies, EuVECA managers and EuSEF managers as well as investment advisers.  Although it principally applies to EU firms, some obligations in EU SFDR are also applicable to non-EU firms marketing or distributing financial products in the EU. 

Despite EU SFDR having been in force for nearly a year, firms are continuing to deal with several areas of uncertainty.  It is unfortunate, therefore, that the regulatory technical standards (RTS) supplementing the EU SFDR (EU SFDR RTS) have been delayed for a second time until 1 January 2023. 

The EU SFDR RTS include provisions on:

  • Details of the content and presentation of the information on "do no significant harm".
  • Details of the content, methodologies, and presentation of information in respect of certain sustainability indicators (the mandatory PAI indicators that certain firms will need to consider and report upon).
  • Details of the content and presentation of the pre-contractual information to be disclosed under Articles 8 and 9 EU SFDR.
  • Details of the content and presentation of the website disclosures under Article 10 EU SFDR.
  • Details of the content and presentation of the information disclosed in periodic reports under Article 11 EU SFDR.

We discussed this delay and its impact for firms in our briefing.

In addition, due to the delay, the transitional provisions for financial market participants (FMPs) to publish a detailed statement on their due diligence policies relating to the PAI of their investment decisions on sustainability factors are no longer relevant.  FMPs are therefore expected to be required to publish the statement for the first time by 30 June 2023 (with the first reference period being 1 January 2022 to 31 December 2022).

EU Taxonomy Regulation

The Taxonomy Regulation introduces an EU-wide taxonomy or classification system for determining whether and to what extent certain economic activities can be considered environmentally sustainable.   Environmental sustainability is one element of sustainability under EU SFDR and therefore the two pieces of legislation are effectively connected. 

The Taxonomy Regulation sets out six environmental objectives: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems.

The parts of the Taxonomy Regulation in respect of the environmental objectives of climate change mitigation and climate change adaptation took effect on 1 January 2022.  The remainder will come into effect as from 1 January 2023.

Taxonomy Delegated Regulation

The Taxonomy Delegated Regulation came into effect on 1 January 2022. 

This supplements the EU Taxonomy Regulation with technical screening criteria for determining the conditions under which an economic activity contributes substantially to climate change mitigation and/or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives. 

The Taxonomy Delegated Regulation includes, in its Annex, very detailed technical screening criteria for a large number of (predominantly industrial) activities.

The European Commission has also (somewhat controversially) announced its intention to consult on a Taxonomy Complementary Delegated Act covering certain gas and nuclear activities.

Article 8 Delegated Regulation

From 1 January 2022, the Delegated Regulation supplementing Article 8 of the EU Taxonomy Regulation (Article 8 Delegated Regulation) started to take effect. 

Article 8 of the EU Taxonomy Regulation requires undertakings subject to the Non-Financial Reporting Directive (NFRD) (which includes certain large, listed entities) to include, in their non-financial statements, information on how and to what extent their activities are associated with environmentally sustainable economic activities. 

The Article 8 Delegated Regulation specifies the content and presentation of information to be disclosed by such undertakings and sets out common rules relating to key performance indicators (KPIs).  The information to be disclosed differs depending in the type of undertaking e.g., asset managers, investment firms or non-financial undertakings.

The requirements will apply as follows:

  • 1 January 2022 to 31 December 2022: Non-financial undertakings to disclose the proportion of taxonomy-eligible and taxonomy non-eligible economic activities in their total turnover, capital and operational expenditure and certain qualitative information.
  • 1 January 2022 to 31 December 2023: Financial undertakings to disclose the proportion of taxonomy-eligible and taxonomy non-eligible economic activities in their total assets and certain specified quantitative and qualitative information.
  • 1 January 2023: Non-financial undertakings to disclose KPIs and other specified information under the Article 8 Delegated Regulation.
  • 1 January 2024: Financial undertakings to disclose KPIs and other specified information under the Article 8 Delegated Regulation.

Integration of sustainability risks and factors

The delegated legislation integrating sustainability into EU AIFMD, EU MiFID II and the EU UCITS Directive will come into force during 2022.

Very broadly, the delegated legislation requires AIFMs, UCITS management companies and MIFID investment firms to integrate sustainability risks and factors into their policies and procedures.

The amendments to the UCITS Directive and AIFMD Delegated Regulation will apply from 1 August 2022.

The delegated regulations supplementing the MiFID Org Reg will apply from 2 August 2022.

The amendments to MiFID II product governance obligations will apply from 22 November 2022.

Corporate Sustainability Reporting Directive

In April 2021, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) which would amend a number of existing pieces of EU legislation and largely replace the NFRD. 

The CSRD would apply sustainability reporting requirements to all large companies (whether listed or not) and companies listed on regulated markets (with some exceptions). There would also be proportionate sustainability reporting standards for small and medium-sized undertakings. 

We discussed the CRSD in more detail in our briefing and the CRSD is currently being negotiated by the European Parliament and the European Council.  Based on the currently proposed timetable, the standards would apply for the first time to reports published in 2024 in respect of the financial year 2023.


Global sustainability measures: the four TCFD pilalrs and the ISSB 


WHAT IS THIS?  Various sustainability initiatives from international organisations.

WHO DOES THIS APPLY TO? In the first instance, to policy makers and regulators when formulating their domestic regimes, though none of the standards and recommendations is mandatory.

WHEN DOES THIS APPLY? Many of the standards and recommendations already apply – none of them has an immediate impact on firms, except to the extent that they are already reflected in the measures summarised in the UK and EU sustainability measures summarised above.

As we have outlined, while the granular details governing what firms will have to disclose under the evolving UK sustainability disclosure and taxonomy regime will likely diverge – to a greater or lesser extent – from disclosure requirements in the EU, the principles and standards underpinning that regime will be internationally-based.

The Task Force on Climate-related Disclosures

As an example of the importance of international standards in this area, the "first phase" of the UK's sustainability disclosure regime is expressly aligned with the climate-related financial disclosures established by the Task Force on Climate-related Disclosures (TCFD). The TCFD – consisting of 32 members from across the G20 - was set up by the Financial Stability Board in 2015 with the aim of developing consistent climate-related financial disclosures to be used by industry participants. The resulting 11 TCFD Recommendations are grouped under four thematic areas or "pillars" – governance, strategy, risk management and metrics and targets.

While the 11 recommendations and four pillars have been settled since 2017, it is important to remember that TCFD itself does not stand still and so there have been, and will continue to be, developments and enhancements to the materials supporting the TCFD Recommendations that may, in turn, have an impact on firms seeking to comply with the UK regime and asset owners required to publish metrics. For instance, in October 2020 TCFD published a consultation on Forward-Looking Financial Sector Metrics, those metrics increasingly relied upon by asset owners and managers and others in the financial sector to drive capital allocation decisions, evaluate strategic resilience and progress towards climate-related targets, and to engage with portfolio companies on these topics.  The consultation focused, in particular, on the emerging trend towards the use of Implied Temperature Rise (ITR) metrics. ITR represents an estimate of the global temperature rise associated with the emissions of a single entity or group of entities, expressed as a numeric degree rating.

TCFD has also finalised Guidance on Metrics, Targets and Transition Plans (October 2021), following a consultative process. The Guidance serves provides general guidance for organisations seeking to establish relevant metrics, targets and transitional plans around their climate-related risks and opportunities (similar to the TCFD's Guidance on Scenario Analysis for Non-Financial Companies (2020) and Guidance on Risk Management Integration and Disclosure (2020)). At the same time as finalising this Guidance, the Task Force also updated its Annex: Implementing the Recommendations of the Task Force on Climate-related Financial Disclosures (superseding the 2017 version).

Firms subject to the FCA's new TCFD-aligned disclosure requirements will likely need to keep a "weather eye" on TCFD publications, if only for the purposes of deriving guidance on granular aspects of the UK regime where UK guidance is not forthcoming. 

The International Sustainability Standards Board

The UK's proposed SDR regime (see above) will introduce new requirements for certain UK-registered companies and UK-listed issuers, including those in the financial services sector, to make sustainability disclosures in their Annual Reports in line with reporting under international standards and disclosures under the UK Green Taxonomy. The "international standards" in this regard are those that will be developed by a new body created by the IFRS Foundation. The IFRS Foundation is a not-for-profit organisation established to develop and promote the IFRS Standards – the globally accepted accounting and sustainability disclosure standards. Within the IFRS Foundation, the International Accounting Standards Board (IASB) is responsible for IFRS Accounting Standards.

On 3 November 2021, the IFRS Foundation Trustees announced that IASB will be joined by a new-created standard-setting board – the International Sustainability Standards Board (ISSB) - to meet the growing demand amongst international investors for high-quality, transparent, reliable and – perhaps most importantly of all - comparable reporting by companies on climate and other ESG matters. ISSB will be responsible for setting IFRS Sustainability Disclosure Standards to sit alongside the IFRS Accounting Standards. In doing this, the ISSB will build on (rather than supersede) several existing investor-focused reporting initiatives, including the TCFD Recommendations. The UK government, in its Greening Finance Roadmap, has said that it expects that the standards developed by ISSB will build on the existing four TCFD pillars; and, since the UK SDR will integrate ISSB's standards into its own disclosures, SDR will likewise adopt the four TCFD pillars.

The ISSB is still in the process of being set up, but the current expectation is that it will consult "on a timely basis in 2022" on a first set of draft standards, expected to be climate-related corporate reporting standards. Consultations on standards in relation to a broader set of environmental and sustainability factors will follow.

What this means for the implementation timetable of the UK's SDR regime is unclear. On the face of it, since the UK government's current intention is that SDR will integrate ISSB's standards into its own disclosures, the development of the UK regime is somewhat hostage to the pace of an organisation that is still in the process of appointing its Chair and Vice Chair(s) and its members. However, public announcements from the IFRS Foundation make much of the intention that ISSB will "hit the ground running" in response to calls from IOSCO and others to meet the urgent need for globally-accepted standards in this area.

International Organization of Securities Commissions

In November 2021, after a consultation process, the International Organization of Securities Commissions (IOSCO) published FR08/21: Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management. The focus of the final report is on asset managers and investor protection issues, with the aim of improving sustainability-related practices, policies, procedures, and disclosures in the asset management industry. The paper includes five recommendations for securities regulators and policy makers. While none of these will have immediate or direct impact on firms in their preparations for 2022, and they are clearly not mandatory, they are nonetheless designed to provide a list of potential areas for consideration by the regulators and policy makers around the world as they formulate their sustainability-related rules and regulations under their respective domestic frameworks. Such recommendations – to the extent that the issues are not already under embedded within the domestic regime - may therefore have a "trickle-down" effect, particularly as the UK continues to flesh its domestic sustainability regime over the coming months and years.

The Report includes, among other things, a chapter on regulatory approaches relating to asset manager-level practices and related disclosures – these are broadly categorised in areas consistent with the TCFD thematic "pillars" – i.e., governance, strategy, risk management and metrics and targets (see above). There is also a chapter addressing some of the very real issues that companies and firms are facing as the various sustainability regimes begin to bed down – these include, for instance, data gaps at the corporate levels, the emergence of reliable ESG ratings providers, lack of consistency in terminology, labelling and classification, and different interpretations of materiality.

In November 2021, IOSCO also published FR09/21: Environmental, Social and Governance (ESG) Ratings and Data Products Providers . This reported on a fact-finding exercise of the market and, having identified areas for improvement, included several recommendations for securities market regulators, ESG ratings and data products providers, users of these products and services, and companies subject to review by such providers. Again, none of the recommendations is mandatory, although, in line with one of the recommendations and the call from IOSCO for greater oversight in this area, regulators will likely be focusing increasing attention on the use of ESG rating and data products and the activities of ESG rating and data products providers in their respective jurisdictions. This in turn, it is hoped, could help to increase trust in ESG ratings and data.

ESG Data Convergence Project

On the subject of standardising ESG metrics specifically for use in the private equity industry when collecting information from portfolio companies and reporting that information to investors, we reported on the industry-led ESG Data Convergence Project in our October 2021 briefing. The Project's home page is here. This is one (prominent) example of a range of similar initiatives.

Prudential regulation

UK Investment Firms Prudential Regime


WHAT IS THIS?  New prudential regime for most UK investment firms.

WHO DOES THIS APPLY TO?  UK investment firms (other than very large firms which will be subject to the UK's CRD/CRR legislation) and UK AIFMs and UCITS management companies with MiFID top-up permissions.

WHEN DOES THIS APPLY? 1 January 2022.

The UK Investment Firms Prudential Regime (IFPR) came into force on 1 January 2022 with new prudential rules for UK investment firms.  Firms will therefore already need to be complying with these new rules which are largely set out in the FCA's new MIFIDPRU sourcebook.

This applies to most UK investment firms other than very large firms which will be subject to the UK's Capital Requirements Directive and Capital Requirements Regulation.  It also applies to UK AIFMs and UCITS management companies with MiFID top-up permissions.  It introduces the concept of "small and non-interconnected investment firms" which are subject to a lighter touch version of IFPR.

The rules are largely based on those under the EU's Investment Firms Regulation and Directive which came into force in June 2021 but with a number of changes to reflect the UK's specific circumstances.

The rules include new regulatory capital requirements (including a new K-factors metric for assessing own funds requirements), new governance and remuneration requirements and new reporting and disclosure requirements.

We covered the requirements in more detail in a number of briefings during 2021 including: June 2021 briefingJuly 2021 briefing and November 2021 briefing.


UK Capital Requirements Regulation - Basel III and beyond


WHAT IS THIS?  The implementation of Basel III standards into UK rules.

WHO DOES THIS APPLY TO?  UK banks, building societies and PRA-designated investment firms – but the specific risk-weighted treatment of equity exposures in terms of the rules that apply to banks investing in CIUs will have relevance to private equity and venture capital.

WHEN DOES THIS APPLY? 1 January 2022 (for the CRR II Basel III standards and UK leverage ratio framework), 1 January 2023(?) (for the Basel 3.1 standards).

On 1 January 2022, UK banks became subject to a reformulated post-CRR II prudential framework reflecting the implementation of a number of Basel standards that were included in a revised EU CRR, but which, because they came into force after 31 December 2020 (the end of the Brexit Transition Period), had not been 'onshored' into UK law. (Some Basel-driven changes to EU CRR came into force before that date and had been 'onshored'). The revised framework also includes changes to reflect the outcome of the UK leverage framework.

The Financial Services Act 2021 had empowered the PRA to implement requirements in line with existing Basel III standards (i.e., those contained in EU CRR 2). Broadly speaking, to achieve this, HM Treasury was given the power under the Act to revoke statutory provisions in UK CRR (the so-called Clause 3 revocation power) to enable the PRA to introduce updated prudential rules for credit institutions and PRA-designated investment firms equivalent to those Basel-driven requirements in EU CRR 2. The Treasury also used the Clause 3 power to revoke certain UK CRR provisions relating to the granting by the PRA of permissions for specific capital treatments (for instance, to use the internal ratings based (IRB) approach to calculate risk-weighted exposure amounts for credit risk).

This approach – of moving what would ordinarily have been statutory provisions into a regulator's rulebook – is a blueprint for the model that the government wants to roll out more widely. Ultimately, it aims to move the majority of the remaining UK CRR provisions into the PRA Rulebook (in the meantime, it may be necessary in certain circumstances to follow the cumbersome approach of reading the rules in conjunction with relevant statutory provisions that remain in UK CRR). As discussed elsewhere in relation to the Future Regulatory Framework Review, this migratory approach is likely to be replicated in other areas – for instance, in relation to the UK Solvency II regime (see below).

In October 2021, the PRA published PS22/21: Implementation of Basel standards: Final rules and (with FPC) PS21/21: The UK leverage ratio framework setting out the final rules, statements of policy, supervisory statements and reporting templates and instructions that all came into force on 1 January 2022.

Those sections of the PRA Rulebook that reflect this "immigration" of the Basel requirements from UK CRR are denoted in the title to the relevant sections – e.g., Counterparty Credit Risk (CRR), Credit Valuation Adjustment Risk (CRR), Disclosure (CRR), Large Exposures (CRR), Leverage Ratio (CRR) etc. Where provisions have migrated from specific articles in UK CRR, the heading to that provision indicates the relevant UK CRR article number from which it migrated.

As an example of how many (but by no means all) UK CRR provisions are now in the PRA Handbook, the section of the PRA Rulebook titled "Standardised Approach and Internal Ratings Based Approach to Credit Risk (CRR)", Part 3 (Credit Risk), includes the following UK CRR-derived items of relevance to private equity and venture capital:

  • Article 128 – Items associated with particular high risk
  • Article 132 – Own funds requirements for exposures in the form of units or shares in CIUs
  • Article 152 – Treatment of exposures in the form of units or shares.

Article 133, UK CRR, however, which sets out the assignment of risk weights to equities generally, remains on the statute book.  Under Article 133, equity exposures are assigned a default risk weight of 100%, unless they are:

  • required to be deducted in accordance with Part Two (own funds and eligible liabilities);
  • assigned a 250% risk weight in accordance with Article 48(4) (non-deductible Common Equity Tier 1 items);
  • assigned a 1,250% risk weight in accordance with Article 89(2) (risk weighting and qualifying holdings outside the financial sector); or
  • treated as "high risk items" in accordance with Article 128 (items associated with particular high risk) and assigned a 150% risk weight.

As regards the last item, exposures with particularly high risks are defined in Article 128 (in the PRA Rulebook) as:

  • investments in venture capital firms or in private equity, except where those investments are treated in accordance with Article 132 (which requires the bank to adopt one of three approaches where the exposure is to a collective investment undertaking); and
  • speculative immovable property financing.

In terms of exposures in the form of units or shares in collective investment undertakings (CIUs), Article 132 (own funds requirements for exposures in the form of units or shares in CIUs) provides that banks must calculate their risk-weighted exposures by using one of three approaches: the "look-through" approach, the "mandate-based" approach or the "fall-back" approach.

The bank can choose to use either apply a "look-through approach" to the underlying investments or a "mandate-based approach" subject to satisfying the following conditions:

  • the CIU's prospectus (or equivalent) includes the categories of assets in which the CIU is authorised to invest and details of any investment limits; and
  • reporting by the CIU or its management company is such that:
    • the CIU's exposures are reported at least quarterly;
    • the granularity of the financial information is sufficient to allow the bank to calculate the risk-weighted exposure of the CIU using its choice of the look-through or mandate approach;
    • where the bank uses the look-through approach, information about the underlying exposures is verified by an independent third party.

If those conditions are satisfied, the bank can only apply the look-through approach if it has sufficient information about the individual underlying exposures of the fund. If it does have such information, it is able to look-through to the individual underlying exposures, risk weighting each of those as if they were directly held by the bank. In the case of private equity and venture capital, therefore, this is likely to mean that the bank will assign a risk-weighting of 150%. Where it does not have sufficient information, it may calculate the risk-weighted exposure amount in accordance with the fund's mandate and relevant law, using certain assumptions. Where the bank is unable to apply either the look-through approach or the mandate-based approach, it must apply a "fall back" risk-weight of 1,250%. Alternatively, they may use an internal model.

The broad effect of these provisions taken together is that banks that do not use an internal model will need to assess whether the conditions are satisfied in respect of a particular fund in which it is invested and are required to assign a 150% risk weight to exposures with "particularly high risks".

These provisions, and others newly formulated as PRA rules, reflect the implementation of the "initial" Basel 3 measures incorporated into UK CRR.

That, however, is not the end of it for banks, since the above does not represent all of the Basel III requirements. The final set of Basel III standards published in December 2017 – also known as "Basel 3.1" – address additional and new measures on the standardised approach for credit risk, the IRB approach for credit risk, minimum capital requirements for CVA risk, minimum capital requirements for operational risk, the output floor and the leverage ratio. These include further changes to the assignment of risk weights to equities, including a risk weight of 400% to speculative unlisted equity exposures and a risk weight of 250% to all other equity holdings (other than investments in nationally subsidised investment programmes). This will have an impact on the CIU investment provisions outlined above.

BCBS expects its members to apply these final reforms from 1 January 2023. The stated aim of HM Treasury, the Bank of England and the PRA was to bring these final measures into force in line with the expectations of BCBS – i.e., by 1 January 2023. It is not clear whether the UK remains on target to meet that date. The November 2021 Regulatory Initiatives Grid indicates that a consultation paper will be published in H2 2022, and, while the Basel implementation deadline of 1 January 2023 deadline is cited, the corresponding "key milestone" in the grid is indicated to be "after March 2023". That suggests that the UK may miss the 1 January 2023 deadline.


EU Capital Requirements Regulation

EU CRR treatment of equity exposures - investment in funds


WHAT IS THIS?  Part of a CRD/CRR overhaul package that relates to risk-weighting of equity investment in funds

WHO DOES THIS APPLY TO?  EU credit institutions – but the specific treatment of equity exposures will have relevance to private equity in terms of the rules that apply to EU banks investing in that sector

WHEN DOES THIS APPLY? 1 January 2025 (as proposed, subject to any amendments during legislative process).

On 27 October 2021, the European Commission adopted its "Banking Package 2021", representing a wide-ranging review of, and update to, the EU Capital Regulation (EU CRR) and the EU Capital Requirements Directive (EU CRD). Amongst other things, the package, once the measures have been enacted, will finalise the EU's implementation of Basel III in the EU (see above.

The package consists of the following legislative measures:

Most of these measures will obviously only directly impact EU credit institutions and are beyond the scope of this briefing. However, as regards the legislative proposal to amend EU CRR to implement the revised Basel framework, there are specific proposed amendments to Article 133 (equity exposures) which will have a bearing on the rules governing banks' investment in private equity funds and other collective investment undertakings. 

Not surprisingly, the current EU CRR requirements (which implement Basel III) are almost identical to those in UK CRR and the PRA Rulebook (which, essentially, represent the 'onshoring' of the EU CRR regime) (see previous item). So, currently, equity exposures are assigned a default risk weight of 100%, unless, for instance, they are treated as "high risk items" in accordance with Article 128, EU CRR which refers to investments in venture capital firms, private equity and speculative immovable property financing and specifies a risk-weighting of 150%.

When it comes to exposures in the form of units or shares in collective investment undertakings (CIUs), credit institutions must calculate their risk-weighted exposures by using the methodology stipulated by Article 132 (own funds requirements for exposures in the form of units or shares in CIUs). Subject to conditions, this allows them to either apply a "look-through approach" to the underlying investments or a "mandate-based approach" subject in either case to satisfying the same conditions as outlined above (although EU CRR additionally requires the CIU to be (broadly) an EU UCITS, an AIF managed by an EU AIFM or an AIF marketed in the EU). If the bank cannot apply either approach (i.e., because those conditions are not fully satisfied), they must apply a "fall back" risk-weight of 1,250%. Alternatively, they may use an internal model.

Although, Article 132 will remain unchanged under the European Commission's proposals, the proposed amendments to Article 133 will have an impact. Equity exposures will be assigned an increased default risk weight of 250%, unless:

  • they are required to be deducted or risk-weighted in accordance with Part Two of EU CRR (Own Funds and Eligible Liabilities);
  • they are equity exposures to unlisted companies in which case they will be assigned a risk weight of 400% where they are not required to be deducted or risk-weighted in accordance with Part Two and they are:
    • investments for short-term resale purposes;
    • investments in venture capital firms or similar investments which are acquired in anticipation of significant short-term capital gains.

It will be noted that there will no longer be a definition of "exposures with particularly high risks" (Article 128 will be replaced in its entirety by provisions relating to subordinated debt exposures). Instead, there is a reference to exposures to unlisted companies, with its default assignment of a 400% risk-weighting.

However, there is an important derogation: long-term equity investment – meaning investments of at least three years or taken on with the intention of holding on to them for at least three years (as approved by senior management) – will be assigned the default equity risk weight of 250%.

Equity risk-weighting: investment by EU banks in unlisted companies

This means that, while there will be an unavoidable increase in the default equity risk weightings that credit institutions will have to apply in future, beyond 1 January 2025 investment in unlisted companies (whether direct or through a collective investment undertaking on a "look-through basis" (if allowed)) should not be treated any less favourably than investment in ordinary equity.

It should be noted that as Article 132 will not be changing, in respect of their exposures to CIUs, EU banks will still be required to apply - subject to meeting the relevant conditions (see above) - either the "look-through" approach (which will mean that a risk-weighting of 250% in respect of the relevant underlying unlisted company will apply) or "mandate based" approach, failing which they will have to apply the "fall back approach" with its punitive and disincentivising 1,250% risk-weighting. However, it will no longer be possible to use an internal model as an alternative.

This, and other aspects of the legislative package, will now be subject to the legislative processes of the European Parliament and Council. As currently drafted, and subject to certain exceptions, the changes would come into force on 1 January 2025.


Solvency II Measures


WHAT IS THIS?  A review of the 'onshored' Solvency II regime

WHO DOES THIS APPLY TO?  UK insurers and reinsurers

WHEN DOES THIS APPLY? The review is ongoing – no concrete date has yet been set in terms of when insurers may face changes

In October 2020, HM Treasury published a Call for Evidence marking the start of a broad-ranging review of the prudential regulation of UK insurance – the Solvency II regime.

In July 2021, the Treasury published its response to the Call for Evidence. Between those two publications, the Brexit transitional period finally came to an end and on 31 December 2020, the Solvency II regime was 'onshored' into UK, with amendments.

As a result of the findings of the Call for Evidence, it was clear to the Treasury that reform was required and it asked the PRA to look at the various options for change: the PRA launched a Quantitative Impact Study (QIS) on 20 July 2021 designed to collect data via a template questionnaire to support the Solvency II review. This was followed in August 2021 by a Qualitative Questionnaire, to complement the QIS.

The results of the QIS will be used to inform the government's thinking on reforms to the UK Solvency II regime. A consultation is expected in early 2022. The Treasury has indicated that a reformed prudential regulatory regime should enable the insurance sector to play a significant role in supporting the Government's objectives in relation to the provision of long-term capital to support growth, including investment in infrastructure, venture capital and growth equity (as well as other long-term productive assets). More specifically, some respondents to the call for evidence appear to have indicated (among many other things) that the scope of the lower equity capital charge should be broadened. However, it is too early to tell at this stage whether the legislative proposals, when they eventually emerge, will be so granular to include a widening the scope of the long-term equity asset class for the purposes of Article 171a of the 'onshored' UK Solvency II Delegated Regulation (see below for the EU review in this area). This is one to watch for UK private equity and venture capital.

The UK Solvency II review is part of a bigger reform agenda, the Financial Services Future Regulatory Framework Review. One of the consequences may be that the bulk of the existing legislative requirements under the UK Solvency II regime may be transformed into rule requirements promulgated by the PRA.


EU Solvency II regime


WHAT IS THIS?  Part of a CRD/CRR overhaul package that relates to risk-weighting of equity investment in funds.

WHO DOES THIS APPLY TO?  EU insurers and reinsurers – but the specific treatment of equity exposures will have an impact on investment in private equity by insurers.

WHEN DOES THIS APPLY? Not yet clear.

During 2020 and 2021 the EU Solvency II Directive has been subject to review by the European Commission, particularly looking at its risk-based capital requirements, the rules on the valuation of long-term liabilities and issues arising from the first 5 years of the Directive's operation. Following that review, the European Commission published its proposal for a Directive amending Solvency II on 22 September 2021. The proposed amending Directive is now subject to the EU legislative process, with the European Parliament and Council now considering the text and preparing negotiating positions. Subject to the completion of that process, the draft Directive currently envisages that Member States would be required to transpose the relevant measures into their national laws to apply 18 months and 1 day after entry into force.

The proposed amending Directive addresses several issues, including: the proportionality principle, the quality of supervision, reporting, long-term guarantee measures, macro-prudential tools, group supervision and supervision of cross-border insurance business. A separate legislative proposal, as part of the overall package, was also published on 22 September 2021, and proposes the establishment of a framework for the recovery and resolution of insurance and reinsurance undertakings.

One of the priorities behind the overhaul of Solvency II is to try to incentivise more long-term investment by insurance companies, in keeping with the aspirations of the CMU Action Plan and the desire to refinance the post-pandemic economy. In particular, the Commission intends to assess the appropriateness of the existing Solvency II rules governing the criteria for long-term equity investments: long-term equity designation attracts beneficial risk weighting treatment for insurers under the Solvency II rules but, we understand, it has been difficult for private equity to qualify. The Commission is considering revisions to the eligibility criteria for the long-term equity asset class that were introduced into Article 171a of the EU Solvency II Delegated Regulation by way of amendments made through Delegated Regulation (EU) 2019/931. This includes possible simplifications to the conditions under which equity investments would be treated as "long term", expanding the number of equities that would therefore be subject to the more favourable 22% risk weight (instead of 39% for listed equities and 49% for unlisted equities).

The level of investment that insurers make into equities generally has been dwindling over recent years and, more specifically, investment in private equity has been – according to EIOPA – extremely low. The Commission has said, in a Communication published on the same day as the above proposed Directives, that the review of the eligibility criteria for the long-term equity class would enable insurers to contribute to pan-EU economic recovery and the long-term financing of businesses.

The Commission goes on to say that it will not introduce changes to the EU Solvency II Delegated Regulation at this stage but will start engaging in discussions with EU Member States, the European Parliament, and other stakeholders about possible content in tandem with the legislative process for the amending Directive and the insurance recovery and resolution directive (we understand that one such meeting has already taken place). It remains to be seen what relaxations to the existing criteria might be agreed: the Commission does say that it intends to amend the EU Solvency II Delegated Regulation "broadly in line" with EIOPA's Opinion on the 2020 Review of Solvency II, published in December 2020. Among EIOPA's proposed amendments to the long-term equity criteria in Article 171a of the EU Solvency II Delegated Regulation, were suggestions that there should be a commitment to hold the investment for more than 5 years on average and that only listed EEA equities or unlisted equities of companies with head offices in the EEA would be eligible.

Any changes to the EU Solvency II Delegated Regulation would be in the form of a Commission proposal which would be subject to scrutiny by the European Parliament and Council during a "non-objection" period. If both institutions approve the Level 2 measure during the non-objection period, or that period expires without either of them having registered an objection, it will then proceed to publication in the Official Journal and come into force as specified. All of that, of course, is some way off.

Investment funds

UK PRIIPs Regime (1): FCA amendments


WHAT IS THIS?  FCA targeted amendments to the UK PRIIPs regime by way of changes to FCA rules and UK PRIIPs RTS.

WHO DOES THIS APPLY TO?  Manufacturers and distributors of UK PRIIPs.

WHEN DOES THIS APPLY? Policy Statement is planned for Q1 2022: application date, and any transitional relief, will be confirmed then.

On July 2021, the FCA published a consultation paper on proposed amendments to the UK PRIIPs regime, relating to the scope rules and changes to the 'onshored' Regulatory Technical Standards. The paper was – and, indeed, was expressly described by the FCA as - a consultation on post-Brexit divergence. The FCA has felt for some time that the PRIIPs framework was not working as originally intended and that some of the uncertainties and unintended effects were actually posing a risk of consumer harm – in other words, quite the opposite to the policy intention of consumer protection.

In outline, the changes to the FCA rules and guidance will:

  • introduce rules to clarify the scope of the UK PRIIPs Regulation as regards corporate bonds, making it clearer that certain common features of these instruments do not make them into PRIIPs;
  • introduce interpretative guidance to clarify what it means for a PRIIP to be "made available" to retail investors;

The changes to the FCA Handbook will include the creation of a new Product Disclosure sourcebook (DISC).

The changes to the UK PRIIPs RTS are to:

  • replace the prescribed (and misleading) performance scenarios (and the methodologies determining how they should be produced) with a requirement for the provision of narrative information on performance;
  • address the potential for some UK PRIIPs to be assigned an inappropriately low summary risk indicator in the UK PRIIPs KID;
  • address concerns about the application of the "slippage methodology" when calculating transaction costs (slippage being the difference between the price at which a trade is executed and the "arrival price" when the order is transmitted to the market).

We look at the above issues in more detail below.

The FCA rules and guidance on scope and corporate bonds will clarify that ordinary, "plain vanilla" bonds will not be PRIIPs. So, a debt security with a fixed coupon is not a PRIIP, even if the coupons are subject to certain pre-defined changes. To be a PRIIP, a debt security must come between the retail investor and an ultimate investment asset which is not purchased by the investor. Therefore, a debt security will not be a PRIIP if the overall return for the retail investor is determined by the economic performance of the commercial or industrial activities of the issuer. Conversely, a debt security will be a PRIIP where the returns to the investor are materially determined by price movements or the investment performance of assets other than the debt security itself (including reference assets and indices, or benchmarks relating to assets or a class of assets).

The interpretive guidance on "made available" will essentially operate as a safe harbour. The FCA does not consider that it is a reasonable interpretation that a PRIIP is to be regarded as "made available" simply because it is possible for at least one retail investor, as a matter of fact, to buy it. Instead, the FCA will not consider a UK PRIIP to have been made to retail investors if:

  • the relevant marketing materials (including the prospectus, if there is one) make clear and prominent disclosures that the UK PRIIIP is only being offered to investors eligible for categorisation as professional clients (under the MiFID II client categorisation methodology) and is not available to retail investors;
  • the marketing and distribution strategy ensures that, as a matter of fact, offers are made and material is distributed only to professional investors; and
  • the relevant financial instrument is issued at a minimum denomination value of £100,000 (or its equivalent in another currency).

The FCA is of the view that the requirement for prescribed performance scenarios derived from the EU PRIIPs Regulation as "onshored" posed risks to consumers in that it had the unintended consequence of KIDs failing the "accurate, clear, fair and not misleading" requirement. Instead, under revisions to the PRIIPs KID RTS PRIIPs manufacturers are [now] required to describe in narrative form the factors likely to affect future performance of the product. These are likely to include those most likely to determine the outcome of the investment and those which could have a material impact on its performance. Disclosure must include the most relevant index, benchmark, target, or proxy (as applicable) together with an explanation of how the PRIIP is likely to compare against that in terms of performance and volatility. There should be an explanation of the conditions required to generate higher or lower returns and what outcome could be expected in a worst-case scenario – i.e., in severely adverse market conditions.

While the FCA did not propose in the consultation to add past performance to the KID, it did nonetheless solicit views on whether showing past performance in addition to the narrative would be helpful and included indicative drafting of what this might look like. This amounted to a graphical representation of 10-year performance information (or whole of life information on the product if less than 10 years old, but at least one calendar year of actual performance), showing gross and net returns and comparisons against the index or benchmark.

To address concerns that the RTS methodology had in the past led to lower risk ratings than expected, the UK PRIIPs RTS has been amended to include a new requirement for product manufacturers to enhance the SRI if they consider the risk rating produced by the methodology is too low. However, for VCTs the RTS SRI methodology is disapplied altogether and they must be assigned an SRI score no lower than 6. As regards data collection, PRIIP manufacturers are required to notify the FCA if they have upgraded the SRI score (above that determined by the RTS methodology) for any of their products. Finally, the character limit that PRIIPs manufacturers have for explaining all other significant risks not covered in the SRI score calculations has been raised from 200 to 400.

There have been some technical amendments to the UK PRIIPs RTS requirements on transaction costs and charges. These include some limited modifications to the transaction costs slippage methodology, the treatment of anti-dilution benefits, the calculation of costs for OTC bond transactions and index tracking funds.

The consultation closed on 30 September 2021. Originally, the FCA planned to make the final rules and amend the UK PRIIPs RTS by the end of 2021, with the changes coming into effect on 1 January 2022. However, this timetable has slipped. In the November 2021 Regulatory Initiatives Grid the FCA now says that it is aiming to publish the Policy Statement in Q1 2022: this will include confirmation of when the rules will take effect and any implementation period.


UK PRIIPs REGIME (2): Extension of the PRIIPs exemption for UK UCITS


WHAT IS THIS?  Exemption for UCITS from having to publish a UK PRIIPs Key Information Document.


WHEN DOES THIS APPLY? Now – the exemption has been extended to 31 December 2026.

On 13 October 2021, the exemption in the UK PRIIPs Regulation releasing UK UCITS management companies from having to prepare a PRIIPs-compliant KID was extended by another five years, from 31 December 2021 to 31 December 2026. This extension was effected by The Packaged Retail and Insurance-based Investment Products (UCITS Exemption)(Amendment) Regulations 2021, following a Treasury announcement in June 2021.

In its announcement, the government made the point that, despite the five-year extension, depending on the review of the UK retail disclosure regime, changes to the UK PRIIPs Regulation may be made (indeed, it may even be superseded by a replacement UK regulation) before 2026 which may impact on the relevant extension.


The UK Overseas Funds Regime: EEA UCITS and other non-UK funds


WHAT IS THIS?  A new statutory Overseas Funds Regime for non-UK collective investment schemes, based on equivalence and recognition

WHO DOES THIS APPLY TO?  Non-UK collective investment schemes offering equivalent protection to UK authorised schemes

WHEN DOES THIS APPLY? Not yet specified – pending finalisation of FCA rules on which the regulator proposes to consult in 2022

The Overseas Funds Regime (OFR) is a new regime for non-UK collective investment schemes, including EEA UCITS. Under it, non-UK funds will be able to market to UK retail investors if they meet certain criteria and the FCA has approved the scheme as "recognised"

The legislative amendments enabling the establishment of the OFR have been made under the Financial Services Act 2021 – these provisions insert new sections and make amendments to Part 17 of FSMA (and also to the UK Money Markets Fund Regulation). These establish the basis on which a collective investment scheme authorised outside the UK may become a "recognised scheme" under an equivalence regime. In summary:

  • HM Treasury must have made regulations approving the relevant country or territory because an "equivalent protection" test is met - i.e., that the protection to afforded to participants in schemes by the law and practice of the non-UK jurisdiction is at least equivalent to that afforded to UK authorised schemes;
  • The scheme is of a description of type of CIS specified in HM Treasury regulations;
  • HM Treasury may only make the above regulations if adequate co-operation arrangements exist/will exit between the FCA and the relevant overseas regulator;
  • HM Treasury may impose additional requirements on the operator of the overseas scheme;
  • Assuming the equivalent protection test is met, and the relevant country is approved, the operator of the scheme may apply to the FCA for recognition of the scheme.

There is a similar equivalence regime for non-UK Money Market Funds. Section 272 (individually recognised overseas schemes) will remain available for those schemes unable to take advantage of the OFR.

However, since the government has yet to make a commencement order, none of these provisions is yet in force. According to the November 2021 Regulatory Initiatives Grid, the FCA is "now working on operationalising the OFR" and will be consulting on various aspects of its Handbook rules "throughout 2022" to ensure that OFR funds are appropriately captured. It remains to be seen when the OFR will become fully operational. Presumably as and when the FCA says that its Handbook changes are ready, the government will switch the statutory regime on.


UK Long-Term Asset Funds


WHAT IS THIS?  A new UK authorised regime for investing in long-term assets.

WHO DOES THIS APPLY TO?  UK authorised fund managers and depositaries of long-term asset funds.


The FCA's new authorised fund regime for investing in long term assets came into force on 15 November 2021. This was set out in Policy Statement PS21/14.

The new regime created the Long-Term Asset Fund (LTAF), is a type of authorised open-ended AIF designed specifically to facilitate investment in long-term, illiquid assets, such as venture capital, private equity, private debt, real estate, and infrastructure.  The regime is set out in a new Chapter 15 of the FCA's Collective Investment Schemes Sourcebook (COLL 15) (and other relevant sections of the FCA Handbook). 

Under the new regime, LTAFs must be at least 50% invested in unlisted securities and other long-term assets and can invest in both UK and non-UK assets.  The investments are largely limited to most types of securities and contractually based investments under the UK Regulated Activities Order; interests in certain loans; interests in certain immovable property; precious metals; certain traded commodity contracts and units in certain types of collective investment schemes.  As a general matter, there must be a prudent spread of risk and, in some cases, investment limits or other restrictions also apply.

The authorised fund manager (AFM) of the LTAF must be a full-scope AIFM who will be subject to the rules on UK AIFMs as well as the applicable rules in COLL 15.  The AFM must possess the necessary knowledge, skills, and experience to understand the activities of the LTAF and the risks involved.  It must employ sufficient personnel with the necessary skills, knowledge, and expertise to discharge their responsibilities and the governing body of the AFM must meet certain requirements including having the necessary knowledge, skills and experience and independence of mind.  Certain delegation and conflicts of interest rules also apply.

A depositary must be appointed who is responsible for the safekeeping of the scheme property.  There is expected to be a further consultation on the registration of the scheme property of an LTAF in the first half of 2022.

An external valuer must also be appointed unless the AFM has the necessary knowledge, skills, and experience to carry out this function and the depositary agrees.

The instrument constituting the LTAF must include certain detailed, specified information.  There must also be a prospectus for investors including certain prescribed information and which must be kept up to date.  Where the requirements under the PRIIPs Regulation apply, a key information document must also be produced in addition to the prospectus.

As regards reporting, the AFM of an LTAF must produce reports on a quarterly, half-yearly and annual basis.  The annual report must include a report from the depositary.

LTAFs will be classed as a non-mainstream pooled investment (NMPI) under the UK financial promotions regime and subject to NMPI rules which includes limits on the types of persons to which they can be promoted.  Currently LTAFs may only be promoted to professional clients, sophisticated investors and (subject to significant qualifications) certain high net worth investors but the FCA will consult in in the first half of 2022 on their promotion to broader range of retail investors.

Finally, redemptions may not take place more frequently than monthly and there must be a notice period of at least 90-days (or more if that would be appropriate for the type of asset).  The FCA expects redemptions to be from a sale of a representative sample of the portfolio.




WHAT IS THIS?  A proposed directive to amend EU AIFMD and EU UCITS Directive.

WHO DOES THIS APPLY TO?  EU AIFMs, EU UCITS management companies and their depositaries.

WHEN DOES THIS APPLY? Not yet known but not before 2024 at the earliest.

On 25 November 2021, the European Commission finally issued a proposed directive (AIFMD II) to amend the EU AIFMD.  Some of the proposed changes to EU AIFMD would also apply to the EU UCITS Directive.  The changes would apply for the EU but not firms authorised in the UK under the UK versions of AIFMD or the UCITS Directive. There is currently no indication that the UK is planning to make similar changes.

The changes proposed include:

  • Permitted activities: The scope of permitted activities for AIFMs would be extended to include benchmark administration and credit-servicing.  Loan origination and servicing securitisation SPVs would be included as permitted activities for AIFMs.  This would allow for loan origination activities to be carried on in other Member States on a cross-border basis. However, it is not explicitly clear whether this would amount to some form of "passport".
  • Delegation: The rules on delegation arrangements would be tightened for both AIFMs and UCITS management companies and would explicitly apply to "top-up services".
  • Substance: New EU substance requirements would be introduced as a condition of authorisation for both AIFMs and UCITS management companies. 
  • Loan origination: For AIFMs, new risk management requirements would apply in respect of loan origination activities by AIFs together with some limitations on loan origination activities such as prohibitions on very large loans to other financial entities.
  • Liquidity management: Additional, detailed liquidity management rules would apply both for AIFMs that manage open-ended AIFs and UCITS management companies.  This would also include a power for competent authorities to require the activation or deactivation of liquidity management tools (including in respect of non-EU AIFMs marketing in the EU).
  • Depositaries: AIF depositaries would no longer be required to be established in the same Member State as the relevant AIF.   There would also be a prohibition on the use of third country AIF depositaries in jurisdictions which are identified as high-risk under the Fourth Anti-Money Laundering Directive or on the EU list of non-co-operative tax jurisdictions.
  • CSDs: CSDs providing custody services in respect of AIFMs and UCITS management companies (rather than acting in the capacity of an issuer CSD) would be subject to the relevant custody delegation rules.
  • Disclosure and reporting: Additional items would have to be disclosed to investors by AIFMs including in Article 23 investor pre-contractual disclosures.  Regulatory reporting obligations to competent authorities would be extended for both AIFMs and UCITS management companies. 
  • Marketing: Stronger anti-money laundering (AML) and tax compliance requirements would apply for AIFMs marketing AIFs under National Private Placement Regimes.

We discuss the proposed changes in more detail in our briefing.

The draft proposals will need to be considered by the European Parliament and European Council.  It is envisaged that AIFMD II would become effective two years after coming into force (i.e., not before 2024 at the very earliest).


EU Cross Border Distribution of Funds regime and ESMA Marketing Guidelines


WHAT IS THIS?  EU Directive, Regulation, and guidance on the marketing of funds in the EU.

WHO DOES THIS APPLY TO?  EU AIFMs, EU UCITS management companies, EuSEF managers and EuVECA managers – but UK and other non-EU fund managers seeking to market their funds into certain EU jurisdictions may also be impacted by amended NPPRs.

WHEN DOES THIS APPLY? Broadly, this started applying for 2 August 2021, though some EU Member States have still not implemented the Directive. The non-EU EEA Member States will also be implementing the regime in due course. The ESMA Guidelines apply from 2 February 2022.

The legislative regime - CBDR and CBDF

The Regulation on cross-border fund distribution (CBDR) has applied since 2 August 2021 and EU Member States were required to also implement the Directive on the cross-border marketing of funds (CBDF Directive) as from that date.

Broadly, the CBDR and CBDF Directive introduce:

  • a new harmonised definition of "pre-marketing" (encompassing information and/or communications relating to investment strategies or an investment in order to test investor appetite in a particular fund which is not yet established (or is established but is not yet registered for marketing)). Any subscription by investors in units/shares of an AIF that takes place within 18 months of the pre-marketing will be considered to be the result of marketing (this curtails the possibility of arguing that such investments arose as a result of reverse solicitation);
  • a new requirement for EU AIFMs to notify their home Member State regulators of details of the pre-marketing;
  • new rules relating to the de-notification of the marketing of units or shares in an EU AIF in jurisdictions where that AIF has exercised a marketing passport, including a rule restricting the pre-marketing of "similar investment strategies or investment ideas" for a period of 36 months following such a de-notification (though there are differing views as to the application of this); and
  • certain, additional requirements which apply to EU AIFMs, UCITS management companies and EUSEF/EUVECA managers when marketing units or shares to retail investors. These include the requirement to put in place certain "facilities" in the relevant member state to perform certain defined tasks.

In practice, implementation of the CBDF Directive has been uneven with a number of Member States missing the initial 2 August 2021 implementation deadline. As at the date of this briefing, some EU Member States are still yet to implement the CBDF Directive; and even where it has been implemented, several interpretive and other practical uncertainties persist. Industry groups are looking to forge some degree of market consensus on these issues.

The CBDR does not apply in the UK. The UK has also decided against implementing the CBDF Directive. Nonetheless, UK and other non-EU fund managers seeking to market AIFs into the EU may still be impacted by these rules. Individual EU Member States have the ability to apply the rules set out in the CBDR and CBDF Directive into their national private placement regimes – indeed, since 2 August 2021, a number of EU Member States have chosen to do precisely that.

ESMA Marketing Guidelines

ESMA has issued its final Guidelines on Marketing Communications under the Regulation on Cross-Border Distribution of Funds (the " Guidelines"). The Guidelines apply on a comply or explain basis (national regulators are required to notify ESMA whether they will implement the guidelines or not) from 2 February 2022

The finalised Guidelines apply to all marketing communications addressed to investors or potential investors. The Guidelines contain a non-exhaustive list of the types of documents that are considered as marketing communications (as well as a negative list which excludes "legal and regulatory" documents from this definition).

Broadly the Guidelines include:

  • Identification of marketing communications as such: marketing communications should include sufficient information to make it clear that the communication has a purely marketing purpose, is not a contractually binding document or an information document required by any legislative provision and is not sufficient on which to take an investment decision. A marketing communication should include a prominent disclosure of the terms “marketing communication” and the Guidelines set out an example disclaimer to be included (where appropriate to the length/format of the communication).
  • Description of risks and rewards: information on risks and rewards should be disclosed equally prominently and in the same level/position, font, and size as one another. The Guidelines suggest that presenting information on risks and rewards in a tabular format is one way of meeting this requirement.
  • Fair, clear, and not misleading: marketing communications should contain information that is fair, clear, and not misleading. Whether information is considered to be fair, clear, and not misleading is to be assessed with reference to the target investor type (e.g., retail, or professional). The information should also be consistent with the other legal and regulatory documents of the relevant fund. Where a marketing communication describes the features of an investment, this description should be kept up to date and contain adequate information to enable the key elements of those features to be understood. Additional granular requirements apply to marketing communications that are directed at retail investors.
  • Language requirements: Marketing communications should be written in either (i) one of the official languages or (ii) another language accepted by the national competent authority of the relevant Member State in which the fund is distributed.
  • Information on costs: information on the costs associated with purchasing, holding, converting, or selling units or shares should allow investors to understand the overall impact of costs on the amount of their investment and on the expected returns.
  • Information on past performance and expected future performance: Information on past performance should not be the main information of the marketing communication and any change that significantly affected the past performance of the fund should be prominently disclosed. The Guidelines also restrict the use of simulated past performance in marketing communications. Disclosing such simulated past performance should be limited to marketing communications relating to either (i) a new share class of an existing fund/investment compartment or (ii) a new feeder fund whose performance can be simulated by reference to the performance of its master fund. The narrowness of this restriction may make it difficult, if not impossible (compliant with the letter of the guidelines), to market new funds by simulating past performance data based on the actual past performance of predecessor funds. Expected future performance should be based on reasonable assumptions supported by objective data and disclosed on a time horizon which is consistent with the recommended investment horizon of the fund. The Guidelines include two disclosures that should precede information on past performance and/or future performance.
  • Information on sustainability-related aspects: Information on the sustainability-related aspects of the fund should not be disproportionate to its relevance in the fund's strategy.

What should fund managers be doing?

Managers should be aware of the local interpretive glosses that individual EU member states are applying to the CBDF Directive in their jurisdictions and monitor the application of these rules to relevant national private placement regimes. Managers should also review the content/presentation of their marketing communications to ensure those communications comply with the requirements of the ESMA Guidelines. Again, there are uncertainties as to how firms will respond to the specifics of the ESMA Guidelines in practice and so industry practice should also be monitored.

For further information on the CBDR and the CBDF Directive, please see our briefing from May 2019, and our 2021 New Year Briefing.


EU PRIIPs Regime: amendments to the PRIIPs RTS


WHAT IS THIS?  An amendment to the EU PRIIPs Delegated Regulation on KIDs.


WHEN DOES THIS APPLY? 1 January 2023 (as agreed by the European Commission).

On 7 September 2021, following a protracted period of review, consultation and, in February 2021, the submission of draft RTS by the European Supervisory Authorities, amendments to the Level 2 Commission Delegated Regulation on the EU PRIIPs KID (the EU PRIIPs RTS) were finally approved by the European Commission. Following non-objection from the Council and the European Parliament in early December 2021, Commission Delegated Regulation (EU) 2021/2268 amending the EU PRIIPs RTS was published in the Official Journal on 20 December 2021.

In outline, the changes involve:

  • the addition of UCITS key investor information provisions into the EU PRIIPs KID;
  • the inclusion of link to past performance information and previous scenario analysis for EU UCITS;
  • the introduction of the ability to increase the SRI number (i.e., beyond what the prescribed methodology dictates);
  • enhancements to the performance scenario methodology; and
  • additional costs disclosures.

On the face of the amending Regulation, the changes come into effect on 1 July 2022. We understand, however, that the Commission has agreed to delay the effective date of the amended RTS to 1 January 2023, in order to align the changes with those being made to the synchronised amendments that are being made to the PRIIPs Regulation (with regards to the extension of the PRIIPs exemption for UCITS) and to the UCITS Directive (to reflect the fact that a PRIIPs KID will satisfy the key investor protection requirements of that Directive) to ensure that firms will not have to provide investors two pre-contractual disclosure documents in relation to the same document – see the two items following this one.

In more detail, the revised EU PRIIPs RTS will include the following:

  • Certain UCITS key investor information (KII) provisions will be transposed into the PRIIPs KID, applicable to certain UCITS and AIFs, i.e.:
    • (where relevant), information to be provided in respect of separate investment compartments of the UCITS/AIF;
    • (where relevant) the identification of two or more share classes of the same UCITS/AIF;
    • specific provisions on UCITS or AIF as funds of funds, feeders and structured funds;
    • additional information on underlying investments, management style, benchmarks, redemption and dividends;
    • the name of the depositary, where and how to obtain further information/copies of the prospectus or description of the investment strategy, the latest annual report and (for UCITS) half-yearly report, specification of the languages in which such information is available and how to find other practical information (including unit/share prices).
  • Firms will be able to cross-reference to other sources of information (including the manufacturer's website) provided that all information fundamental to the retail investor's understanding of the essential elements is included in the KID;
  • For UCITS, the KID should include a link or reference to where past performance information can be found and the number of years for which past performance data available, and in this regard the linked information must comply with a new Annex on the content and presentation of past performance information – the requirements are based on UCITS KII performance disclosures, but with some prescribed warnings;
  • Where the PRIIP manufacturer considers that the summary risk indicator (SRI) number assigned using the prescribed methodology in the EU KID RTS does not adequately reflect the risks of the PRIIP, it may decide to increase that number, documenting its decision-making process – this is couched in permissive, rather than mandatory, terms;
  • As regards the appropriate performance scenarios for UCITS and AIFs there will be new methodologies underpinning the calculation of these, together with revised presentation requirements:
    • The unfavourable, moderate and favourable performance scenarios will be calculated on a monthly basis by way of a new methodology linked to the actual past performance of the PRIIP, using a 10-year data period;
    • The stress scenario will continue to be calculated in substantially the same way as now (albeit with some differences in the detailed calculation methodology) - the stress scenario must not be better than the unfavourable scenario;
    • For PRIIPs with a recommended holding period of between 1 and 10 years, the performance scenarios should be shown at two different holding periods – i.e., at the end of the first year and at the end of the recommended holding period (it will no longer necessary to show the scenario at half-way through the recommended holding period);
    • In terms of the presentation of the performance scenarios, there will be a modified template and amendments to the prescribed narrative disclosures;
  • In terms of transaction costs:
    • Firms will have to disclose – as a minimum – the explicit transaction costs (calculated over 3 years, and shown as a percentage);
    • The anti-dilution benefit should only be taken into account to the extent that it does not take the total transaction costs below the explicit transaction costs;
    • There is special, transitional treatment for UCITS regarding transaction costs until 31 December 2024 – until then, UCITS managers will be able to use the same approach as new PRIIPs – i.e., based on estimating transaction costs using portfolio turnover and bid-offer spreads;
    • There will be limited modifications to the transaction costs slippage methodology;
    • The templates for presentation of costs have been modified, with more explanation by way of prescribed narratives; managers will be able to include monetary amounts as well as percentages in the composition of costs table.


EU PRIIPs Regime: "Quick Fix" extension of PRIIPs exemption for EU UCITS


WHAT IS THIS?  Exemption for EU UCITS from having to publish an EU PRIIPs Key Information Document.


WHEN DOES THIS APPLY? the exemption has been extended to 31 December 2022.

While the UK has enacted a 5-year extension to the PRIIPs exemption for UK UCITS managers (i.e., from having to provide a KID), the EU's corresponding extension in this regard is more limited. On 20 December 2021, Regulation (EU) 2021/2259 was published in the Official Journal: this extends the exemption by one year, to 31 December 2022.


EU UCITS: "Quick Fix" amendment regarding PRIIPs-compliant KIDs


WHAT IS THIS?  Amendment of the UCITS Directive providing that an EU PRIIPs compliant KID satisfies UCITS Directive KIID requirement.


WHEN DOES THIS APPLY? 31 December 2022.

Alongside the modest extension of the PRIIPs exemption for EU UCITS managers (see above), amendments have been made to the UCITS Directive. These amendments, in Directive (EU) 2021/2261, provide that, where a KID is drawn up in accordance with the requirements of the EU PRIIPs Regulation, it should be considered as satisfying the requirements applicable to key investor protection for the purposes of the UCITS Directive. EU Member States will be required to transpose the Directive by 30 June 2022 and to apply its measures from 1 January 2023 (to synchronise with the expiry of the EU PRIIPs exemption on 31 December).


EU PRIIPs Regime: European Commission Review


WHAT IS THIS?  A review of the EU PRIIPs Regulation as part of the wider review of retail investor protection.


WHEN DOES THIS APPLY? The review is ongoing; the ESA must deliver their advice to the Commission by 30 April 2022; the date of any consequential changes is not yet set.

The amendments to the EU Delegated Regulation (the EU PRIIPs KID RTS) outlined above were not the end of changes to the EU PRIIPs regime: a wider overhaul is coming.

Part of the European Commission's wide-ranging Capital Markets Union 2020 Action Plan included a proposal to publish an EU strategy for retail investments. The Commission consulted on this strategy last summer, which will include a review of the EU PRIIPs regime. Publication of the EU strategy for retail investments is due in H1 2022.

In July 2021, the Commission sent a call for advice to the Joint Committee of the European Supervisory Authorities, asking the ESAs to assist in the preparation of legislative proposals implementing aspects of the retail investment strategy and, more particularly, regarding the review of the EU PRIIPs Regulation. The ESAs have been given a deadline of 30 April 2022 in which to deliver their advice.

The ESAs have been asked to provide technical advice on the following main areas:

  • a general survey on the use of the EU PRIIPs KID;
  • a general survey on the operation of the comprehension alert in the EU PRIIPs KID;
  • a survey of the practice application of the rules laid down in the EU PRIIPs Regulation;
  • an assessment of the effectiveness of the administrative sanctions, measures and other enforcement actions for infringements of the EU PRIIPs Regulation;
  • an assessment of the extent to which the EU PRIIPs Regulation is adapted to digital media; and
  • an examination of several questions regarding the scope of the EU PRIIPs Regulation.

On 20 October 2021, the Joint Committee of the ESAs published a call for evidence seeking feedback from the industry on the above areas raised by the European Commission; but it also went further because of view amongst the ESAs that changes to the EU PRIIPs Regulation are required in other areas, not just those covered by the Commission mandate.

Among other things, the call for evidence seeks feedback on the scope of the EU PRIIPs Regulation (for instance, in terms of the products covered, the concept of products being "made available to retail investors" and whether a taxonomy of PRIIPs should be developed); the differentiation between different types of EU PRIIPs (for instance, whether product groupings should be developed, whether the level of prescribed standardisation in the KID should be reduced).

The call for evidence closed for comments on 16 December 2021. Following the delivery of the ESA's advice on 30 April 2022 we will have to wait to see the Commission's response to gauge just how substantive the legislative amendments may be.


European Long-Term Investment Funds


WHAT IS THIS?  Proposed EU regulation amending the European Long-Term Investment Funds Regulation.

WHO DOES THIS APPLY TO?  European Long-Term Investment Funds and their managers.

WHEN DOES THIS APPLY? Not yet known.

The European Commission has issued a proposal for amendments to the European Long-Term Investment Funds Regulation (ELTIF II).  This seeks to encourage greater uptake of European Long-Term Investment Funds (ELTIFs) in the EU particularly in the context of alternative asset management strategies, including private equity and venture capital.  It also forms part of the EU's wider review of retail investment generally.

The proposals in ELTIF II largely focus on extending the types of assets in which an ELTIF can invest and the activities that it can carry out.

For example, ELTIF II would permit investment in long-term investments in any jurisdiction so that ELTIFs could pursue a global, rather than EU, investment strategy.  It would also permit investment in units in UCITS and AIFMs managed by EU AIFMs, subject to such funds meeting certain conditions including that they themselves invest in eligible investments.

Many of the limits on portfolio composition would be increased allowing managers more flexibility in terms of portfolio composition and master feeder ELTIF structures would also be permitted (i.e. where both the feeder and master fund are authorised as ELTIFs).

ELTIF II also proposes an increase in the level of permitted borrowing that an ELTIF may engage in and extend the purposes for which borrowing may be carried out. 

Under the proposals, the specific suitability requirements, including the minimum EUR 10,000 investment requirement, would be removed and, instead, ELTIF managers would be subject to the comparable requirements in MIFID II when marketing to retail investors.

Finally, there would also be a number of changes largely aimed at current market practice regarding co-investment for alternative asset management arrangements including:

  • an exemption from certain of the suitability requirements where the retail investor is a member of senior staff, portfolio manager, director, officer, agent or employee of the manager or its affiliate and has sufficient knowledge about the ELTIF concerned; and
  • a carve-out in the conflict of interest provisions permitting the ELTIF manager, its affiliates and their staff to co-invest in that ELTIF and/or co-invest with the ELTIF in the same asset, provided that there are appropriate conflict of interest arrangements in place and these are adequately disclosed.

We covered the proposals in more detail in our November 2021 briefing. For the position in the UK, see the section on UK Long-Term Asset Funds above.


UK MiFID II: amendments


WHAT IS THIS?  Changes to the UK MiFID rules.

WHO DOES THIS APPLY TO?  Investment firms and other firms subject to the UK MIFID rules.

WHEN DOES THIS APPLY? Some rules have already come into force but the remainder take effect on 1 March 2022.

During 2021, a number of changes were made to the UK MiFID Org Reg including the removal of some portfolio management related obligations when dealing with professional clients, such as the requirement to disclose when the overall value of a managed portfolio depreciates by 10% and certain reporting and information obligations. 

In addition, the FCA also issued a Policy Statement (PS21/20) with amendments to UK MIFID.  These follow changes made by the EU under the EU MiFID "quick fix" Directive (see below) and are intended to ensure that the FCA's requirements are simplified and more proportionate to the relevant risks. 

These included removal of the requirements for RTS 27 reports (execution quality metrics for execution venues) and RTS 28 reports (annual report with the top 5 execution venues).  These changes took effect on 1 December 2021.

A further change will take effect on 1 March 2022 permitting firms to consider certain types of research as an acceptable minor non-monetary benefit under the inducements rules.

The types of research which are covered by this change are:

  • Research on listed or unlisted companies with a market capitalisation below £200m, provided it is offered on a rebundled basis or for free;
  • Third party research that is received by a firm providing investment services or ancillary services to clients where it relates to fixed income, currency or commodity instruments;
  • Research received from a research provider which is not engaged in execution services and is not part of a financial services group that includes an investment firm that offers execution or brokerage services;
  • Written material that is made openly available from a third party to any firm wishing to receive it or to the general public; and
  • Corporate access services which relate to listed or unlisted companies with a market capitalisation below £200m.


EU MiFID II/EU MIFIR: amendments


WHAT IS THIS?  Amendments to EU MiFID II, EU MiFIR and new EU guidelines on EU MiFID II market data obligations.

WHO DOES THIS APPLY TO?  EU MiFID investment firms.

WHEN DOES THIS APPLY? Various dates. EU guidelines on EU MiFID II market data obligations apply now.  Certain changes to EU MiFID II apply as from 28 February 2022.

In 2021, a number of updates to EU MiFID II were proposed and agreed.  Many of these will take effect in 2022. These include amendments to EU MiFID II, updated EU guidelines on EU MiFID II market data obligations and a review of the EU Markets in Financial Instruments Regulation (EU MIFIR).  In addition, the European Commission issued some legislative proposals on further amendments to EU MiFID II and EU MiFIR in November 2021.

Amendments to EU MiFID II

COVID-19 amendments

A number of amendments to EU MiFID II will apply as from 28 February 2022. These amendments were introduced to reflect the impact of COVID-19 on EU financial markets and are often referred to as the MiFID “Quick Fix” amendments.  In general, they provide for reduced obligations in a number of areas – particularly the provision of information to clients.

The amendments include a lighter touch inducements regime for research on issuers with market capitalisation below EUR 1 billion and the disapplication of certain product governance requirements for bonds with no embedded derivative other than a “make-whole clause” or financial instruments marketed and distributed exclusively to eligible counterparties.

Except in the case of investment advice and portfolio management, firms will no longer be required to provide professional clients with certain information on costs and charges.  Other information requirements have also been made less stringent.  These include a new ability for firms to provide information on costs and charges after the transaction where the transaction is concluded through a distance communication and the client has agreed to this.   In addition, firms will be able to provide information in electronic format unless the client is a retail client and has requested information to be provided on paper.

We originally covered these amendments in our 2020 briefing.

Legislative proposals on further amendments

The European Commission also issued a legislative proposal on further amendments to EU MiFID II in November 2021. 

The proposed amendments include removing the requirement for persons who deal on own account on a trading venue by means of direct electronic access to be authorised provided that they do not provide or perform any other investment services. 

In addition, under the proposals, investment firms and market operators operating multilateral trading facilities (MTF) or organised trading facilities (OTF), as well as operators of regulated markets, would need to have arrangements in place to ensure they meet the data quality standards in EU MiFIR.

Amendments to EU MiFIR

Review of EU MIFIR

The European Securities and Markets Authority (ESMA) has issued a consultation paper on the review of RTS 1 (equity transparency) and RTS 2 (non-equity transparency) of EU MiFIR. 

ESMA’s proposals include various amendments to the data to be reported as well as shortening the deferral period for certain transactions to a maximum of the opening of the next trading day (rather than noon).

There are also proposals in respect of exchange traded funds including increasing the pre-trade large in scale threshold from EUR 1,000,000 to EUR 3,000,000 and increasing the post-trade transparency threshold for 60 minutes publication delay from EUR 10,000,000 to EUR 15,000,000.  Amendments in respect of trading systems are also proposed.

ESMA aims to submit the draft technical standards to the European Commission in Q1 2022.

Legislative proposals on further amendments

The European Commission also issued a legislative proposal on further amendments to EU MiFIR in November 2021.  This includes a requirement that all multilateral systems be a regulated market or authorised as an MTF or OTF.  It also includes provisions in respect of trading and trade transparency; requirements in respect of consolidated tape providers; amendments to share and derivatives trading obligations; a prohibition on systematic internalisers offering payment for retail order flow, and the removal of the open access obligation for exchange-traded derivatives.

EU guidelines on EU MiFID II market data obligations

From 1 January 2022, the Guidelines on the MiFID II/MiFIR obligations on market data applied to national competent authorities, trading venues, approved publication arrangements, consolidated tape providers and systematic internalisers.

These include new guidelines on the provision of market data (including access to delayed data, unbundling and providing market data on a non-discriminatory basis), publication of market data policies and transparency obligations (including a detailed explanation of the accounting methodology for market data fees). 

Governance and Outsourcing

FCA: new rules on operational resilience


WHAT IS THIS?  New FCA rules on operational resilience.

WHO DOES THIS APPLY TO?  Certain UK FCA-authorised firms including enhanced scope SMCR firms, electronic money institutions and payment institutions; the rules also apply to some PRA-regulated firms.

WHEN DOES THIS APPLY? 31 March 2022 (with some transitional measures).

The FCA issued a policy statement (PS21/3) setting out its final rules on operational resilience for certain UK FCA-authorised firms, including enhanced scope firms under the Senior Managers & Certification Regime, electronic money institutions and payment institutions and also some PRA regulated firms.  The rules aim to increase and enhance such firms' operational resilience and therefore minimise harm to consumers and market integrity due to operational disruptions.

Under the new operational resilience requirements, firms will need to identify their important business services and set an impact tolerance for each one.  An important business service for these purposes is broadly a service provided by (or on behalf of) the firm which, if disrupted, could cause intolerable levels of harm to any of the firm’s clients or pose a risk to the soundness, stability or resilience of the UK financial system or the orderly operation of the financial markets.  An impact tolerance is broadly the maximum tolerable level of disruption to an important business service, taking into account various factors.

Firms will also need to have in place sound, effective and comprehensive strategies, processes and systems to enable them to comply with their obligations under the new operational resilience rules.  They will also have to identify and document the people, processes, technology, facilities and information necessary to deliver each of the important business services with the ability to identify and remedy vulnerabilities, if appropriate.

Firms must develop a testing plan and keep this up to date.  This testing plan should set out how the firm will remain within the impact tolerances for each of its important business services.  Regular scenario testing will also be required, with additional testing in certain circumstances, such as a material change in the firm's business.

Firms will have to keep appropriate records which are approved and regularly reviewed by the firm's governing body.  They will also need to maintain an internal and external communication strategy to act quickly and effectively to reduce the anticipated harm caused by operational disruptions. In the event of an operational disruption, a firm must provide clear, timely and relevant communications to stakeholders.

The rules will be set out in a new Chapter 15A of the FCA's Senior Management Arrangements, Systems and Controls Handbook (SYSC) and will apply from 31 March 2022 (with some transitional measures applying).  Affected firms will therefore need to start reviewing their business services and internal policies and procedures in order to be able to comply with the requirements as from that date.


Bank of England: Operational Resilience - Banks And Insurers


WHAT IS THIS?  New PRA rules, Supervisory Statement and Statement of Policy on operational resilience.

WHO DOES THIS APPLY TO?  UK banks, building societies, PRA-designated investment firms and to insurers (UK Solvency II firms, the Society of Lloyd's and its managing agents).

WHEN DOES THIS APPLY? 31 March 2022.

In March 2021, the Bank of England published PS6/21: Operational resilience: Impact tolerances for important business services. This followed a consultation (CP29/19) published in December 2019, which itself had built on a discussion paper published in July 2018.

The policy statement sets out the Bank of England's feedback to the consultation and includes:

Coinciding with the start of the FCA's new SYSC 15A rules on operational resilience (see above) and similar in substance and detail to those rules, the new Operational Resilience Parts of the PRA Handbook and SS1/21 will be effective from 31 March 2022. In-scope firms should be contacting their supervisors to agree their plans for meeting the policy requirements. As the PRA has made clear, operational resilience – broadly speaking, the ability of firms and the financial sector as a whole, to absorb and adapt to shocks and disruptions, rather than to contribute to them – goes beyond business continuity and disaster recovery. Firms must have plans in place to deliver essential services, regardless of the cause of the disruption – including man-made threats (such as physical and cyber attacks, IT failures, supplier failures) and natural hazards (such as fire, flood, severe weather and – of course – pandemics).

At a high level, the new rules and policy require firms to have in place sound, effective and comprehensive strategies, processes and systems that enable it adequately to:

  • identify their important business services (or, where relevant, important group business services) by considering how disruption to the business services they provide can have an impact of the PRA's objectives;
  • set an impact tolerance for disruption for each important business service; and
  • ensure that they can continue to deliver their important business services and are able to remain within their impact tolerances (as set in accordance with the above requirement) during severe but plausible scenarios disrupting the firm's operation.

An "important business service" is one which, if disrupted, could pose a risk to the firm's safety and soundness or (where the firm is an O-SII) the stability of the UK financial system. An "impact tolerance" is the maximum tolerable level of disruption to an important business service (or important group business service) as measured by a length of time in addition to any other relevant metrics – in other words, the impact tolerance for each important business services must specify the length or point in time (in addition to any other relevant metrics) for which a disruption to that service can be tolerated. The firm's management body must approve the important business service(s) (or important group business service(s)) and the impact tolerances set by the firm. Note that in terms of the obligation to ensure that the firm can remain within its impact tolerance for each important business service in the event of a "severe but plausible disruption" to its operations (the third bullet point above), it must comply "within a reasonable time" of the rule coming into effect on 31 March 2022, but in any event no later than 31 March 2025. After this date, maintaining operational resilience will be a dynamic activity.

Firms must identify and document the necessary people, processes, technology, facilities and information required to deliver each of its important business services and must carry out regular scenario testing of its ability to remain with the impact tolerance(s) it has set in the event of a severe but plausible disruption of its operations.

Each firm will be required to prepare and regularly update a written self-assessment of its compliance with the Operational Part of the rules and be in a position to provide the current version, and all versions produced during the preceding three years, to the PRA on request. The management body of the firm must approve and regularly review the self-assessment.

The Statement of Policy addresses the relationship between operational resilience and governance arrangements, operational risk policy, Business Continuity Planning and outsourcing.


Bank of England: Operational Resilience - FMIs


WHAT IS THIS?  New Policy Statements and Supervisory Statements.

WHO DOES THIS APPLY TO?  FMIs - central counterparties, central securities depositories, recognised payment system operators and specified service providers.

WHEN DOES THIS APPLY? 31 March 2022.

In March 2021, the Bank of England published a number of documents on its policy designed to improve the operational resilience of FMIs and protect them and the wider financial sector and UK economy from disruption. The final documents reflect a number of consultation papers published in December 2019. They cover very similar ground to the Bank's requirements for banks, PRA-designated investment firms and insurers (see above).

The various documents on operational resilience are:

Unsurprisingly, the three Policy Statements are all essentially identical to one another; the same is substantially true of the three Supervisory Statements, though they necessarily refer to the different sets of legislation that underpin regulation of the FMIs (e.g., UK EMIR and its associated technical standards for CCPs, UK CSDR and its associated technical standards for CSDs and the Banking Act 2009 for operators recognised payment systems (RPSOs) and specified service providers). The Supervisory Statement for Recognised Payment System Operators and Specified Service Providers also contains an amended Code of Practice about the operation of recognised payment systems which introduces a new Part 2 on operational resilience.

All of the above policies, and the amendments to the Code of Practice for RPSOs and SSPs, take effect from 31 March 2022 when the relevant FMIs are expected to identify important business services, set impact tolerances and regularly test their ability to meet tolerances with due regard to the mapping of dependencies. As with the other financial services sectors (see above), within a reasonable time after 31 March 2022, and in any event no later than 31 March 2025, FMIs are expected to take all reasonable actions to ensure that they remain within their impact tolerances in the event of an extreme but plausible disruption to operations.


Bank of England: Dear CEO letters to FMIs on material outsourcing arrangements


WHAT IS THIS?  The BoE's supervisory expectations in relation to material outsourcing arrangements, including outsourcing to the public cloud.

WHO DOES THIS APPLY TO?  CSDs, CCPs, Recognised Payment System Operators and their Specified Service Providers.


The BoE wrote to the CEOs of CSDsRecognised Payment System Operators (RPSOs) and Specified Service Providers (SSPs) and CCPs on its supervisory expectations in relation to material outsourcing arrangements, including outsourcing to the public cloud (see also the section on cloud outsourcing below).

This follows increasing reliance by FMIs on a small number of cloud service providers (CSPs) and other critical parties which the BoE considers may bring risks in respect of data security and the resilience of the outsourced services.

In the letters, the BoE reminds FMIs of their obligations under existing requirements, such as CPMI-IOSCO’s Principles for Financial Markets Infrastructure (PFMIs), and states that they should have due regard to its recent policy on the Operational Resilience of FMIs and consider any relevant international standards. 

The BoE reminds FMIs that entering into, or significantly changing a material outsourcing or sub-outsourcing arrangement involving CSPs would require FMIs to engage with the BoE. In the case of CSDs this would be through an application for authorisation for outsourcing under the UK Central Securities Depositories Regulation.  CCPs would need to notify the BoE to enable the BoE to assess compliance with the UK European Market Infrastructure Regulation and RSPOs and SSPs would need to seek non-objection if the change could materially alter their business model or risk profile.  In each case FMIs should submit any applications at an early stage and sufficiently in advance of entering into the relevant contract to allow the BoE to have sufficient time to review the arrangement.

The letters also set out the Bank's current expectations for FMIs in relation to material outsourcing arrangements, including with CSPs.  This includes that an FMI has robust risk management procedures, continues to deliver its critical operations or important business services in a robust, resilient and secure manner and has a documented exit strategy.  In addition, the use of outsourced service providers must not undermine the FMI's ability to recover and meet its operational resilience objectives.

The BoE also states in the letters that it expects FMIs to notify the BoE and seek non-objection for arrangements where participants are considering outsourcing their connectivity gateway or security solutions used to access the FMI's services to the public cloud and this may materially affect the FMI’s risk profile or that of the relevant system.   FMIs may also need to introduce enhanced control arrangements, including the participant possibly seeking the pre-approval of the FMI.

The letters also include the BoE’s current supervisory expectations for FMIs when there is a material change in the risk profile. This could include those arising from participants outsourcing connectivity and security solutions to the public cloud.  The expectations include ensuring that there are appropriate measures in the relevant participant rules or requirements, appropriate assurance and compliance procedures, and the ability to identify, assess and manage the associated operational risks.  FMIs must monitor the risk of a concentration of participants outsourcing connectivity and security solutions to a small number of CSPs or the public cloud, including the risk of a prolonged outage at a CSP affecting multiple participants simultaneously.

The BoE also states that it intends to consult on its proposed expectations for FMIs on outsourcing in due course with specific reference to the cloud.


Discussion Paper on Diversity and Inclusion


WHAT IS THIS?  Discussion paper with policy options to improve diversity and inclusion in financial services.

WHO DOES THIS APPLY TO?  All UK financial services firms – including FCA-authorised firms (including payment service providers, e-money firms, credit rating agencies and recognised investment exchanges), PRA-regulated firms and financial markets infrastructures regulated by the Bank of England.  The application of the requirements to overseas firms operating in the UK is also being considered.


The FCA, PRA and BoE issued a joint Discussion Paper (DP 21/2) setting out policy options to improve diversity and inclusion (D&I) in financial services.  This is intended to form the basis of new rules and guidance for financial services firms requiring them to take D&I into account in their policies, governance arrangements, accountability, remuneration arrangements and disclosures.  They would also form part of the supervisory approach of the FCA, PRA and Bank of England.

The rules and guidance would potentially apply to all financial services firms – including FCA-authorised firms (including payment service providers, e-money firms, credit rating agencies and recognised investment exchanges), PRA-regulated firms and financial markets infrastructures regulated by the BoE.  The application of the requirements to overseas firms operating in the UK is also being considered.

The proposals build on and are intended to complement measures in other financial services legislation including those in the EU's Investment Firms Regulation and Directive and the UK IFPR.

There will be a consultation in Q1 2022 and a Policy Statement in Q3 2022. Topics to look out for regarding the UK regulators' policy approach include how certain key concepts are defined, with some industry participants taking the view that the proposed definitions are unduly narrow. Other key issues to monitor will relate to the setting of diversity targets, disclosure and reporting on the part of regulated firms, and the ability of international groups to leverage off global diversity and inclusion programmes.

The FCA also issued a separate Consultation Paper setting out draft rules on diversity for listed company boards and executive committees, expected to enter into force in 2022.

We discussed these papers in more detail in our briefing.


Cloud Outsourcing: Very like a whale?


WHAT IS THIS?  A general update on various cloud outsourcing initiatives in the UK, EU and globally.

WHO DOES THIS APPLY TO?  All firms, subject to sectoral and jurisdictional application.

WHEN DOES THIS APPLY? For the most part, relevant guidance applies now – UK FCA authorised firms are subject to FCA guidance first published in 2016. Other guidelines are all in force as regards new arrangements, but have transitional provisions regarding 'legacy' arrangements.

Outsourcing to the cloud has been a preoccupation of supervisors around the world for some time, perhaps somewhat overtaken more recently by a specific focus on operational (including digital operational) resilience (see above). However, such outsourcing remains a concern.

Of course, the concerns over financial services firms outsourcing to cloud service providers are not new. As far back as July 2016, the FCA first published FG16/5: Guidance for firms outsourcing to the 'cloud' and other third-party IT services, applicable to all firms. This FCA Guidance was updated in September 2019 to remove credit institutions (and investment firms then subject to EU CRR) from the scope of application; this was because of the publication of EBA's recommendations on outsourcing to cloud service providers as embedded in its wider outsourcing guidelines (EBA Guidelines). However, to this day FG16/5 continues to apply to all other FCA regulated firms and their service providers.

In the UK, the EBA guidelines (dated 25 February 2019) apply to credit institutions and investment firms subject to the EU Capital Requirements Directive (EU CRD) – prior to the application of the Investment Firm Prudential Regime (IFPR) in the UK, this would have caught "IFPRU investment firms" as then defined in the FCA Handbook. Now, the EBA Guidelines will apply to a narrower range of PRA-designated investment firms. The EBA Guidelines also apply to UK payment institutions and UK electronic money institutions. For a reminder of why EU Level 3 materials – as they stood on 31 December 2020 – still apply to UK firms, see the FCA's post-Brexit approach to EU non-legislative materials.

The EBA Guidelines came into force on 30 September 2019 in relation to all outsourcing arrangements started on or after this date, and also to any pre-existing arrangements subject to review or amendment after this date. As regards legacy outsourcing arrangements (i.e., those entered into before 30 September 2019), the EBA Guidelines included a transitional provision requiring firms to complete documentation compliant with the Guidelines following the first renewal date, but by no later than 31 December 2021 (however, this did not apply to cloud outsourcing arrangements). Where firms were unable to complete this review by the deadline, they were required to report to their competent authority on their progress. However, the PRA and FCA made it clear that firms were not expected to report to them on their progress towards meeting the 31 December 2021 deadline. Instead, they should aim to review any outstanding critical or important outsourcing arrangement at the first appropriate contract renewal following the first renewal date of each existing outsourcing arrangement or revision point. Where arrangements of 'legacy' critical or important outsourcing arrangements have not been finalised by 31 March 2022, firms are required to notify PRA or FCA, as appropriate. This date aligns with effective date of the new operational resilience provisions from the FCA and Bank of England (see above: FCA: New rules on operational resilience and Bank of England: Operational Resilience – Banks and Insurers).

ESMA has now contributed its piece to the cloud outsourcing jigsaw. In June 2020, it published a consultation paper on its own sectoral guidelines on outsourcing to cloud service providers. In drafting these, it took into account of the EBA Guidelines (with their incorporated recommendations on outsourcing to cloud service providers) and the EIOPA Guidelines on the same theme). It was also "mindful" of the European Commission's proposal for a Digital Operational Resilience regulation (see Section 7, EU Digital Finance Strategy) which may – if, for instance, it has the effect of harmonising the separate sectoral cloud outsourcing guidelines now published by EBA, ESMA and EIOPA – necessitate further amendments or additional guidance.

Following consultation, and a Final Report, the final Guidelines on outsourcing to cloud service providers were published on 10 May 2021. They apply to EU competent authorities and to the following firms and institutions (in the EU, unless otherwise stated):

  • AIFMs and AIF depositaries;
  • UCITS and their management companies and depositaries;
  • CCPs and Tier 2 third-country CCPs which comply with the relevant EMIR requirements;
  • Trade repositories;
  • Investment firms and credit institutions when carrying on MiFID investment services and activities, EU data reporting services providers and operators of MiFID trading venues;
  • Central Securities Depositories (CSDs);
  • Credit Rating Agencies;
  • Securitisation Repositories;
  • Administrators of critical benchmarks (as defined in the EU Benchmarks Regulation).

Importantly, the ESMA Guidelines do not apply to firms in the UK (they became effective after the end of the Brexit transition period and therefore firms are not required to have regard to them unless the FCA explicitly sets out its expectations in relation to them, which it has not done (see FCA's post-Brexit approach to EU non-legislative materials).  However, they will clearly be relevant to those firms with pan-European business models. They are also directly relevant to Tier 2 third-country CCPs, including those in the UK, which comply with relevant EMIR requirements – i.e., those third-country CCPs that have been recognised by ESMA to offer services and activities under EU EMIR and which have been assessed as being systemically riskier. ESMA will take the outsourcing guidelines into account when assessing the extent to which compliance with the relevant EMIR requirements by a Tier 2 third-country CCP is satisfied by comparable requirements in the relevant third country.

The ESMA Guidelines applied from 31 July 2021 to all cloud outsourcing arrangements entered into, renewed or amended on or after that date by in-scope firms. Firms are required to review and amend their pre-existing cloud outsourcing arrangements with a view to ensuring that they take the Guidelines into account by 31 December 2022. Where that review is not finalised by that deadline, firms are required to inform their competent authority, setting out the measures they are planning to complete the review or the possible exit strategy.

Finally, at the international level, the International Organization of Securities Commissions (IOSCO) published an updated version of its Principles on Outsourcing in October 2021. As the name suggests, these address wider issues associated with outsourcing by way of seven principles setting out expectations for regulated entities that outsource tasks, together with guidance for implementation. There is an Annex on Outsourcing and Cloud Computing, although this specifically looks at the issues as they affect Credit Rating Agencies (reflecting the fact that it reflects the work of IOSCO Committee 6 on Credit Rating Agencies). However, the executive summary does note in passing that the basic approaches to outsourcing and cloud computing are not limited to the CRA sector and span the entire financial services industry. Broadly speaking, the Principles apply to trading venues, market intermediaries and market participants acting on a proprietary basis, and regulated credit rating agencies. The Principles are not directly addressed to financial market infrastructures within the scope of the CPMI-IOSCO Principles for Financial Market Infrastructures, though such FMIs may choose to apply some or all of them to parts of their business.

Financial crime and market abuse

Review of UK's AML/CTF regulatory and supervisory regime


WHAT IS THIS?  A broad-ranging review of the UK's AML/CTF regime.

WHO DOES THIS APPLY TO?  All firms that are "relevant persons" under the MLRs.

WHEN DOES THIS APPLY?  Spring/summer 2022 (as regards limited amendments to the MLRs); uncertain regarding wider changes following the review.

In July 2021, HM Treasury launched a Call for Evidence in relation to the review of the UK's AML/CTF regulatory and supervisory regime. At the same time as the Call for Evidence, there was a parallel consultation on amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). Both consultations closed on 14 October 2021 and the government is analysing the responses. The government says that a final report will be published "no later than 26 June 2022", though it says that a further consultation may be conducted in the light of consultation responses. The timing of any eventual changes to the regime is therefore uncertain. By contrast, the MLRs consultation, with its limited set of proposed amendments, suggested that secondary legislation is due to be laid in Spring 2022.

The Call for Evidence focused on the MLRs and the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 and included consideration of the following issues:

  • the effectiveness of the regimes, and their extent – i.e., those sectors that are currently in scope as "relevant entities";
  • whether the current regulations are operating as intended, including:
    • whether the existing risk-based approach works well, or whether it has effectively become an overly prescriptive, "tick-box" exercise with little or no discretion allowed;
    • whether the reliance regime works well
    • whether the current requirements are not flexible enough and therefore limit the adoption of new technologies;
    • whether the current guidance regime works well, particularly in the light of possible inconsistencies between different sets of guidance and the length of time it takes for updates to guidance to be adopted following legislative changes;
  • the structure of the supervisory regime (including concerns about consistency and possible gaps in that regime) and whether a single supervisor is appropriate.

While the Call for Evidence was broad ranging, the scope of the consultation on the MLRs was deliberately much narrower and more focused, designed to elicit comments on the government's proposal to make some "time-sensitive" updates to the MLRs in order to bring them in line with international standards and to clarify certain changes that had been made as part of the EU Exit legislation. Although the MLRs consultation was run in parallel to the wider Call for Evidence, any limited changes to the MLRs resulting from that specific, focused consultation are not intended to affect or prejudge the broader findings of the review. Proposed changes to the MLRs therefore included:

  • an expansion to the requirement for relevant persons to report to the registrar of companies any discrepancies between the information they hold about beneficial owners of companies, arising out of their CDD duties, and the information recorded by Companies House on the public companies register – at the moment, this requirement applies "before establishing a business relationship" – the proposal is to convert this into an ongoing requirement;
  • changes to align the definitions of "credit institution" and "financial institution" (under Regulation 10, MLRs) with FSMA and definitions under the Regulated Activities Order;
  • in line with a FATF recommendation, the implementation of the so-called "travel rule" as regards cryptoasset transfers and replicating (with some tailoring) the provisions in the onshored Funds Transfer Regulation in the MLRs and applying them to the cryptoasset sector;
  • changes in scope to reflect latest FATF risk assessments (e.g., to exclude certain payment service providers – Account Information Service Providers and Payment Initiation Service Providers);
  • changes to allow AML/CTF supervisors to have a right of access to view the content of a suspicious activity report (SAR) on request;
  • in the context of the formation of limited partnerships, some amendments to the definitions of "Trust or Company Service Provider" and "business relationship".

These changes are unlikely to have a substantial impact on most firms. The overall review, however, may result in some more fundamental and substantive changes to the regime which firms will need to keep on their radars.


Economic Crime (Anti-Money Laundering) Levy


WHAT IS THIS?  A monetary economic crime levy in an amount referable to the firm's size to fund government action to tackle money laundering.

WHO DOES THIS APPLY TO?  The "AML-regulated sector" – i.e., all "relevant persons" under the Money Laundering Regulations, including most financial services firms (e.g. credit institutions, financial institutions, cryptoasset exchange providers and custodian wallet providers).

WHEN DOES THIS APPLY? The first levy year starts on 1 April 2022; payment of the first levy will be due after 31 March 2023.

It seems like it has been a long time coming, but the new economic crime levy (Economic Crime Levy) to be paid by entities subject to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) is finally becoming a reality, with the first levy year beginning on 1 April 2022 (April Fool's Day).

As we reported in last year's New Year Briefing, the Chancellor announced the new Economic Crime Levy at in the Budget on 11 March 2020, describing it as a measure designed to help fund government actions to tackle money laundering and give effect to the reforms first laid out in the 2019 Economic Crime Plan. HM Treasury subsequently launched a consultation on the new levy in July 2020. Over a year later, on 21 September 2021, HM Treasury published its response together with draft implementing legislation.  A technical consultation on the draft legislation ran from 21 September to 15 October 2021.

In outline:

  • each levy year will run from 1 April to 31 March – the first levy year will start this Spring, on 1 April 2022 (i.e., 1 April 2022 – 31 March 2023);
  • an entity will be in scope of they are AML-regulated at any point in a levy year – a firm will be AML-regulated if it has carried out a regulated activity as per Chapter 1, MLRs;
  • small entities with UK revenue of £10.2 million of less will be exempt;
  • otherwise, the size of the Economic Crime Levy will depend on the firm's size – that size will be determined based on the UK revenue that the firm has made during its period of accounts that ends in the levy year (see table below) – revenue will be defined as turnover (as defined in the Companies Act 2006) plus other amounts not included in turnover, which, in accordance with UK GAAP, are recognised as turnover in the entity's profit and loss account or income statement;
  • levy payments will be made by entities to their relevant collector (FCA, HMRC or the Gambling Commission) after the end of each levy year – this means that payments in respect of the first levy year (1 April 2022 – 31 March 2023) will not be due until the 2023/2024 levy year – i.e., after 31 March 2023.

The details are to be confirmed in the final legislation and in the respective regulators' rules. Pending those, based on the Treasury response, the amount of the levy will be as follows:

Where the firm is constituted as a limited partnership, the levy will be payable at partnership level. In the case of other partnerships, each of the partners will be liable on a joint and several basis.

Provision to establish the Economic Crime Levy is included in the Finance (No.2) Bill 2021-22 (Part 3, Clauses 53-66) which was introduced on 4 November 2021 as part of the Autumn 2021 Budget and is now undertaking its passage through Parliament. Note that, in the Bill as introduced, the fixed fees (to replace the indicative fixed fee ranges indicated in the above table) have been set at £10,000 for "Medium" firms, £36,000 for "Large" firms and £250,000 for "Very large" firms.


EU revision of EU AML/CFT legislation


WHAT IS THIS?  Proposals for an updated EU AML/CFT regime including a new EU AML/CFT central authority and new and revised rules.

WHO DOES THIS APPLY TO?  EU financial services entities including crypto-asset service providers and, in some cases, their affiliates.


The European Commission has launched four legislative proposals in respect of anti-money laundering and counter terrorist financing (AML/CFT) which aim to strengthen the EU’s AML/CFT regime.

The proposals include: a Regulation establishing a new EU AML/CFT authority; a Regulation on AML/CFT, and a Sixth Money Laundering Directive.

EU regulation establishing a new EU AML/CFT authority

This would establish a new Authority for Anti-Money Laundering and Countering the Financing of Terrorism (AMLA) which would be the EU AML/CFT central authority.  It is expected that it would be established in early 2023.

AMLA's role would include monitoring and assessing money laundering and terrorist financing developments and risks in the EU and third countries; directly supervising some of the riskiest financial institutions (largely those operating in multiple Member States who meet certain risk factors), and monitoring and coordinating national supervisors and supporting the work of national Financial Intelligence Units (FIUs).

In addition, AMLA would have investigative powers and the power to impose fines. It would also develop technical standards, guidelines and recommendations and maintain a central database of certain supervisory information.

EU regulation on AML/CFT

The EU has been concerned for some time about inconsistencies in the implementation and application of the Money Laundering Directives in the Member States.  As a result, it has proposed a Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (Regulation on AML/CFT) which would impose directly applicable rules on obliged entities.

The obliged entities subject to the Regulation on AML/CFT would largely reflect those under the Fourth Money Laundering Directive (MLD 4) but with some additions such as a wider definition of crypto-asset service providers. As before, credit institutions and financial institutions, such as investment firms, AIFMs and UCITS management companies, would be caught. 

The Regulation would largely be based on MLD 4 with some amendments and additional clarifications or detail, including:

  • Measures to be applied by obliged entities including requirements for internal policies, controls and procedures, risk assessments (based on specified risk variables) and more detailed group requirements (including for third country branches or subsidiaries of an EU parent undertaking).
  • Detailed rules on customer due diligence and beneficial ownership.  These would be more detailed than those under MLD 4 including a lower threshold of €10,000 for an occasional transaction to trigger customer due diligence requirements and more prescriptive information to be collected on customers and beneficial ownership.
  • Disclosure requirements for nominee shareholders and nominee directors and an obligation for non-EU legal entities which enter into a business relationship with an EU obliged entity or acquire real estate in the EU to register their beneficial ownership in the EU.

There would also be new provisions restricting the use of anonymous accounts, bearer instruments and cash payments over €10,000.

Sixth Money Laundering Directive

The Sixth Money Laundering Directive (MLD 6) would replace the previous five Money Laundering Directives and would complement the Regulation on AML/CFT.  As mentioned above, many of the provisions in the previous Money Laundering Directives would be reflected in the Regulation on AML/CFT.  However, MLD 6 will include some new requirements including:

  • Requirement for licensing or registration of currency exchange and cheque cashing offices and trust or company service providers – and checks on the senior management and beneficial owners.
  • Ability for supervisors to require passported electronic money issuers, payment service providers and crypto-asset service providers to appoint a central contact point in the host Member State.
  • Powers to national supervisors over the senior management of certain obliged entities.
  • More specific rules on beneficial ownership registers.
  • Provisions regarding FIUs and supervisors, including requirement for supervisory colleges where an institution is based in a number of Member States.


Digital assets in the UK


WHAT IS THIS?  UK consultations and exploratory measures in respect of digital assets including digital currencies.

WHO DOES THIS APPLY TO?  Potentially all persons issuing, holding or carrying on activities in respect of digital assets.

WHEN DOES THIS APPLY? Not yet known.

2021 saw the initiation of a number of UK consultations and exploratory measures in respect of digital assets which are expected to continue into 2022.  We discuss some of the most important of these below.

HM Treasury consultation on digital assets and stablecoins

In January 2021, HM Treasury issued a consultation and call for evidence on digital assets and stablecoins.

It stated that the government intended to focus initially on those areas where risks and opportunities were the most acute. It included a number of proposals including bringing stable tokens (i.e. which stabilise their value by referencing one or more assets e.g. stablecoins) into the regulatory perimeter – starting with stable tokens as a means of payment.  Under the proposals, this would capture firms issuing stable tokens and firms providing services in relation to them, such as custody or execution of transactions. Any rules would be largely based on e-money and payments regulation and include requirements for authorisation, prudential requirements and systems and controls and conduct requirements.

The consultation also asked for more general views including on areas of existing regulation where clarification or amendments are needed to support the use of security tokens; the benefits and drawbacks of distributed ledger technology (DLT) for FMI (particularly trading, clearing and settlement) and how relevant regulation and legislation can be optimised for DLT, and what the UK government and regulators should do to help facilitate the adoption of DLT and new technology across the financial markets and FMI.

It is not yet clear when HM Treasury will issue feedback on this consultation.

Law Commission Call for Evidence on digital assets

The Law Commission issued a Call for Evidence in April 2021 on digital assets which asked for views on the implication of using digital assets, including the potential consequences of digital assets being “possessable” and the transfer of, and taking security over, digital assets.

An interim update in November 2021 stated that a digital assets consultation paper is expected to be published in mid-2022.  This is expected to include consideration of the legal categorisation of certain digital assets and whether they should be considered to fall within a new “third category” of personal property, distinct from things in action and things in possession.

According to the update, the consultation paper will also consider: the acquisition, disposition, derivative transfer of title and competing claims in relation to digital assets; the taking of security over digital assets; custody relationships in respect of digital assets, and how legal remedies or actions can protect digital assets.

Central Bank Digital Currency

During the course of 2021, the BoE and HM Treasury have been carrying out work to explore the possibility of introducing a Central Bank Digital Currency (CBDC) in the UK. 

This would be a new form of digital money issued by the BoE for use by households and businesses and would exist alongside cash and bank deposits.

In a statement in November 2021, the BoE and HM Treasury announced that they will launch a consultation in 2022 which will set out their assessment of the case for a UK CBDC.


CPMI and IOSCO consult on application of PFMI to stablecoin arrangements


WHAT IS THIS?  Consultation on applying the Principles for Financial Market Infrastructures to certain stablecoin arrangements. 

WHO DOES THIS APPLY TO?  Persons operating systemically important stablecoin arrangements.

 WHEN DOES THIS APPLY? Not yet known.

The International Organization of Securities Commissions (IOSCO) and the Committee on Payments and Market Infrastructures (CPMI) issued a consultative report on the application of the PFMI to stablecoin arrangements (SAs). 

The report proposed that "systemically important" SAs which perform a transfer function (i.e. for the transfer of coins between users) should comply with the relevant principles set out in the PFMI.  The PFMI include guidance on governance, risk management and settlement arrangements. 

In effect, this means that systemically important SAs will be subject to some of the same regulation as existing FMI, such as CCPs and securities settlement systems.

The report suggests four overarching principles to take into account when assessing the systemic importance of an SA: size of the SA; nature and risk profile of the SA's activity; interconnectedness and interdependencies of the SA, and substitutability of the SA. 

The purpose of the report is to provide specific guidance on the application of some of the principles of the PFMI to systemically important SAs, taking into account the unique features of those arrangements compared to other FMI, such as the use of non-bank assets in settlement, multiple interdependent functions and decentralisation.  In particular, the report includes guidance for systemically important SAs in respect of their governance arrangements (e.g. taking into account the fact that governance may be partially or fully decentralised), guidance on the management of risks (including those specific to SAs such as the fact that they may perform a range of different, independent functions) and discussion of issues around settlement (including potential misalignment between technical settlement and legal finality).  Systemically important SAs should also observe any other relevant principles of the PFMI.

It is not yet clear when (or if) the report will be formally adopted but further follow up work is expected in 2022.


Smart contracts in English law


WHAT IS THIS?  Opinion of the Law Commission on the status of smart legal contracts in English law.

WHO DOES THIS APPLY TO?  All counterparties or potential counterparties to smart legal contracts.


The Law Commission published a report summarising its findings as to how the existing law of contract in England and Wales can apply to smart legal contracts.  It defined smart legal contracts as "legally binding contracts in which some or all of the contractual obligations are defined in and/or performed automatically by a computer program".  The Law Commission did not think that it was necessary for there to be the involvement of DLT for a contract to be a smart legal contract.  It also suggested that there could be "hybrid smart legal contracts" where some contractual obligations are defined in natural language and others in computer code.

The report concluded that the current legal framework is able to facilitate and support the use of smart legal contracts, in much the same way as traditional contracts.  Therefore it would be conceptually possible for a smart legal contract to meet the requirements to be a binding contract but, whether it does so in practice, would ultimately depend on the facts. 

However, the position may be different in the case of deeds, due to their additional formality requirements, and it is not certain that a smart legal contract could be used to create an enforceable deed.

The Law Commission also identified a number of particular issues and additional complexities may arise in certain circumstances with smart legal contracts, such as the allocation of risk in the event of errors in the underlying code and the interpretation of the terms of the contract where these are in code.  However, in general, it thought that the current legal framework could accommodate these.  In addition, the Law Commission thought it likely that the market would develop established practices and model clauses for use in the negotiation and drafting of smart legal contracts.


EU Digital Finance Strategy


WHAT IS THIS?  Proposed new EU legislation on digital finance including digital operational resilience, markets in crypto-assets and digital risks.

WHO DOES THIS APPLY TO?  Most EU financial services entities and also certain non-authorised entities.  Certain non-EU entities operating in the EU (which will include some UK firms). 

WHEN DOES THIS APPLY? Not yet known.

The EU's Digital Finance Strategy continued its progress through the EU legislative process.   As discussed in our previous briefings, the EU issued in 2020 four proposed new pieces of legislation comprising a wide range of digital finance rules, including on digital operational resilience, markets in crypto-assets and DLT market infrastructures.  These pieces of legislation continued to be reviewed by the European Parliament and European Council.

Those previous briefings can be found in OverviewImplications for market infrastructure and Implications for ICT service providers.

Following negotiations and some amendments, the Regulation on a pilot regime for DLT market infrastructures has been agreed between the European Parliament and European Council.  This sets out a pilot regulatory regime, effective for three years, allowing DLT multilateral trading facilities, DLT settlement systems and DLT trading and settlement systems to provide services for the trading and settlement of transactions in certain crypto-assets that qualify as financial instruments.  The Regulations will come into force once they have been formally adopted by the European Parliament and European Council and published in the Official Journal.


Fintech in payments


WHAT IS THIS?  The increasing importance of fintech in UK and EU payments regulation.

WHO DOES THIS APPLY TO?  Firms providing payment services.

WHEN DOES THIS APPLY? No specified date.

See our round-up of UK and EU payments initiatives in Section 9 below - among other things, these focus on the emergence of new technologies and how fintech can help facilitate operations in the sector.

Markets and trading

Review of the UK Securitisation Regulation


WHAT IS THIS?  A post-Brexit review of the functioning of the 'onshored' version of the Securitisation Regulation

WHO DOES THIS APPLY TO?  Securitisation issuers, originators, "institutional investors" (including AIFMs)

WHEN DOES THIS APPLY? The review has been presented to Parliament. Although reforms are under consideration, no specific legislative amendments or timelines are currently proposed

In June 2021, HM Treasury published a Call for Evidence to inform its review of the retained EU law version of the Securitisation Regulation (UK Sec Reg) which looked at how it might be tailored to suit the UK securitisation market following the exit from the European Union. Under Article 46 of the UK Sec Reg, HM Treasury is under a legal obligation to review the functioning of the regime and lay a report in Parliament by 1 January 2022. On 13 December 2021, the Treasury met that obligation by publishing its Report and call for evidence response in which it considered the responses it had received and set out its conclusions:

  • generally, the Treasury found it difficult to draw definitive conclusions on the effect of the UK Sec Reg on the UK securitisation market - the EU-derived legislation has only been effective since 2019 and since then the financial markets have been disrupted, not least because of the COVID-19 pandemic;
  • despite that, there are signs that the transparency and robustness of the UK securitisation market have improved, although the UK Sec Reg may not have boosted securitisation issuance or widened the investor base as much as it could have;
  • while the Treasury continues to support the UK Sec Reg, the Regulation may nevertheless benefit from targeted amendments - areas that may be "usefully re-visited" in the ongoing monitoring of the market by HM Treasury, PRA and FCA include the following (though no concrete proposals are made at this stage): work on the disclosure requirements, especially focusing on the distinction between different types of securitisation (i.e., whether they are public or private) and whether the disclosure requirements for certain private securitisations are appropriate;
  • in terms of some specific amendments that the Treasury will be considering are:
    • amendments or clarifications to matters of scope – including removing certain unauthorised, non-UK AIFMs from the definition of "institutional investor" (i.e., so that they would not be subject to the due diligence requirements under the UK Sec Reg);
    • clarifying due diligence requirements for investors when they invest in non-UK securitisations;
    • the introduction of a simple, transparent, and standardised (STS) equivalence framework;
    • whether there should be changes to the risk retention requirements;
    • the possible expansion of the disclosure templates to require more information about a securitisation's environmental, social and governance (ESG) impact.

The prudential treatment of securitisation is not technically within the scope of the review, because these requirements sit outside the UK Sec Reg. However, the Treasury's report does consider the extensive industry responses it received on the capital and liquidity treatment of securitisation and recognises that this is a matter of priority. However, where that treatment is consistent with the Basel standards, it does not see a justification for change. It is also not currently minded to introduce synthetic securitisations into the UK STS framework. Basel 3.1 reforms will be the responsibility of the PRA which is expected to consult in H2 2022 (see [internal link to UK Capital Requirements Regulation – CRR II and Beyond]

At this stage, therefore, no concrete drafting changes are proposed, although there are some specified areas of reform which are under consideration. Those potential reforms need to be seen against the wider backdrop of the UK's Future Regulatory Framework review, on which the government consulted in November 2021 (see Section 10, Financial Services Future Regulatory Framework Review). Among other things, this proposes that the UK regulators will have more devolved powers to shape regulatory requirements themselves.


EU Credit Servicers and Credit Purchasers Directive


WHAT IS THIS?  The EU Credit Servicers and Credit Purchasers Directive

WHO DOES THIS APPLY TO?  EU credit institutions, EU credit servicers, EU and non-EU credit purchasers (the latter will need to appoint an EU representative) and EU representatives

WHEN DOES THIS APPLY? 30 December 2023; for those entities that are carrying on credit servicing activities on that date, the deadline for obtaining authorisation under the Directive is 29 June 2024

After being originally proposed back in 2018, the EU Directive on credit servicers and credit purchasers (Credit Servicers Directive) finally crossed the legislative "finishing line" and was published in Official Journal on 8 December 2021. EU Member States must now transpose the Directive into national law by 29 December 2023 at the latest: the measures must apply from 30 December 2023. Any EU firms carrying on credit servicing activities on that date must have obtained authorisation from their home state competent authority by 29 June 2024.

The Credit Servicers Directive provides for a new pan-EU regime for persons carrying on credit servicing activities in relation to non-performing credit agreements (non-performing loans/NPLs): as defined in the Directive this catches:

  • credit servicers who act on behalf of a credit purchaser in respect of an NPL (or a creditor's rights thereunder) and which carry out the administration of an NPL (including administration of interest payments, collection of principal amounts, sending notice and other activities affecting recovery);
  • credit purchasers of NPLs (or a creditor's rights thereunder) either from the issuer itself, or from other credit purchasers.

In either case, the NPL must have originally been issued by a credit institution established in the EU. It follows that any servicing or purchasing of NPLs that are not issued by EU credit institutions are not caught, except where the credit agreement and/or the creditor's rights thereunder are replaced by a loan issued by such a bank. So, any loans issued by UK and other third country banks or by non-bank lenders (wherever they are located) will not be caught (although, see below in relation to the discretion of Member States to require an EU representative designated by an non-EU credit purchaser to appoint a credit servicer in respect of other types of credit agreement).

There are some additional important exclusions which limit the scope of the Credit Servicers Directive. It does not apply to:

  • any servicing or purchasing activities carried out by EU-established credit institutions;
  • servicing activities carried out by EU alternative investment fund managers (AIFMs) or EU UCITS management/investment companies;
  • servicing activities carried out by EU non-bank lenders subject to supervision under the EU Consumer Credit Directive (EU CCD) or the EU Mortgage Credit Directive (EU MCD);
  • any transfers of NPLs before 29 June 2024 (i.e., the date on which the Directive must be transposed into EU Member States).

It will be noted that, despite industry calls for one, there is no exclusion for MiFID investment managers.

The final version of the Credit Servicers Directive includes some useful narrowing of certain definitions and provisions compared to previous drafts. In terms of the finalised requirements, at a very high level:

  • As regards EU credit institutions selling NPLs:
    • they will be required to provide disclosures to the prospective credit purchaser containing information regarding the creditor's rights under the NPL, and the relevant collateral – this will have to be on a template to be specified by the EBA under technical standards;
    • they will be required to provide, on a twice-yearly basis, certain information to the EU competent authorities in the home and host states;
  • As regards credit servicers:
    • They will be required to obtain authorisation in their home member state, subject to the satisfaction of certain conditions and prescribed application requirements; if carrying on credit servicing activity on 30 December 2023 they will have until 29 June 2024 to obtain authorisation from their home state competent authority;
    • There will be record keeping requirements;
    • Rules will dictate certain contractual requirements between a credit servicer and a credit purchaser, such as a detailed description of the credit servicing activities to be caried out, how much remuneration the credit servicer is receiving (or how the remuneration is to be calculated) and the extent to which the credit servicer can represent the credit purchaser in relation to the underlying borrower;
    • Certain conduct of business-type obligations (to be imposed by the relevant EU Member State) will apply to the relationship with the borrower, and in relation to the transfer and subsequent communications;
    • Conditions will apply to the outsourcing by a credit servicer of its activities to a credit service provider;
    • A passport will be available to allow credit servicing activities to take place on a cross-border basis;
  • As regards credit purchasers:
    • Those domiciled or established in the EU must appoint a credit servicer (or an "exempt" EU credit institution or non-bank lender under the EU CCD or EU MCD) to perform credit servicing activities in respect of those NPLs concluded with consumers;
    • Those which are not domiciled or established in the EU must designate a representative in the EU who will be responsible for the performance of that non-EU credit purchaser; in turn, the representative (if not a credit servicer itself) will be required to appoint a credit servicer where the borrower is a natural person or a micro, small or medium-sized enterprise (SME) – host Member States have the discretion to extend this requirement to credit agreements other than those within the scope of the Directive (although it is not entirely clear on the wording of the Directive whether this is restricted to situations where the borrower is a natural person, or whether it extends to SME borrowers as well);
    • As with credit servicers, certain conduct of business-type obligations (to be imposed by the relevant EU Member State) will apply to the relationship with the borrower, and in relation to the transfer and subsequent communications.

While the main elements of the Directive will impact directly on EU participants in the EU NPL market, UK and other non-EU firms will, depending on the extent to which they seek to penetrate that market, be affected. Note that a UK or other non-EEA AIFM will not be able to rely on the servicing exemption for AIFMs because they will not be authorised or registered under EU AIFMD (and in any event the exemption does not apply to credit purchasing). As outlined above, any UK or other non-EU firm that is a credit purchaser of an in-scope NPL (i.e., one originally issued by an EU credit institution) will have to appoint an EU representative and, in this regard, it is possible that individual Member States may exercise their discretion to extend the Directive's requirements to credit agreements that are not issued by an EU bank. In addition, since there is no exemption under the Directive for MiFID investment managers or other investment firms, any in-scope servicing activities carried on by such entities (whether established in the EU or not) might trigger the authorisation requirements, unless a third-party EU credit servicer is appointed.

There are currently no plans for a UK measure analogous to the Directive though UK firms which advise or manage funds investing in EU secondary credit will be indirectly affected by the EU changes.

Beyond the Credit Servicers Directive, there are other initiatives in play at an EU level relating to the functioning of the European NPL market. In particular, developments (which could lead to future legislative changes) coming out of the EU's NPL Action Plan should be monitored.


EU Securitisation Regulation


WHAT IS THIS?  Draft RTS setting out the underlying rules relating to the EU securitisation risk retention requirement and a consultation on the EU securitisation framework which could lead to amendments to the EU Securitisation Regulation

WHO DOES THIS APPLY TO?  Risk retainers within the scope of the EU Securitisation Regulation and other participants in the EU securitisation markets.

WHEN DOES THIS APPLY? Not yet known.

The European Banking Authority (EBA) published a consultation paper on 30 June 2021 relating to a draft set of regulatory technical standards (RTS) setting out underlying rules that will apply to originators, sponsors and original lenders caught by the EU Securitisation Regulation (EU Sec Reg).  The draft RTS, in very broad terms, supplements the high-level requirements contained in the EU Sec Reg, which, among other things, requires originators, sponsors and original lenders to hold a 5% net economic exposure in relation to the relevant underlying securitisation.  Under the EU Sec Reg this is a direct requirement applicable to the risk retainer, in addition to being an indirect requirement (insofar as EU institutional investors are required to check that a relevant risk retainer holds the 5% retention) ahead of investing in the securitisation.  Other rules under the EU Sec Reg also include requirements on originators if they are to qualify as such under the rules.

The EBA previously adopted a similar RTS concerning risk retention in 2018.  However, those RTS did not enter into force as further tweaks were felt to be required in response to COVID-19.  This latest draft RTS are therefore the EBA's updated proposals.  The draft RTS are currently subject to consultation and, when final, will be submitted to the European Commission for adoption.  The RTS will then be subject to scrutiny by the European Parliament and the Council before being published in the Official Journal and entering into force.

The draft RTS elaborate on the risk retention requirement and the means by which originators, sponsors and original lenders must comply with it.  In this regard, the draft RTS set out more detail on:

  • the ways in which the risk retention may be held;
  • how the risk retention should be measured;
  • the prohibition on originators, sponsors and original lenders hedging or selling the retention stake; and
  • of concern to originators, further detail relating to the "sole purpose" test (readers may recall that the EU Securitisation Regulation prohibits originators being established for the "sole purpose" of securitising exposures).

In relation to the "sole purpose" test, it is understood that the EBA's intention is not to narrow or broaden the underlying requirements as set out in the 2018 RTS.  However, in the current draft RTS, originators must take into account various considerations relating to the originator's substance and governance.  In particular, the originator must not rely on its risk retention business as its sole or predominant source of revenue.  It is not clear from the draft what "predominant" means in this context and it is possible that respondents to the EBA's consultation may have sought to clarify this.

The draft RTS also set out some additional technical and detailed requirements concerning non-performing exposure securitisations; the impact, on the risk retention requirement, of fees payable to a risk retainer; further clarity as to how the risk retention requirement applies in the context of a re-securitisation (where permitted); and asset selection (i.e. anti-cherry picking) requirements.  The EBA also omitted certain requirements contained in the 2018 RTS in order to more closely align the draft RTS to the EBA's mandate to produce these.   

It is also worth noting that, while these RTS are in the process of being finalised, the European Commission also commenced a consultation on the functioning of the EU securitisation framework, which could entail further changes to the EU Sec Reg (which itself only came into force in 2018) in the coming years.  Although it is too early to say where changes could be made, market participants will want to monitor the outcome of this consultation and any legislative proposals made off the back of it (particularly around some of the uncertainties under the current rules, namely the application of certain requirements to non-EU alternative investment fund managers, which, owing to the drafting of the EU Sec Reg, has always been unclear).  Other areas where the market may advocate for further changes and refinements could include the due diligence requirements; permitting AIFMs and UCITS management companies to qualify as sponsors; and the extension of the simple, transparent and standardised or "STS" regime to actively managed securitisations (e.g., CLOs), among other areas.

Financial markets infrastructure

UK CCPs resolution regime


WHAT IS THIS?  Expanded resolution regime for UK CCPs.


WHEN DOES THIS APPLY? Not yet known.

In February 2021, HM Treasury published a consultation paper on an expanded resolution regime for UK CCPs.  This would expand the existing resolution regime for UK CCPs as set out in the Banking Act 2009 giving the BoE additional powers to mitigate the risk and impact of a CCP failure and the subsequent risks to financial stability and public funds.

The expanded resolution regime would give the BoE the power to require a CCP to make ex ante changes to its arrangements to remove potential barriers to resolvability and the ability to place a CCP into resolution before the CCP’s own recovery measures have been exhausted where a continuation of such measures would likely “compromise financial stability”.

The BoE would also be able to take control of a CCP without having to rely on its existing property or share transfer powers and direct a CCP to remove or replace directors and senior executives and appoint temporary managers in severe circumstances (i.e. where there is a rapid deterioration in the financial situation of the CCP and it is therefore at risk of failing, or if there is an infringement by the CCP of a relevant requirement).  In addition, the BoE would be able temporarily to restrict or prohibit any remuneration of equity in severe circumstances and to return the CCP to a "matched book".

Creditors of the CCP (e.g. clearing members and, where they are direct creditors of the CCP, clients) would have a right to compensation if they are left worse off in a resolution than they would have been in the absence of such a resolution under the no creditor worse off (NCWO) safeguard. 

The BoE would be able to deviate from a CCP’s rules and arrangements.  In particular, it would have powers to suspend a clearing member's right to early termination of its participation where this arises as a result of the CCP being placed in resolution and to delay enforcement of a clearing member’s obligations if this would present a risk to financial stability. 

There would also be other financial powers for the BoE including a power to perform variation margin gains haircutting and a power to write down unsecured liabilities and collect cash contributions from clearing members.  CCPs would also be required to hold a second ring-fenced tranche of their own capital

As a last resort, public funds could be used for compensation.


UK CCPs - Supervisory Stress Testing


WHAT IS THIS?  The first public supervisory stress test (SST) of UK central counterparties.

WHO DOES THIS APPLY TO?  The UK CCPs: LCH Limited, LME Clear Limited and ICE Clear Europe Limited.

WHEN DOES THIS APPLY? The 2021-22 exercise is already in train.

In June 2021, the Bank of England published a Discussion Paper on the Supervisory Stress Testing of Central Counterparties. This set out a range of proposals and options for the design of the Bank's UK CCP supervisory stress-testing framework and sought feedback by 17 December 2021. The proposals included the following:

  • Supervisory stress tests (SSTs) should assess both credit risk and liquidity risk and include market shock scenarios – views were sought on what scenarios to include;
  • SSTs should also include sensitivity analysis and reverse stress testing;
  • SSTs should be undertaken on an annual basis, and run over a nine-month basis.

On 19 October 2021, while the feedback period was still open, the Bank announced the launch of the first public SST of the three UK central counterparties (UK CCPs): ICE Clear Europe Limited, LCH Limited and LME Clear Limited. The exercise is taking place over 2021-22 and will look at the system-wide credit and liquidity resilience of the UK CCPs. It will include an examination of the consequences of the UK CCPs' actions for other parts of the UK financial system and an assessment of the systemic effects associated with the fact that all three UK CCPs will be subject to, and have to respond to, the same stress events at the same time. Since this is the first SST, the exercise will be exploratory in nature and the outcome and findings will be used in conjunction with industry feedback to the Discussion Paper to further develop and refine the Bank's regime going forward.

As the Discussion Paper posited, the first SST will include both a credit component and a liquidity component:

  • The credit component will test the sufficiency of the UK CCPs' resources to withstand a combination of market stress scenarios and clearing member defaults;
  • The liquidity component will test the ability of UK CCPs to service all relevant cash requirements under a combination of market stress scenarios and the default and non-performance of clearing members and service providers;
  • Both components will include an examination of concentration costs.

Other aspects of the first SST exercise include:

  • The application of four market risk scenarios of increasing severity;
  • Reverse stress testing to examine the impact of increasingly severe assumptions regarding market stress severity, concentration costs and the number of defaulters and to test combinations of assumptions likely to deplete UK CCP resources beyond normally accepted levels.

The SST exercise will be applied to the UK CCPs' resources, exposures and market prices as of the close of business on 17 September 2021, across a stress test horizon of five days.

The Bank will publish the findings of the 2021/22 SST exercise in summer 2022. Presumably then – or, more likely, at some point after that - the Bank will publish further developments of its UK CCP SST in the light of the 2021/22 findings and feedback from the 2021 Discussion Paper.


EU CCP Recovery and Resolution Regime


WHAT IS THIS?  The incoming regime established by the EU CCP Recovery and Resolution Regulation.

WHO DOES THIS APPLY TO?  EU central counterparties (EU CCPs).

WHEN DOES THIS APPLY? 12 August 2022 (with some exceptions).

Regulation (EU) 2021/23 on a framework for the recovery and resolution of central counterparties (the EU CCP Recovery and Resolution Regulation) was published in the Official Journal on 22 January 2021 and entered into force on 11 February 2021. It will largely apply from 12 August 2022, except that:

  • Amendments that the Regulation makes to Article 54, EU Markets in Financial Instruments Regulation are deemed to have applied retrospectively from 4 July 2020 – these essentially relate to the application of access rights as regards exchange-traded derivatives and the amendments enabled EU CCPs to apply to their competent authority, before 11 February 2021, for permission to avail themselves of the transitional rights to disapply access rights until 3 July 2021);
  • Amendments that the Regulation makes to the European Market Infrastructure Regulation (EU EMIR) regarding the introduction of new Article 13a EU EMIR (the replacement of interest rate benchmarks in legacy trades) applied as from 11 February 2021;
  • Certain provisions in Articles 9 and 10 concerning recovery plans will apply as from 12 February 2022;
  • Certain provisions in Articles 9 and 10 concerning the use of an EU CCP's prefunded dedicated own resources and the compensation of non-defaulting clearing members will apply from 12 February 2023;

In brief outline, the Regulation – which was based on the Bank Recovery and Resolution Directive - sets out a recovery and resolution framework largely based on a three-step "lifecycle" approach:

  • Prevention and preparation: EU CCPs and resolution authorities will be required to draw up recovery and resolution plans on how to handle any form of financial distress that would exceed an EU CCP’s existing resources - these include “default events” (one or more clearing members failing to honour their obligations) and “non-default events” (e.g., business failure incurring losses) – resolution authorities will be able to require an EU CCP to take measures to address identified resolvability obstacles.
  • Recovery measures: EU CCPs will be able to take specific recovery measures, including cash calls to non-defaulting clearing members, the reduction in value of daily collateral (variation margin gains haircutting) and the use of the EU CCP’s own resources (an additional, pre-funded “second skin in the game” to be used by the EU CCP after the default fund). Resolution authorities will have the power to intervene at an early stage.
  • Resolution tools: in the event of an EU CCP failure, EU competent authorities will have a number of tools at their disposal: including the partial termination of the EU CCP’s contracts, variation margin gains haircutting, the write-down of CCP capital, a cash call to clearing members, the sale of the CCP or parts of its business or the creation of a bridge CCP.

Other elements of the EU CCP Recovery and Resolution Regulation include requirements relating to the designation by EU Member States of resolution authorities and the establishment of resolution colleges for individual EU CCPs.

The Regulation includes a number of mandates to the European Securities and Markets Authority (ESMA) to draft regulatory technical standards (RTS) and guidelines. On 18 November 2021, the European Securities and Markets Authority (ESMA) published six consultations seeking views on how to implement those mandates:

All the above consultations close on 24 January 2022. ESMA will consider the responses to the consultations and intends to publish final reports by Q2 2022.


Senior Management and Certification Regime for FMI


WHAT IS THIS?  Proposed Senior Management and Certification Regime for FMI.

WHO DOES THIS APPLY TO?  UK FMI including CCPs, CSDs and payment systems recognised under the Banking Act 2009 and specified service providers to such payment systems.

WHEN DOES THIS APPLY? Not yet known.

HM Treasury issued a consultation paper proposing the creation of a Senior Managers & Certification Regime (SMCR) for FMI.

This would apply to central counterparties, central securities depositories and payment systems recognised under the Banking Act 2009 and specified service providers to such payment systems.

The proposed SMCR would include a Senior Managers Regime, a Certification Regime and Conduct Rules. It would be largely based on the SMCR regimes applicable to other financial services firms.

There is currently no target date for implementation of the SMCR but there will be further public consultation from the BoE on the detail of the proposed regime.

We discussed the proposals in more detail in our briefing.


UK and EU Payments - round-up


WHAT IS THIS?  Reviews of the UK and EU payments regulation.

WHO DOES THIS APPLY TO?  Firms providing payment services.

WHEN DOES THIS APPLY? No specified date.

The payments landscape continues to evolve, particularly in light of new technologies and new entrants to the sector.  As a result, regulators are continuing to consider how the sector can be made more efficient and competitive while also ensuring the requisite levels of consumer protection.

In the UK, the Payments Landscape Review is continuing (see below).  The Payment Systems Regulator (PSR) has issued its framework on central infrastructure services under the New Payments Architecture (NPA) (see below) and also a consultation paper on authorised push payment (APP) scams. 

The European Banking Authority is due to start work on a review of the EU Payment Services Directive with a view to potential legislative amendments and has proposed new rules on the transfer of crypto-assets (see below).

At an international level, the CPMI issued a consultative report on extending and aligning payment system operating hours for cross-border payments as well as a request for views on ways to expand payment-versus-payment settlement to a wider range of foreign exchange transactions.

Call for evidence on Payments Landscape Review

HM Treasury published its response to its 2020 Call for Evidence on the Payments Landscape Review which forms part of its legislative work on the UK payments industry.  This contained a number of observations and recommendations for the UK government, regulators, and industry to meet the government’s vision for a competitive payments sector at the forefront of technology and innovation, with stable, reliable and efficient payment systems and which operates for the benefit of end users.

HM Treasury observed that preventative measures and reimbursement mechanisms are needed to ensure the right level of protection for consumers using Faster Payments when a payment goes wrong, including as a result of APP scams. This may need to be achieved through further regulation.   It also recommended that further work should be done on Open Banking enabled payments i.e. making payments directly from accounts rather than a credit or debit card.

From a policy perspective, the response stated that the government would support the timely and effective implementation of the G20 roadmap to enhance cross-border payments and that the government will consult on bringing systemically important firms in payments chains into BoE regulation and supervision in the first half of 2022.

New Payments Architecture

The PSR issued its policy statement on the regulatory framework for the NPA central infrastructure services.

This sets out the framework for the operation of the central infrastructure services (CIS) under the NPA - the proposed regime for the clearing and settlement of most interbank payments, replacing Bacs and Faster Payments.

Under the framework, Pay.UK, the operator of Bacs and Faster Payments would be responsible for procuring the CIS and for certain aspects of its operations, including being the primary decision-maker for the provision of the CIS, being the primary interface for the CIS user, setting CIS user prices and setting the CIS's rules and standards.  The framework sets out the obligations that would apply to Pay.UK in carrying out these functions and is aimed at ensuring that the operation of the CIS does not stifle or distort competition and facilitates innovation.

The framework also includes obligations for the CIS provider, again aimed at ensuring that there is no stifling or distortion of competition, including a requirement for operational separation between the CIS functions and other payment systems or services provided by the CIS provider or its affiliates. 

The NPA is still at a very early stage and the identity of the CIS provider is not yet known.  It is currently expected that the go-live date will be mid-2024.

Regulation on Transfers of Funds 2015

The European Commission has issued a revision to the Regulation on Transfers of Funds 2015 to extend its scope to include transfers of crypto-assets made by crypto-asset service providers.  The proposals would also introduce obligations on the crypto-asset service providers of the originator and beneficiary in the case of a transfer of crypto-assets regarding the information to accompany such transfers.

It is not yet known when the changes, if adopted, would take effect.


EU Central Securities Depositaries Regulation


WHAT IS THIS?  Updates to the EU CSDR settlement discipline regime and proposed review of CSDR.

WHO DOES THIS APPLY TO?  EU CSDs – although there could be indirect impact for buy-side firms, brokers and other financial market participants.

WHEN DOES THIS APPLY? Not yet known.

Settlement discipline

Mandatory buy-in rules

Following calls for a further postponement of the mandatory buy-in framework under the settlement discipline regime in the EU CSDR, including from ESMA, the mandatory buy-in framework will no longer come into effect on 1 February 2022.  This reflects concerns from market participants around ongoing uncertainties in some aspects of the buy-in rules.   At the time of going to press, there is no official revised date for the rules to come into effect. The penalties regime has not, however, been postponed and will come into effect on 1 February 2022.

Publication of bond trading information

ESMA also announced that it would start publishing information on trading venues with the highest turnover for bonds in order to allow CSDs to apply cash penalties under EU CSDR by 1 February 2022 and would update it on a quarterly basis.

Review of EU CSDR

In July 2021, the European Commission published its delayed report following its review of the EU CSDR.

In general, it found that EU CSDR was achieving its original objectives to enhance efficiency of settlement in EU and the soundness of CSDs and that, in most areas, significant change now would be premature.

However, the report did identify some areas where the European Commission thought further action may be required, possibly through further legislation known as CSDR REFIT.  

The proposed changes included clarifying and simplifying certain requirements related to the provision of services by CSDs.  These included the requirement for the annual review and evaluation of CSDs and the passporting requirements.

It was also thought that there should be enhanced co-operation amongst EU supervisory authorities and strengthened supervisory convergence which could, for example, be through mandatory colleges or RTS from ESMA.

As regards the ability to settle in commercial bank money, the report thought that it was necessary to assess whether some of the requirements should be simplified and made more proportionate. The European System of Central Banks was also invited to consider how to facilitate access to central bank services on a cross-border basis.

The report also thought that consideration should be given to amending the settlement discipline framework, particularly the mandatory buy-in rules, given the perceived disproportionate burden and lack of clarity.

In the case of third-country CSDs, there was little appetite for a comprehensive third country framework for the recognition and supervision of third-country CSDs but the report suggested that further improvements to the current regime could be considered, including revisiting the grandfathering clause and introducing a notification requirement.

Finally, the report also recommended that further consideration be given to the use of technology by CSDs and whether existing supervisory convergence tools could be used or whether amendments to existing RTS might be required.

UK financial services regulation

Financial Services Future Regulatory Framework Review


WHAT IS THIS?  The future regulatory framework for UK financial services.

WHO DOES THIS APPLY TO?  It applies directly to the UK government, HM Treasury, the FCA, the PRA and the Bank of England but is also of interest to persons subject to financial services legislation.

WHEN DOES THIS APPLY? Not yet known.

Following a consultation in late 2020, HM Treasury has issued its Proposals for Reform (Proposals) under the Financial Services Future Regulatory Framework Review.  Interested stakeholders must provide their comments on the Proposals by 9 February 2022.

The Proposals set out HM Treasury's vision for the future regulatory framework for UK financial services following the UK's departure from the EU, including the roles of Parliament, the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Bank of England (BoE). 

As a general matter, the FCA and PRA (and, to a lesser extent, the BoE) (together the UK Regulators) would take on increased responsibility for direct regulatory requirements which apply to firms.  Parliament would be responsible for setting the strategic framework and objectives for financial services regulation and holding the UK Regulators to account.

Under the Proposals, it is intended that the UK Regulators would take over responsibility for the direct regulatory requirements currently set out in retained EU law.  Over time, retained EU law would be deleted from UK legislation and incorporated into the UK Regulators' rulebooks.  That process is expected to take a number of years.  Although in many cases, it is expected that the rules in the UK Regulators' rulebooks would replicate existing EU law, in some cases there are expected to be UK-specific amendments.

In the case of financial market infrastructure (FMI), many of the rules and rulemaking powers were derived from EU law and therefore, on leaving the EU, were granted to UK Regulators through UK onshoring legislation.  Under the Proposals, the necessary rulemaking powers would be given to the UK Regulators under new UK legislation.  Affected FMI include trade repositories, credit rating agencies, recognised investment exchanges, payment services and e-money institutions, central counterparties (CCPs) and central securities depositaries (CSDs).

A new Designated Activities Regime (DAR) is also proposed.  This would apply in respect of financial activities which are currently subject to retained EU law but where the applicable rules do not apply solely to FCA and PRA authorised firms, such as the short selling rules and the margin rules for derivatives.  Under the DAR, the UK Regulators will have the power to determine the rules that will regulate these designated activities.  These powers would be on a more limited basis than the FCA and PRA's powers in relation to authorised persons and would only be in respect of the designated activities and not other unrelated activities of the relevant person.  There would also be enforcement mechanisms and penalties for failure to comply with the relevant rules.  The DAR could be extended to other activities in the future.

As many rules would be transferred to the UK Regulators, there would be increased rights of scrutiny for HM Treasury.  These include a new statutory requirement for the FCA and PRA (through its Prudential Regulation Committee) to respond to HM Treasury recommendations and a new power for HM Treasury to be able to require the UK Regulators to review their rules where the government considers that it is in the public interest.  The FCA and PRA would also be required to publish and maintain a framework for how they conduct rule reviews. 

There would also be a new power for the government to require the UK Regulators to "have regard" to certain public policy considerations when making rules or make rules in specific areas of regulation in order to address public policy concerns.

The UK intends to increase its use of deference mechanisms, including through equivalence decisions and Mutual Recognition Agreements with overseas partners.  Regulatory deference is referred to in the Proposals as "a process endorsed by the G20 where jurisdictions and regulators defer to each other when it is justified by the quality of their respective regulatory, supervisory and enforcement regimes".  The Proposals suggest that there should be new accountability mechanisms requiring the FCA and PRA to consider the impact on relevant deference arrangements when making rules and when setting general approaches on supervision, including consultation with HM Treasury.  The FCA and PRA would also need to assess, where proportionate and relevant, whether their rule-making and general approaches on supervision are in compliance with the UK’s obligations under trade agreements.

There would be new secondary objectives for the FCA and PRA in respect of growth and international competitiveness.  As these would be secondary objectives, the FCA and PRA would not be required to do anything which would be inconsistent with their primary objectives.  The FCA and PRA's current obligation to take into account the desirability of sustainable growth in the economy in the UK in the medium or long term would be amended to be clear that such growth should occur in a sustainable way that is consistent with the government’s commitment to achieve a net zero economy by 2050.

Finally, two voluntary panels, the FCA's Listing Authority Advisory Panel and the PRA's insurance sub-committee, would be placed on a statutory footing and the FCA and PRA would be required to disclose more information on their engagement with these panels.  The UK Regulators would also have to have clear and transparent processes for appointing members to their panels in order to increase diversity of membership.


UK Wholesale Markets Review


WHAT IS THIS?  A post-Brexit review of the regulation of the wholesale secondary markets in the UK

WHO DOES THIS APPLY TO?  UK trading venues, UK investment firms

WHEN DOES THIS APPLY? The review is ongoing: responses to the consultation are being considered. A response may be forthcoming shortly – the government is keen to implement changes as soon as possible

In July 2021, HM Treasury published its consultation on the Wholesale Markets Review, a post-Brexit examination of how regulation of the secondary markets, as inherited from EU legislation (the MiFID II framework), might be tailored to reflect the "unique circumstances" of the UK. It is an initiative that it is being conducted alongside the wider Future Regulatory Framework Review, published in October 2020.

In outline, the government proposes simplification of the existing regime governing the wholesale secondary markets, with less prescription than now, including by:

  • clarifying the regulatory perimeter, specifically in relation to technology firms and brokers trading by telephone;
  • reviewing the operating conditions governing multilateral trading facilities (MTFs) and organised trading facilities (OTFs) – including, for example, by looking at whether MTFs should be allowed to engage in matched principal trading; whether investment firms should be allowed to operate a systematic internaliser and an OTF within the same legal entity (currently prohibited); whether the restriction on OTFs executing packaged derivatives trades that include cash equity products should be maintained;
  • removing the quantitative thresholds in the definition of systematic internaliser and reverting to a qualitative definition whereby an SI is determined by its market activity for a particular asset class;
  • removing restrictions under the UK MiFID II transparency regime that that government believes have not (contrary to the policy intention) aided price formation – for instance, by deleting the double volume cap and removing the share trading obligation;
  • recalibrating the transparency regime for fixed income and derivatives (FICC) markets to ensure that the correct instruments are subject to the transparency requirements – for example:
    • by revising the derivatives trading obligation to bring it in line with the onshored version of the EMIR REFIT clearing obligation;
    • by extending the exemption from the derivative trading obligation to all post-trade risk reduction services (not just portfolio compression), subject to conditions;
    • possibly, by removing the admitted to trading or "traded on a trading venue" (ToTV) concept entirely for OTC derivatives and instead determining whether a transaction is centrally cleared (whether mandatorily under UK EMIR or voluntarily);
    • by replacing liquidity calculations for FICC instruments with a qualitative and quantitative assessment, using information similar to that currently used for OTC derivatives subject to the derivatives trading obligation;
    • by limiting the scope of the pre-trade transparency regime to instruments traded (or tradeable) on systems such as electronic order books and periodic auctions;
    • by reducing the number of post-trade transparency deferrals that are available, for instance by removing the "size specific to the instrument" (SSTI), package order and exchange for physical (EFP) deferrals;
  • reviewing the commodities regime to ensure that market activity is not unnecessarily restricted;
  • amending the market data regime to enable participants to identify the best available prices – for instance, by developing a consolidated tape for fixed income data either by changing legislation to enable a private sector tape or having public sector involvement in creating and running a tape.

Although arguably not technically matters for a consideration as part of a review of the wholesale markets, the Treasury also took the opportunity to seek views on how the 10% loss reporting rules for portfolios and contingent liability transactions applies to retail clients (possibly with a view to some relaxation of the requirement) and whether electronic communication should be the default medium for reporting to retail clients. The 10% loss reporting rules in relation to services offered to clients are in any event subject to temporary measures under which the FCA will not take action for breach, subject to certain conditions in the case of retail clients. For services to professional clients, the FCA will not take action for breach if firms have allowed their clients to opt-in to receiving notifications. The FCA recently extended these temporary measures for another year, until 31 December 2022.


FCA: a new Consumer Duty


WHAT IS THIS?  A new Consumer Duty, establishing a duty of care in firms' dealing with consumers (in addition to existing regulatory requirements)

WHO DOES THIS APPLY TO?  UK regulated firms, including EMIs, payment institutions and registered account information providers depending on the nature of their activities

WHEN DOES THIS APPLY? The FCA aims to publish new rules by 31 July 2022 – the latest consultation proposes that they would be effective on 30 April 2023

In May 2021, the FCA published CP21/13: A new Consumer Duty (the "first consultation"). Consultation closed on 31 July 2021. On 7 December 2021, the FCA published a further consultation paper (CP21/36) (the "second consultation") which set out feedback on the first consultation, further policy proposals and draft Handbook text. Consultation closes on 15 February 2022. In the second consultation the FCA said it plans to publish the policy statement and the final rules by 31 July 2022 (the November 2021 Regulatory Initiatives Grid had previously suggested a target date of Q3 2022) – it is currently proposing that firms should have until 30 April 2023 to fully implement the Consumer Duty.

The proposals are a significant and onerous development for retail firms, products and services. The onset of the new rules will not only require considerable application of resources just to prepare for the conduct of new business in future: in addition, firms will have to consider their "back books" and existing products and services.

The new Consumer Duty in outline

In outline and in structural terms, the new Consumer Duty will have three main elements:

  • A new Consumer Principle – replacing Principles 6 and 7 for retail business;
  • Cross-cutting rules – these will set out how firms should act to deliver good outcomes (and clarify the FCA's expectations under the Consumer Principle) and will require firms to:
    • Act in good faith towards retail customers;
    • To avoid foreseeable harm to retail consumers;
    • To enable and support retail customers to pursue their financial objectives;
  • Rules relating to the four outcomes that the FCA wants to see in relation to the Consumer Duty – these relate to:
    • The governance of products and services;
    • Price and value;
    • Consumer understanding;
    • Consumer support.

Diagram: Consumer Duty – The "Pyramidal" Structure (FCA CP21/36, p.33)

Scope and application

In the first consultation, the FCA had proposed applying the Consumer Duty to a standard "retail client" definition across all sectors and businesses, but it had also conflated terms such as "consumer" and "customer" and used them in different contexts, resulting in some confusion as to the intended scope. In the second consultation, there is recognition that this would have been disproportionate. Instead, the FCA now proposes to align the scope of the Consumer Duty with the existing scope of the sectoral sourcebooks. The draft Handbook text in the second consultation therefore introduces a specific definition of "retail customer" for the purposes of the Principles as meaning:

  • In relation to activities to which COBS applies … a customer who is not a professional client (as both those terms are defined);
  • In relation to activities to which BCOBS applies … a banking customer or prospective banking customer (i.e., broadly, a consumer, micro-enterprise or small charity with annual income of less than £1 million);
  • In relation to activities to which ICOBS applies … a policyholder or prospective policyholder (excluding one who does not make the arrangements preparatory to the conclusion of the contract of insurance); and
  • In relation to any other activities, a customer (as defined) – which, broadly speaking, means a client who is not an eligible counterparty.

However, it is not clear that this will necessarily address in full the concerns that respondents raised – for instance, about a "blunt tool" being used to define what a retail consumer is, the application of the MiFID and non-MiFID professional "opt-ups" and whether certain SMEs and high net worth individuals are, or are not, in scope.

Another area of controversy (and confusion) arising out of the proposals in the first consultation, was the application of the Consumer Duty to firms along a distribution chain. The new limb of the definition of "retail customer" outlined above, also expressly extends "any person who is, or would be, the end retail customer in the distribution chain whether or not they are a direct client of the firm". The FCA reiterates what it said in the first consultation paper: i.e., that all firms will need to comply with the Consumer Duty for retail business for their own activities but, generally, would only be responsible for their own activities and would not need to oversee the actions of other firms in the distribution chain. However, while the FCA will generally expect firms with a direct relationship with the end user to have the greatest responsibility under the Consumer Duty, "all firms that have an impact on consumer outcomes will need to consider their obligations". There are some very detailed draft rules in a new chapter on the Consumer Duty (PRIN 2A) on the responsibility of manufacturers and distributors (specifically in the context of the "products and services" and "price and value" outcomes): these are over and above other Handbook rules, such as PROD.

In terms of firms that operate exclusively in the wholesale markets but which are part of a distribution chain for retail products or services, the proposal is that the Consumer Duty will apply to them where they have a material influence over any of the following: the design or operation of retail products or services (including their price and value), the distribution of retail products or services, the preparation and approval of communications that are to be issued to retail clients, or direct contact with retail clients on behalf of another firms. As with the first consultation, the FCA gives the example of an investment bank that designs a structured product for sale to retail customer as being a wholesale firm to whom the Consumer Duty will apply; in contrast, to an investment bank that simply provides wholesale instruments which form component parts of a product that is created by a third-party firm, to whom it would not.

Any authorised firm which approves a financial promotion on behalf of an unauthorised third party (presumably for communication to persons who will be "retail clients") will be subject to the Consumer Duty.

The new Consumer Principle

The first main element of the Consumer Duty, the new Consumer Principle (Principle 12), is that "a firm must act to deliver good outcomes for retail customers". Where the Consumer Duty applies, this Principle 12 will apply instead of Principle 6 (a firm must pay due regard to the interests of its customers and treat them fairly) and Principle 7 (a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading) which will both be disapplied (although, at some risk of confusion, the FCA proposes to provide that existing guidance on Principles 6 and 7 will remain relevant to firms in considering their obligations under the Consumer Duty). Principles 6 and 7 will remain in the Handbook and will continue to apply to conduct outside the scope of the Consumer Duty.

The Cross-cutting Rules

The cross-cutting rules set out the overarching conduct which firms must demonstrate when acting to deliver good outcomes for retail customers and require firms to:

  • Act in good faith towards retail customers – this is a standard of conduct characterised by honesty, fair and open dealing and acting consistently with the reasonable expectations of retail customers. Guidance will indicate that acting in good faith does not require a firm to act in a fiduciary capacity where it is not already obliged to;
  • Avoid foreseeable harm to retail customers – this means firms must be both proactive and reactive in avoiding foreseeable harm. There is some useful guidance (with examples) to the effect that avoiding foreseeable harm is not an absolute obligation and does not mean that the firm has the responsibility to prevent all harm;
  • Enable and support customers to pursue their financial objectives – since the FCA sees the focus of this rule as being not only on enabling but also supporting retail consumers to pursue their financial objectives, the second consultation has added that concept. Where a firm is providing an execution-only or non-advised service, the firm can assume that the financial objectives of the retail customer are to purchase, use and enjoy the full benefits of the relevant product, unless, that is, the firm knows or could reasonably be expected to have known otherwise. Firms which provide advisory or discretionary services can assume that the financial objectives of their retail customers are those that they have disclosed to the firm (e.g., on the fact find) unless it knows or could reasonably be expected to know that the disclosed information is manifestly out of date, inaccurate or incomplete.

Under the first consultation, the FCA had proposed that firms would be required to "take all reasonable steps" to avoid foreseeable harm to consumers and to enable customers to pursue their financial objectives. This wording has been removed on the basis that the FCA wants firms to focus on acting reasonably and on outcomes for their customers, not on process. However, it should be noted that the whole Customer Duty is subject to reasonableness (see below).

The four outcomes

The most detailed rules and guidance in the draft ESG sourcebook are dedicated to the "four outcomes" in the Consumer Duty "pyramid" – these build on the Consumer Principle and the Cross-cutting Rules and set out firms' key obligations in relation to the following:

The Consumer Duty and reasonableness

At first sight, many of the individual obligations under the Consumer Duty appear mandatory and absolute. However, the interpretation of everything is underpinned by a concept of reasonableness. That said, FCA is at pains to stress that what is reasonable under the Consumer Duty is an objective test, not something that firms will be able to define for themselves. It says that it has introduced an "objective standards which firms need to comply with based on the tortious concept of how a reasonable prudent firm would act". The draft rules accordingly include guidance to the effect that all elements of the Consumer Duty must be interpreted in accordance with the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product and making assumptions about the needs and characteristics of its retail customers based on those of an average retail customer. What is reasonable will depend on all the relevant circumstances, including the nature of the product, the characteristics of the retail customer(s) and the firm's role in relation to the product (including its position in the distribution chain).

Implementation issue: The Consumer Duty and SMCR

The second consultation has introduced something that was not discussed in the first consultation: new proposals to amend the SMCR Code of Conduct by adding a new Rule 6 requiring all conduct rules staff to act to deliver good outcomes for retail customers. This individual conduct rule will apply where the firm's activities fall within the scope of the Consumer Duty. New rule obligations underpinning that conduct rule will gloss it by requiring the relevant individual to act in good faith towards retail customers, avoid reasonable harm to them and enable and support them to pursue their financial objectives (i.e., essentially making the individual subject to the same cross-cutting rules that apply to the firm). The new conduct rule will be interpreted in accordance with a reasonableness standard. Where it applies, Rule 4 (requiring the individual to pay due regard to the interests of customers and treat them fairly) will be switched off – i.e., Rule 4 and Rule 6 will be mutually exclusive.

The FCA expects firms to provide training to their relevant staff on these changes – so, in-scope firms will also have to factor such training into their project plans for preparing for the new regime within the implementation period (see above).


The UK's appointed representatives regime: review and amendment


WHAT IS THIS?  A twin-pronged and collaborative review of the UK appointed representatives regime, by HM Treasury and the FCA.

WHO DOES THIS APPLY TO?  All those firms who currently have, or intend to have, appointed representatives ("principal firms") and the appointed representatives themselves.

WHEN DOES THIS APPLY? The FCA expects to publish final rules in H1 2022 – the application date of those rules is not yet set. No specific legislative changes are proposed at this stage, but may emerge following the Treasury's review of responses to the Call for Evidence.

On 3 December 2021, HM Treasury published a Call for Evidence on the appointed representatives regime. This coincided with the publication by FCA of CP21/34: Improving the Appointed Representatives regime. Both consultations close on 3 March 2022. In the consultation paper, the FCA says that it expects to publish final rules in "H1 2022".


The FCA consultation builds on previous thematic reviews of the general insurance sector in 2016 and the investment management sector in 2019, both of which identified shortcomings in the understanding that principals had of their responsibilities for their appointed representatives (ARs). Both the government and the FCA are also responding to the observations that the Treasury Select Committee made in its report on the "Lessons from Greensill Capital" inquiry – i.e., that it appears that the appointed representative regime may be being used for purposes which are well beyond those for which it was originally designed – and that both the government and the regulator should consider reforms to the regime to limit its scope and reduce opportunities for abuse.

In outline, the FCA's consultation focuses on two main areas of change:

  • Imposing additional information requirements on ARs and increased notification requirements for principals
  • Clarifying and strengthening what principals are responsible for and what is expected of them.

In addition, it proposes some "simplifications" to SUP 12 and seeks views on regulatory hosting arrangements and disproportionately large ARs, relative to their principals.

Draft Handbook text is included showing the FCA's proposed amendments.

See below for further details on the FCA's proposals.

The Treasury Call for Evidence floats some possible legislative changes in support of the FCA's actions. These include in relation to:

  • the overall scope of the section 39 exemption, including the regulated activities which ARs are permitted to carry on;
  • the regulatory tools available to the FCA, if it is concluded that the FCA should be empowered to do more to prevent abuse of the AR regime;
  • whether more direct regulatory requirements should be placed on ARs in order to strengthen incentives for regulatory compliance and high standards of conduct – this includes the possibility of applying the SMCR regime to a greater or lesser extent to staff within ARs (currently they are subject to surviving elements of the predecessor Approved Persons Regime (APR));
  • the role of the Financial Ombudsman Service in relation to ARs and their principals where consumers have experienced detriment whilst dealing with an AR.

Changes to information and notification requirements

The FCA proposes tougher requirements on principals to provide the regulator with more information on their ARs and the business they conduct and make notifications to it on the activities the ARs are permitted to undertake and whether the principal intends to start providing regulatory hosting services. The proposals include:

  • principals will be required to provide a great deal more granular information on the AR at least 60 calendar days in advance of the appointment, including: the primary reason for the appointment, the nature of the regulated activities the AR will undertake, details about the non-regulated business of the AR, whether retail clients will be involved, whether the AR was previously appointed by a different principal, whether the AR is part of the group and, if so, information on that group, information about the nature of the financial arrangements between the principal and AR, information on anticipated revenue;
  • after the appointment takes effect, the principal would be required to notify the FCA of any material changes to the enhanced information already provided (see above) and, in any event, would be required to complete an annual verification of those details and confirm that either the details remain accurate, or report changes.
  • Information about the AR's regulated activities for which the principal takes responsibility will appear on the Financial Services Register;
  • principals will have to provide complaints data on their ARs on an annual basis, on a new reporting form;
  • principals will have to provide revenue information on their ARs on a new reporting form, within 30 days of their Accounting Reference Date;
  • firms will be required to notify the FCA of their intention to start providing regulatory hosting services, at least 60 calendar days before the proposed start date (firms that already provide such services will need to notify the FCA immediately upon the new rules becoming effective) – see below on the discussion about potential further changes on regulatory hosting.

Responsibilities of principals and FCA expectations

The key proposals, which in the round address the need for principals to have more robust oversight of their ARs, are as follows:

  • although there is already an expectation (in guidance) that principals should consider whether individuals at ARs meet the fit and proper requirements, this will be clarified to require the managing body at the principal to conduct an annual review and assessment as to whether senior management at the AR remain fit and proper (the rules will include some specific guidance on how to assess competence and capability of individuals at the AR);
  • new guidance will expand upon the meaning of the principal's existing obligation to "take reasonable steps" to ensure that ARs act within the scope of their appointment (to include an expectation that this may include ensuring a high standard of oversight);
  • new guidance will clarify what the FCA means in relation to the existing obligation on principals to ensure that they have "adequate" controls over the AR's intended activities, and resources to monitor and enforce the AR's compliance;
  • in terms of the obligation to monitor growth on the part of the AR, new guidance will specify the circumstances in which such growth will trigger a review of oversight appropriateness;
  • while no changes are proposed to the Threshold Conditions, new guidance in SUP will clarify the FCA's expectations regarding effective oversight of ARs – in essence, principals should have systems and controls to enable them to effectively oversee staff at ARs to a comparable standard as if they were directly employed by the principal;
  • in line with the proposals under the new Consumer Duty (see FCA: a new Consumer Duty above), principals should be ensuring that the activities of the AR do not result in risk of harm to consumers or to market integrity;
  • a new rule will require principals to conduct an annual review on the fitness and propriety of AR senior management, the AR's financial position, the ability of relevant persons to carry on regulated activities at the AR and the adequacy of the principal's controls and resources – if circumstances dictate, the principal will need to conduct such a review more frequently than annually (e.g., if the AR changes its business model, the scope of the AR appointment changes, senior management at the AR changes or the AR enters into a new arrangement with another principal);
  • new guidance will clarify the circumstances in which principal firms should consider terminating or wind down their relationship with ARs;
  • there will be a new requirement for principals to create and maintain a "self-assessment" document – i.e., a written record of how the firm is complying with the enhanced requirements.

Regulatory hosting models

The consultation paper includes a chapter on some additional areas of concern, but in respect of which (by and large) no specific rule changes are currently proposed.

In terms of regulatory hosting, the FCA notes that the number of firms providing such services has grown significantly over the last few years. The model – or, perhaps more accurately, various variations of the model – is considered by the FCA as an area of potential harm, partly because supervision and enforcement work has identified that a commonly occurring theme is that regulatory hosts tend to commit insufficient resources to their oversight of their ARs.

Currently, there is no definition of "regulatory host" in the Glossary: the draft rules include a proposed definition, required because of the new obligation requiring firms to notify the FCA of their intention to start providing regulatory hosting services.  Otherwise, as stated above, there are no specific rules proposed at this stage in respect of regulatory hosting.

Under the draft Glossary definition, a "regulatory host" is, broadly, a firm:

  • that offers or provides a service by which unauthorised persons may become appointed representatives of the firm;
  • that markets or offers that service to unauthorised persons as an alternative to applying for authorisation in return for remuneration;
  • whereby:
    • either the firm itself does not carry on any regulated activities in a principal capacity; or
    • the regulated activities carried on by one or more appointed representatives of the firm are not connected to any regulated activity undertaken by the firm in a principal capacity.

Aside from that definition, as stated, there are no specific policy or rule proposals at this stage. However, the FCA is calling for views on the pros and cons of the regulatory hosting model. Following the multi-firm review of principals and ARs in the investment management sector in 2019, the FCA is specifically seeking views on potential harms from regulatory hosting models in this sector, including the emergence of secondment arrangements (under which the regulatory host allows AR staff to be seconded to it as the principal and who then carry on a range of regulated activities, including those not permitted under the AR regime). In this context the FCA also seeks views on the "host AIFM" model as another example of potential harm highlighted in the 2019 multi-firm review and one in which there may be similar use of secondments.

Despite the absence of proposed draft rules at this stage, the FCA nonetheless signals some potential policy options to address the identified harms with a regulatory hosting model, some of which, it concedes, may need legislative change. These could potentially include:

  • requiring firms that want to provide a regulatory hosting model to obtain specific FCA consent before providing one (this goes further than the currently proposed advance notification requirement outlined above);
  • limiting the range or scope of regulated activities that regulatory hosts can oversee;
  • requiring regulatory hosts to meet a number of requirements that are additional to those that apply to other principals;
  • banning the use of regulatory hosting services altogether.

The last of these would be the most severe response and the FCA acknowledges that such a ban might impact the market significantly. It also acknowledges that the effectiveness of such a ban will turn on the definition of "regulatory hosting"; notwithstanding the fact that the consultation already proposes such a definition (for the purposes of identifying the circumstances in which a firm has the 60-day notification obligation (see above)) the FCA invites view on how best to define the term.

The FCA has not decided which, if any, of these options it might pursue. It is working with the Treasury on the question of whether the perceived harms require measures.

For more discussion on the impact that the policy proposals on the regulatory hosting model might have on private fund managers, listen to, or read, our further commentary in our Alternative Insights briefing published on 16 December 2021.

Smaller principals with larger ARs and overseas ARs

There is also a section of the consultation that discusses proposed measures (similar to those outlined above in relation to regulatory hosting models) in the context of relatively small principals responsible for overseeing ARs of significant size and also in relation to principals which have responsibility for overseas ARs.

Prudential standards

While there are no concrete proposals at this stage, the FCA does raise the possibility of new or enhanced prudential standards to address identified harms associated with appointed representative models.


Review of the UK Financial Promotions Regime


WHAT IS THIS?  Proposed new UK financial promotions rules, including additional rules in respect of high-risk investments, new rules on the approval of financial promotions of unauthorised persons and amendments to certain of the financial promotion exemptions.

WHO DOES THIS APPLY TO?  FCA-authorised firms and other persons seeking to communicate financial promotions.

WHEN DOES THIS APPLY? Not yet known.

High-risk investments

The FCA issued a Discussion Paper (DP21/1) in April 2021 on strengthening the financial promotion rules for high-risk investments and firms approving financial promotions. 

The Discussion Paper asked for views on whether any additional investments should be subject to marketing restrictions as high-risk investments.  

In particular, the FCA raised the possibility of treating equity shares as speculative illiquid securities where they are issued for on‑lending, buying or acquiring investments or buying or funding the development of property.  This means that they would be subject to the restriction on promotion to retail clients. The FCA said that it would also consider how to address any overlaps with the marketing regime for AIFs where the shares are also units in an AIF. 

In addition, the FCA also asked for views on stronger restrictions for peer‑to‑peer (P2P) agreements.

The FCA also asked whether there should be any changes to the FCA’s current definition of readily realisable securities which is used in the restriction on promotion to retail clients.  It suggested treating exchanges in EEA member states as third country exchanges and also removing fixed income securities traded on an exchange-regulated MTF from the definition.  The FCA also asks for views on whether the focus on liquidity remains an appropriate way to distinguish securities which are appropriate for mass‑marketing without restrictions to retail investors from those which are not.

The FCA also asked for views on whether there should be additional checks by firms when categorising clients rather than relying on effective self-certification, which could include some or all of:

  • Taking “reasonable steps” to independently verify that a retail investor meets the relevant requirements to be high net worth or sophisticated or that restricted investors are not investing more than 10% of their net assets.
  • Having documented grounds to reasonably believe that an investor meets the relevant requirements.
  • Having regard to any information held about the relevant individual from other interactions or collected as part of the appropriateness or preliminary suitability assessment.
  • Questioning or verifying declarations where there are certain red flags e.g. where an investor attempts to invest an amount over a certain threshold.

The FCA also suggested that firms might provide clearer, more prominent risk warnings and/or “positive frictions” such as cooling off periods, educational videos or online tests. 

Finally, the FCA also asked whether there should be more requirements for approvers of financial promotions, including an obligation to assess whether approval needs to be withdrawn and more involvement in categorising recipients of the financial promotion.

Approval of financial promotions

HM Treasury consulted in July 2020 on a regulatory framework for approval of financial promotions and in June 2021 issued its response.

The original consultation considered whether there should be a "regulatory gateway" for the approval of the financial promotions of unauthorised persons.  In its response, HM Treasury confirmed that it thought that this was the correct approach.

Under the regulatory gateway, unauthorised persons would only be able to communicate a financial promotion if it had been approved by a firm which had obtained consent from the FCA to provide such approval.  All new and existing authorised firms would, by default, be prohibited from approving the financial promotions of unauthorised persons through having a “Financial Promotion Requirement” on their permission.  Firms wishing to approve financial promotions of unauthorised persons would therefore need to apply to the FCA to have that “Financial Promotion Requirement” removed (in whole or in part).

There would be exemptions for the approval of financial promotions to be communicated by an unauthorised person in the same group or the approval of the authorised firm’s own promotions for communication by unauthorised persons. There would also be an exemption for principals approving financial promotions for their appointed representatives.

There is no specified date for the new framework. The government has stated that intends to bring forward legislation “when parliamentary time allows”.

Financial promotion exemptions

HM Treasury has issued a consultation on the financial promotion exemptions under the UK Financial Promotions Order. This sets out proposals for changes to the exemptions for certified high net worth individuals and sophisticated investors (including self-certified sophisticated investors).  The consultation closes on 9 March 2022.

The consultation follows concerns around the misuse of these exemptions as well as the rise of online investing and the impact of price inflation and pension freedoms on the financial thresholds used in the exemptions.  In general, the government is in favour of retaining exemptions for high net worth and sophisticated investors but considers that some amendments are needed.

The consultation therefore proposes increasing the financial thresholds for high net worth individuals as well as updating the name of the high net worth individual exemption.  As regards the financial thresholds, HM Treasury does not propose specific figures but instead asks for views on what would be an appropriate level.  It does, however, state that it considers that the thresholds should be increased in line with inflation as a minimum.  As a very rough guide this is likely to increase the thresholds by at least 50%.  The government does not propose changing the assets in scope of the net asset calculation.

The name of the exemption would also be amended from the "certified high net worth individual" exemption to the "high net worth individual" exemption.

In addition, the consultation proposes that the criteria for self-certified sophisticated investors be amended by removing the criterion to have made more than one investment in an unlisted company in the previous two years as this is no longer considered an indicator of investor sophistication following the rise in online investing and crowdfunding.  It also proposes updating the criterion that an individual has been, in the last two years, a director of a company with an annual turnover of at least £1 million by increasing the turnover threshold to £1.4 million in line with inflation.

Changes to the thresholds for high net worth individuals and sophisticated investors would also potentially impact firms' ability to rely on the "overseas persons exemption" as one way to benefit from the overseas persons exemption is if the particular regulated activity is carried on as a result of a "legitimate approach" i.e. one which does not breach the financial promotions restriction.  The exemptions relating to high net worth individuals and sophisticated investors are some of the more common exemptions relied upon and therefore stricter criteria for those exemptions would potentially also result in fewer persons being able to rely on the overseas persons exemption. 

Under the proposals, the high net worth individual and self-certified sophisticated investor statements would also be amended as follows:

  • Updating the format making the criteria to be met more prominent, e.g. by breaking up the text or reordering it and making it clearer that investors who don’t meet the criteria shouldn’t proceed any further.
  • Simplifying the language, e.g. with fewer references to financial services legislation.
  • Requiring greater investor engagement by requiring the investor to select which specific criteria they meet in order to be classified as high net worth or sophisticated and to set out how they meet these criteria.

Finally, it is proposed that firms would have more responsibility to ensure that individuals meet the criteria to be deemed high net worth or sophisticated.  Firms communicating a financial promotion would have to have a reasonable belief that an individual meets the criteria, not simply that they have signed a relevant statement, and document this information accordingly.  Firms would also be required to provide details about themselves in any communications made using the exemptions, including the firm’s address, contact details of the firm and if appropriate, the firm’s Companies House number (or international equivalent) to enable consumers to undertake basic due diligence on the persons carrying out the marketing and to assist the FCA in investigating non-compliance.


FCA: Temporary Permissions Regime - landing slots


WHAT IS THIS?  The winding down of the Temporary Permissions Regime.

WHO DOES THIS APPLY TO?  EEA firms which had previously passported into the UK and had notified the FCA that they were availing themselves of the TPR.

WHEN DOES THIS APPLY? The end of the TPR will be as specified by the FCA in individual "landing slot" emails.

As we have reported before, the Temporary Permissions Regime (TPR) allows certain EEA firms, which had previously passported their services into the UK under Schedule 3 or 4 of FSMA, to avail themselves of temporary permission subject to having notified the FCA by 30 December 2020. Unless extended, the TPR lasts until 31 December 2023.

However, in practice, for individual firms within the TPR the cessation of their temporary permission will actually depend on the "landing slot" process. Under this, the FCA has started emailing formal directions to firms in the TPR confirming their "landing slot": this is the period or window during which the firm can apply for full Part 4A permission (or vary their existing Part 4A permission if they have a UK top-up permission).

The formal direction will specify when the firm must submit its application for either of those permissions. Any applications prior to the specified opening of the window will be disregarded. If the firm does not submit an application before the specified closing date, the FCA will cancel the firm's temporary permission – if eligible, the firm will be moved into supervised run-off (SRO) as part of the Financial Services Contracts Regime (which will apply for a maximum of five years). Under this, it will be deemed authorised for the purposes only of winding down their UK regulated business: no new business is permitted.