In this edition we look at MiFIR and the share-trading obligation, relations with clients, a delay to the implementation of the European Single Electronic Format, fresh regulatory levies and options for reporting income for FSCS levy calculations.

MiFIR, the share-trading obligation and equivalence

On 4 November the FCA said on its website that it would use its Temporary Transitional Power or TTP to allow firms to continue trading all shares on European Union trading venues and systematic internalisers if they chose to do so, and if the regulatory status of those venues and systematic internalisers permits such activity. Before the end of the transition period the FCA will publish a transitional direction to give effect to this.

The FCA believes this approach will keep UK-based firms able to execute their share trades at the venues where they can get the best results for themselves and their customers.

The UK has decided to "recognise EU equivalence" on various occasions and allow the continued operation of certain financial services and markets for British firms that access EU markets and EEA (European Economic Area) firms that access the UK. Of possible interest to asset managers is the part of EMIR (Article 2A) that deals with regulated markets. British firms will be able to consider EEA trading venues as regulated markets under Article 2A of UK EMIR. This will enable British firms to continue to treat derivatives traded on EEA regulated markets as exchange-traded derivatives rather than OTC derivatives.

These moves are in line with HM Government's approach to - and support for - open markets. The FCA states that British participants can use a trading venue in the EU for the purpose of executing trades in shares, as long as the venue has the relevant clearance under either the UK’s longstanding regimes for overseas access or under the temporary permissions regime (TPR). Firms ought to check this as part of their pre-end-of-transition-period "confirmations."

Relations with clients - what a performance!

In April ESMA published its final report about guidelines that apply to National Competent Authorities and managers of UCITS funds and managers of certain AIFs who market to retail investors. The guidelines aim to reduce regulatory arbitrage between EU countries regarding performance fee structures and the circumstances in which payments for these can take place. The Guidelines will apply two months after the publication date (i.e. 6 January 2021).

Application

Managers of any new funds created after the date of the guidelines' application with performance fees, or any funds existing before the date of application that introduce performance fees for the first time after that date, should comply with the guidelines immediately in respect of those funds.

Managers of funds with performance fees existing before the date of the guidelines' application should apply the guidelines in respect of those funds by the beginning of the financial year after 6 months from the application date of the guidelines.

Requirements exist for pre-sale disclosures of performance fees (FCA rulebook COLL 4.2.5) and payments regarding performance fees (COLL 6.7.6), in that a fund manager ought to calculate performance fees on the basis of the scheme's property only after all other deductions have been made.
    
The guidelines will not apply directly to British fund managers because they come into force after the end of the Brexit implementation period, but fund managers can take some direction from the FCA's Brexit Policy Statement (PS19/5) in which the regulator declares that EU non-legislative pronouncements will remain relevant after exit day, although they are not to be found in British law.  

So how should fund managers proceed? They would be wise to consider the guidelines in terms of the performance fee arrangements that they have in place for funds that are either based or marketed in the EU.

Product governance and distribution: some ESMA Qs and As

The European Securities and Markets Authority has added three new questions to a section of its investor-protection question-and-answer file. These are to do with costs and charges and are directed at manufacturers of financial instruments. Asset managers who manufacture financial instruments ought to find them useful when designing financial products, along with compliance officers who have to assess and monitor compliance with firms' arrangements to do with product governance.   

General organisational arrangements

The FCA has issued policy statement 20-14, announcing a delay to the implementation of the European Single Electronic Format and an update about its Coronavirus-related policy.

The policy statement pushes back the time when issuers of listed securities, or those considering admission to listing, are obliged to publish and file machine-readable financial statements and electronic tagging of basic financial statements and notes to these financial statements. Known as the European Single Electronic Format, the proposals are designed to make issuers' financial data more accessible to various people.

Delays in this implementation of this format are due in part to Brexit and in part to the pandemic, because both are pressurising issuers. There ought to be any direct regulatory repercussions for asset managers and fund managers. This is, however, a massive improvement in the way issuers publish their financial statements and will probably make information easier for fund managers to digest, so it is noteworthy for firms that have their own research teams or pay for reasearch.

AML consultative paper

On 11 November the Money Laundering and Terrorist Financing (Amendment)(EU exit) Regulations 2020 came into being. These are the latest changes to the UK's Money Laundering Regulations. They introduce provisions relating to trusts, providing for additional trusts to be included on the UK's trust register and extending the duty to report discrepancies in beneficial ownership to trusts. They broaden the reporting requirement to include the Commissioners for Her Majesty’s Revenue and Customs. The regulations require the commissioners to maintain a register of beneficial owners of taxable trusts and potential beneficiaries of taxable trusts.  This amendment will require firms to report discrepancies to the commissioners from 10th March 2022 onwards.

Regulatory levies

On 19 November the FCA made a policy proposal to increase the charges that it levies on the firms that it regulates. Asset managers ought to be interested in Chapter two of CP20/22, where the FCA sets out its proposals to restructure and increase "application fees" and to introduce new "transaction fees." The proposals fall into two parts.

Application fees (Table 2.1) have remained static for some 20 years, resulting in FCA sharing the application processing costs with existing fee payers. Straightforward applications will increase from £1,500 to £2,500, while moderately complex applications will increase from £5,000 to £10,000. A variation of permission (VoP) within the same fee block will increase from £250 to £500.

Then there are transaction fees. The FCA wants to introduce two new charges here.

• Changes in control (CICs). For processing CIC applications the FCA charges around £740 but is proposing to introduce a charge of £500 for this.
• Applications under the Senior Managers Regime. When the FCA processes one of these it will charge £250.

The FS Register and FCA Directory data

An update to the "Directory of certified and assessed persons" webpage contains dates of which solo-regulated firms should be aware when submitting directory data. Deadlines are as follows.

For firms that use a single-entry submission method, there is a deadline of 9 December if they wish their data to appear on 14 December and a final deadline of 31 March 2021.
For firms that use a multiple-entry submission method or that wish to use the "amend template," there is a deadline of 4 December if they wish their data to appear on 14 December and a final "submission window" that runs between 11 January and 18 March.

The FCA indicates that it will begin to publish data on 14 December.  Firms that miss the "submission window" can still upload directory information using the single-submission method up to 31 March respectively.

Market conduct and ESS

On 23 November the FCA published a "registration guide" which explains how it is changing the way in which investors submit the standard form on which they notify it of major shareholdings (TR-1 Form) as required by Chapter 5 of the Disclosure Guidance and Transparency Rules (DTR 5). The new process will involve the completion of an electronic TR-1 Form, available through the DTR 5 reporting element of the FCA’s Electronic Submission System (ESS), and will begin in the first quarter of the New Year. In readiness for this change, investors who are obliged to notify the FCA about various things in accordance with DTR 5 (Position Holders) and persons reporting TR-1 Forms on behalf of Position Holders (Reporting Persons) will have to go through a two-step registration process.

• Step 1. They must register to use the Electronic Submission System (ESS) (if they are not registered already, perhaps for short-selling notifications).
• Step 2. They must register for Major Shareholdings Registration DTR 5.

Firms that have notified the FCA about various things during the last 12 months will receive e-mails that instruct them in detail about how to register. The FCA will tell them about their "registration windows" and they ought to follow the timetables that it sets them. The FCA says that the registration process is very simple and takes no longer than 15 minutes, but each registration is subject to approval and the whole process might therefore take days to complete. Position Holders and Reporting Persons who do not participate in the early registration process will have the opportunity to register once the new system is live...but...

Seeing as how a TR-1 notification in relation to shares in a British issuer that is allowed to trade on a regulated market should be submitted to the FCA no later than two trading days after the date on which the threshold was crossed, the FCA recommends that firms should register before they have to submit TR-1 notifications, the better to avoid delays.

The new DTR 5 portal will be open in the first quarter of next year. Investors will no longer be allowed to send TR-1 Forms to the FCA by email. Only notifications sent through the new portal will be considered for the purpose of monitoring compliance with the reporting requirements of DTR 5.

It is therefore important for firms to consider registering for ESS and DTR 5 even if they have not previously submitted TR-1 returns, or even if they think it unlikely that they will have to, so as to avoid unnecessary delays in the event of future notifications. The reporting thresholds for investment managers, according to DTR 5.1.5, are 5% and 10% (and above) of voting rights attaching to shares managed in investment management portfolios, but the notification levels begin at 3% for individual firms. Any firm that does not register for ESS should therefore be satisfied that it will not exceed these thresholds.

Options for reporting income for FSCS levy calculations

In 2018 asset managers began reporting ‘look-through’ income for the Financial Services Compensation Scheme levy. Income relating to beneficiaries who are FSCS-eligible claimants must be reported. The FCA has learnt that some firms may be reporting income for the FSCS levy that they do not need to report.

A firm must include income which it knows relates to eligible claimants, and must include income whenever it cannot find out whether the underlying beneficiary is an eligible claimant...because the FSCS may pay compensation in relation to it. However, if the firm can identify income that relates to beneficiaries who are not eligible claimants, it cam exclude that income. In any case, the FCA says, a firm can report all income if it chooses to do so (and pay the resultant higher fees).

This is a helpful reminder that firms should know the eligibility of their services and clients for FSCS compensation purposes. Unfortunately, that is easier said than done.

The eligibility of an investor to benefit from the scheme is, first, defined by what the firm is not. Very broadly speaking, he may be able to claim if it is NOT a financial services firm or fund, a pension or retirement fund (with lots of exceptions), a large company, a supranational institution, a government, a central administrative authority or a regional, local or municipal authority.

Then "eligibility" is defined by whether the investor receives “protected investment business,” which includes the main regulated activities associated with 'managing' (investments, UCITS and AIFs) although the definition for 'managing' funds is restricted to Authorised Funds and (hold on tight!) funds with registered or head offices in the UK or otherwise domiciled in the UK unless they are AIFs that are bodies corporate and not collective investment schemes. Managers of overseas funds can rest easy but managers of UK-based funds should check to see whether the investment vehicles that they use are conducting “protected investment business.”

With that established, it seems clear that individuals and small companies are eligible claimants for the purposes of Protected Investment business. So if a firm is conducting such and is marketing to both eligible and ineligible claimants, it should classify its clients or investors for FSCS purposes in order to split its Annual Eligible Income correctly. This is in addition to client and investor classification for marketing and Financial Ombudsman purposes, which, of course, follow different rules.

* Jonathan Wilson can be reached on +44 (0)20 3146 1869 or at jon@elliswilson.co.uk