In this edition we look at some of last month’s developments in the run-up to the announcement of the deal that British Prime Minister Boris Johnson struck with the European Union – a deal that left financial services out almost entirely. The EU’s second Markets in Financial Instruments Directive once again takes centre stage.

QCP 20/23: marketing, bearer shares and temporary absences

On 3 December the Financial Conduct Authority proposed to make some changes to its rules in QCP 20/23 (a ‘quarterly’ consultative paper) that ought to be of interest to asset managers in all sectors.

On the subject of the Senior Managers and Certification Regime’s approach to temporary absences of more than 12 weeks, it states that if someone who performs an SMF (senior management function) is temporarily absent from his job “on long-term leave” and the firm intends to keep the job open for his return, the firm “need not notify the FCA that the individual’s approval should be removed.”

Instead, the FCA proposes to make such a firm notify it about the “long-term leave” on Form D within seven business days after the end of the 12-week period. The regulator intends to amend the form to include a reference to “taking leave or returning from leave” as well as an effective date for some kind of “change.” It also wants the firm to tell it when the manager has returned by using the same Form D within seven business days of his return. It wants the firm to appoint someone else to do the job and no re-approval is required when the original man returns to his job. Conversely, if the firm is aware that somebody will not be returning, it should notify the FCA in the appropriate manner.

Firms that employ people who are temporarily absent and who have been allocated prescribed responsibilities ought, if the FCA has its way, to remove and allocate those responsibilities to other people who perform SMFs and to notify the FCA about it using Form J (the same process that exists today).

The abolition of bearer certificates in collective investment schemes (CIS) is also on the agenda in QCP 20/23. Legislation has been laid before Parliament that will, if passed, prohibit all CIS domiciled in the UK from issuing bearer shares. The FCA is proposing to remove any provisions relating to CIS bearer shares and to require firms to convert or redeem such certificates within 12 months. This is bound to affect Open-Ended Investment Companies authorised before June 2017 as well as all unregulated CISes. The FCA wants to introduce transitional provisions and end them on 1 January 2022. EEA UCITS (Undertakings for Collective Investments in Transferable Securities in the European Economic Area) operating under the TMPR (Temporary Marketing Permissions Regime) are to be exempt.

Marketing is another subject to be found in QCP 20/23. COBS 4.5 requires any authorised fund manager to explain its choice of the benchmark that it uses in any communication about an authorised fund. The FCA wants these rules to apply to fewer types of communication, only applying to those that might influence retail clients’ decisions about investments. It wants to leave out communications that do not refer to the aims, benefits or risks of investing.

Other suggestions to be found in QCP 20/23 include changes to the “cancellation of permission application form” in SUP 6 Annex 6 and the ‘recognition’ of [presumably this means adherence to] the Global Precious Metals Code by the FCA.

This is an admission by the FCA that its existing rules and guidelines are not clear enough. It is now trying to be more consistent in its diktats by narrowing the application of the rules. Fund managers are bound to benefit, although the FCA’s new policy towards bearer shares is unlikely to affect most of them.

Brexit

On 3rd December there appeared a draft FCA “direction guide” for firms that are subject to its so-called Temporary Permissions Regime. This contains information about the ways in which EEA UCITS schemes can notify the FCA about new sub-funds.

In this direction guide, the FCA sets out the process that it expects a firm subject to the TPR to follow when a fund operator in its purview wishes a new sub-fund to be treated as a “recognised scheme” after IP Completion Day. A firm subject to the TPR will be required to send off a “specific notification letter” and provide additional fund-related documents such as the rules of incorporation, a prospectus and important information about investors.

This is relevant only to EEA UCITS that wish to market new sub-funds in the UK now that the "transitional period" (a time, now over, during which EU rules still applied in the UK) has ended. The information that the FCA expects seems to be standard fayre. A firm has to satisfy certain conditions if a new sub-fund is to be marketed in the UK. One such condition is that at the time when the new sub-fund’s home state regulator authorises it, at least one other sub-fund of the new sub-fund's umbrella has to be a “recognised scheme.”

A note about issuers

Compliance Matters rarely concerns itself with guidelines issued to the issuers of securities. Wealth managers, however, benefit mightily from their access to the National Storage Mechanism, the FCA’s official mode of storing announcements and documents that the FCA requires issuers to give it in accordance with its Disclosure, Listing and Prospectus Rules. It is therefore worth them knowing that issuers that submit Annual Financial Reports (AFRs) that they have prepared in the European Single Electronic Format (ESEF) must do so using the ESEF taxonomy and an ESEF reporting manual that the European Securities and Markets Authority has published.

The mini-bond ban

In January last year, in the wake of three high-profile scandals, namely London Capital & Finance, Basset & Gold and Blackmore Bond plc, the FCA introduced temporary provisions to prevent the marketing of speculative illiquid security (SIS) instruments to retail investors. In December the FCA extended this temporary ban to listed bonds that have features similar to those of SISs and are not traded regularly, effective a few days ago on 1st January. This is not a total ban; the FCA has combined the sale of SISs to certified HNW and self-certified sophisticated investors with preliminary assessments of suitability.

Of wider interest to all firms that promote non-mainstream pooled investments (NMPIs) is a rule that explicitly requires a firm to make a preliminary assessment of suitability beforehand. This was also effective on 1st January.

When it was consulting interested parties about this in the summer, the FCA said that it expected firms and products subject to such rules not to "allow open availability on a website of specific financial promotions or to provide these, even if they have been subject to an initial warning or ‘tick box.’" The changes to the promotion of NMPI rules should re-state firms existing practices, although firms ought to check to see that they do.

Fenician Capital Management

On 15 December the FCA fined a partner and a portfolio manager at this firm $100,000 and banned them from performing a regulated activity in accordance with the European Union's Market Abuse Regulation. The case is an interesting one that Ellis Wilson uses in market-abuse training, not least because it reveals the things that the FCA does with the transaction reports that it receives. Firms and individuals need to be trained in market abuse and ought to monitor investment and trading activities and the importance of appropriate records that relate to investments.

The European Union’s Markets in Financial Instruments Directive

More news emerged on 16th December about how the "MiFID secondary market transparency" will operate in 2021, the period of transition having ended. On that date, the FCA published a supervisory statement about “pre- and post trade transparency.” It did so to cover the eventuality that HM Government could not strike a deal with the European Union on the subject of financial services – an eventuality largely fulfilled – and set out its intentions for overseeing the “MiFID transparency regime” in the UK. To this end, the UK has taken steps to duplicate those public registers and databases that the EU runs to help the regime continue. The statement covers various issues, including:

• a Financial Instruments Reference Database (FIRDS);
• a Financial Instruments Transparency System (FITRS);
• an investment firm register;
• a systematic internaliser database;
• tick sizes;
• commodity position limits; and
• information for various people to receive about equities, bonds and derivatives.

The FCA will keep the new regime under review. It says that firms might still need to consult the European Securities and Markets Authority’s databases in certain situations, while at the same time looking at British registers and databases of the same kind when gathering information to meet their obligations towards MiFID and MiFIR. By way of example, the average daily number of transactions (ADNTE) figures published by ESMA on 1 March 2020 will still apply in the UK until 31 March this year. By 8 March 2021, the FCA will publish new ADNTE figures for shares traded on British trading venues, except for shares of EU issuers traded on British markets for the first time. The FCA will be unable to publish the ADNTE of ESMA on its FITRS (see above) if that is larger than the ADNTE that the British regulator has calculated. Trading venues and firms will have to continue to take that data from the ESMA FITRS.

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