ACA Digest December 2018

December 11, 2018

ACA Europe Digest provides clients with a brief overview of the major compliance developments facing investment managers including issues we have reported on over the last few months, and a look ahead to what’s on the horizon.

Understanding the relevant issues to your business from a regulatory compliance perspective can be a time-consuming exercise. ACA have spent the time reading and analysing regulatory developments and legislation to assist you in staying current. We therefore hope you will find the material both informative and useful in your day-to-day operations and for planning future projects.

Brexit – planning for the worst case scenario

The pace of political developments around the search for agreement between the EU and the UK on the latter’s terms of exit is so fast that any written commentary is liable to be obsolete before you can hit [save]. With this caveat in mind, here are some notes to help you navigate the coming weeks:

  • Absence of certainty: financial markets (and underlying businesses) famously hate uncertainty. Unfortunately, political developments have conspired to produce a near-perfect storm of diverse scenarios for the EU/UK relationship in coming months. A couple of key dates in the short term:
    • Date on any revised deal TBC – House of Commons vote on proposed exit terms
    • 21 January – in the event of deal being voted down, this is thought to be the deadline for the UK to decide on next steps
  • Worst case scenario: the FCA (like HM Government) has considered, and prepared for, the worst-case scenario and expects regulated firms to do the same. Many of the issues facing financial firms are essentially structural in nature, such as the potential loss of EU passporting rights, which is addressed in our recent Q&A Are You Ready for a No-Deal Brexit?. This summarises some of the key impact areas and ways in which firms are attempting to future proof their businesses.
  • What will happen on 29th March 2019? We expect no cliff-edge, at least in terms of financial legislation or markets. HM Treasury has already published the key statutory instruments that will convert EU laws into UK ones in the event of a no-deal scenario. The FCA has published two consultation papers on Brexit:  Brexit: proposed changes to the Handbook and Binding Technical Standards, part one (CP18/28) and part two (CP 18/36). Together running at 1,767 pages, these are probably for regulatory completists only. Meanwhile, ESMA has given its full backing to securing the necessary Memorandums of Understanding between the FCA and other EU regulators that are critical for arrangements such as the delegation of investment management services to UK firms.
  • Short term divergence from EU regulation unlikely: The FCA has consistently argued (all the way back to June 2016) that regulatory equivalence will be a key foundation stone for future trading deals with the EU and beyond. A transition period (at least until December 2020) would make this a certainty but even without that we see this remaining a touchstone for the UK regulator. In time, the FCA will seek to foster closer links with other supra-national bodies such as the International Organisation of Securities Commissions (“IOSCO”). Much will also depend on the political complexion of the UK government in years to come.

MiFID II – 12 months on, what are the key focus areas?


Recent FCA activity suggests that the receipt and usage of investment research is currently high on the Regulator’s agenda. More precisely, a request for information regarding research unbundling and other practices related to the new rules on inducements and paying for research (the “Research Request”) was sent to 30 asset management firms in August, in an effort to assess the impact of MiFID II on the investment research market. The FCA confirmed that they will follow up with a programme of firm visits to a selection of these firms.

While we are currently waiting for the FCA to publish findings that will shine greater light on the Regulator’s expectations as well as business practices in this area, we encourage firms who utilise third party research to use the Research Request as a checklist for assessing the robustness of their arrangements and identifying any gaps that need to be addressed.

For more information on the areas covered within the Research Request, please see our Alert on the topic.

Costs and Charges

With the anniversary of the implementation of MiFID II fast approaching, firms should be turning their attention to the Ex-Post Costs and Charges Disclosure to ensure that any reporting split across MiFID I and MiFID II requirements over the last year is now brought fully in line with MiFID II.

ESMA guidance states that this disclosure must be made on an annual basis from the date that the relationship started, however, many firms have agreed with clients to make the disclosure annually on a mutually convenient date, such as in line with the calendar year. Firms should ensure that they are able to make the disclosure promptly in line with either the ESMA guidance or as agreed with clients. It should be noted that the disclosure must contain an illustration of the cumulative effect of the costs on the return, which can take multiple forms, such as a graph, table or narrative.

Across the industry, it appears that firms have been grappling with how to calculate costs and charges, particularly in relation to the implicit costs of transactions and how far to utilise the PRIIPs methodology. Amongst calls for further clarity on the matter, the Cost Transparency Initiative (“CTI”) has been launched to build on work already undertaken by the Institutional Disclosure Working Group, including the composition of templates for disclosures. A pilot test of the templates has been launched, expected to be completed in January 2019. In the meantime, firms may wish to consider using one of the standardised templates, such as the European MiFID Template (“EMT”), which arose out of industry initiatives in an effort to create standardisation after the regulators declined to provide a pro forma for the disclosure of costs and charges. While question marks remain as to their ultimate usefulness, and many in the purely institutional space prefer bespoke formats, firms may wish to adopt them for both commercial and regulatory reasons while awaiting further guidance from the CTI.

Transaction Reporting

The FCA has been relatively quiet on the transaction reporting front since their Forum back in the summer, where they highlighted a number of issues for firm’s to focus on. A full analysis of its feedback is available on our website, however in summary the FCA reminded firms:

  • Their identifiers, and that of their clients and employees needs to be accurate both from a content and formatting perspective; characters used to create identifiers that are deliberately erroneous will not be tolerated.
  • Timestamps need to be sufficiently granular (at least to the nearest second) and in Universal Coordinated Time (“UTC”). Default timestamps are no longer permissible, as they were under MiFID I/SUP 17.
  • Transactions submitted using the price pending code (“PNDG”) should be updated when the correct price is available.
  • To ensure that transactions rejected as a result of instrument validation failures (where the instrument is not present in the instrument reference data (“IRD”) at the point of submission or for 7 days thereafter), and the firm is confident the instrument is reportable, are either resubmitted or notified to the FCA as being omitted from the IRD.
  • To use the ‘errors and omissions notification form’ to notify the FCA of any systemic failings in their transaction reporting arrangements.
  • That they are required to conduct end to end reconciliations of the reports submitted, using sample data obtained from the FCA’s Market Data Processor.

The FCA has additionally notified firms that from 15 December 2018, the data extract schema will be updated to include the transaction submission date. This should enable firms in their review of whether their transaction reports are complete and accurate, as well as being submitted on a timely basis.

Cryptocurrencies – the FCA wakes up

As part of a Treasury led Cryptoasset Taskforce, the FCA has published a report on the UK’s policy and regulatory approach to cryptoassets, and their intended path in this area. This Taskforce Report considers the various implications of distributed ledger technology (“DLT”) and cryptoassets on policy and regulation and sets out some of the opportunities and risks they present. The FCA has previously expressed their view that cryptoassets have no intrinsic value and investors should therefore be prepared to lose all the value they have put in.

While the Taskforce notes there are potential benefits associated with cryptoassets, it also recognises that considerable risks remain and that action must be taken to address them, whether they fall within the existing regulatory framework or outside of it.

Some of the key risks noted in the report include:

  • Harm to consumers – who may buy unsuitable products, face large losses, be exposed to fraudulent activity, struggle to access market services and be exposed to the failings of service providers;
  • Risks to market integrity – which may lead to consumer losses or damage confidence in the market;
  • Potential implications for financial stability – which may arise if the market grows and cryptoassets are more widely used; and
  • Risks of financial crime – including opportunities for cryptoassets to be used for illicit activity and cyber threats. Cryptoassets pose risks around criminal activity such as money laundering and terrorist financing because of their accessibility online, their global reach and pseudo-anonymous nature.

The Taskforce has committed to a number of actions which include consulting on clarifications to and potential extensions of the regulatory perimeter by the end of 2018. Further consultations are due to take place in early 2019 on the regulation of cryptoassets and related firms. Firms that interact with cryptoassets in the course of their business should keep an eye out for any guidance arising out of these consultations.

Start planning for the Senior Managers and Certification Regime

The extension of The FCA’s Senior Managers and Certification Regime (“SM&CR”) to all firms authorised under Financial Services and Markets Act (2000) (“FSMA”) has now been confirmed, with a commencement date of 9 December 2019. The FCA’s stated objective with SM&CR is to reduce harm to consumers and strengthen market integrity by creating a system that enables firms and regulators to hold people to account. There are three main strands to this:

  • Senior Managers Regime: a new set of senior management functions which require the prior approval of the FCA. Firms will need to assign certain Prescribed Responsibilities to individual senior managers who, in turn, will require Statements of Responsibility succinctly describing their roles;
  • Certification Regime: replaces FCA approval of those in CF30 (Customer) roles with an obligation on individual firms to check and confirm (“certify”) the fitness and propriety of those employees who are capable of significant harm to the firm, its customers or market integrity; and
  • Conduct Rules: an expanded rule-set which creates a minimum set of standards for all individuals working in financial services, aimed at improving accountability and awareness of conduct issues. For the first time, firms will have to submit annual returns on conduct breaches to the FCA, including details of disciplinary action against employees.

For more information on SM&CR, please see our July Alert published soon after the release of the FCA’s Policy Statement 18/14 and our more recent Alert, which outlines how to prepare for the regime.

SM&CR Implementation Planning and Support

Please speak to Paul HenshawMartin Lovick or your usual ACA Consultant or contact about SM&CR support.

Market Abuse – still high on the FCA’s agenda

Two recent actions by the FCA remind us that the prevention and deterrence of market abuse remains very near the top of its supervisory priorities.

FCA Questionnaire

In July, the FCA sent out a questionnaire “The Risk of Market Abuse in Asset Management Firms” to a broad range of firms, requesting details on their arrangements and procedures. This focused on how firms’ investment and execution strategies influence the controls that they have implemented to mitigate the risk of market abuse, including policies, surveillance, personal account trading procedures, and staff training.

Please click here for our Alert on the Questionnaire and the implications for investment managers.

Market Watch 56

Towards the end of September, the FCA published Market Watch 56 which included “observations” (read: “this is what we expect you to do”) on market abuse surveillance:

  • A renewed focus on designing and implementing systems that are relevant to the firm’s own strategy, particularly in the less well-accommodated fixed income, currencies and commodities asset classes.
  • Not relying on “out-of-the-box” settings, or other industry norms, in terms of calibrating alert parameters.
  • Not treating the list of examples set out in the Market Abuse Regulation (and reproduced in the MAR section of the FCA Handbook) as comprehensive – firms need to be alive to changes in market practice and the risk that these too may cross the line.
  • “Everyone’s doing it” – firms should not assume that, because the FCA has not taken action in one situation, it can be relied on not to do so for similar failings elsewhere.

Review of Controls

ACA offers focused Market Abuse Controls Reviews which aim to provide independent assurance. ACA’s Review will:

  • Examine your market abuse policies and procedures for relevance and completeness;
  • Evaluate the robustness of your firm’s market abuse monitoring;
  • Assess your surveillance techniques; and
  • Consider your control environment by conducting interviews with non-compliance staff.

For more information, read our recent Alert FCA Turns up the Heat on Market Abuse, download our guidance sheet, or speak to Charlotte Longman or your regular ACA consultant.

Green Finance – a long term buy?

Climate change is increasingly a concern of both investors and asset managers, with green and ethical mandates on the rise. As climate change is likely in the future to have a major impact on financial markets and the products that serve those markets, the FCA has released a Discussion Paper setting out some of the opportunities and risks of a transition to a low carbon economy, how climate change affects the FCA’s statutory objectives, and specific actions the FCA intends to take. In particular, the FCA believes that readily available and consistent disclosures relating to climate change issues will help those making investment decisions affected by such issues. The FCA highlights that questions of green taxonomy (i.e. how green products and markets are classified), green disclosure, green performance measurement and ultimately fairness and consumer protection will become more important.

The FCA is seeking input on the following four areas:

  • Climate change and pensions: On account of the long-term nature of pension investments, those making investment decisions should take into account climate change and its effects.
  • Competition and market growth for green finance: The FCA is encouraging growth in the green finance arena through its Sandbox and Innovate programmes.
  • Disclosures about the financial impacts of climate change: The FCA will be consulting on guidance to issuers about how to give investors appropriate information regarding climate change related risks.
  • Public reporting on firms’ management of climate risks: The FCA welcomes views on introducing a new requirement for financial services firms to report publicly on how they manage climate risks to their customers and operations.

Firms are encouraged to consider the issues raised in this discussion paper by submitting their responses to the FCA by 31 January 2019. Further discussion can be found in the Bank of England’s report on this topic.

Securitisation Regulation – what do I need to know?

The EU’s Securitisation Regulation comes into effect from 1 January 2019, applying to securitisations of securities issued after this date. The primary objective of the Regulation is to strengthen the existing rules on securitisation that were implemented in specific sectors after the financial crisis to address the risks attaching to highly complex securitised products.

The principal obligations for our clients arising from the Regulation will be as follows:

  • Prescriptive due diligence requirements for AIFMs and UCITS ManCos and pension funds - “institutional investors” as defined by the Regulation - that are holding, or proposing to purchase, securitisation positions;
  • Requirement for institutional investors to take corrective action in the best interest of investors, including potentially disposing of a position, where their ongoing due diligence identifies that a securitisation in their portfolio no longer meets the requirements of the Regulation;
  • Requirement for either the originator or sponsor of the securitisation to retain at least a 5% holding in a securitisation (the “risk retention requirement”) and a corresponding requirement for institutional investors to check this requirement is complied with for any securitisation they invest in; and
  • Requirement upon originators, sponsors and securitisation special purpose entities (“SSPEs”) (the latter being entities established by the originator expressly to undertake securitisations) to disclose information regarding the securitisation to regulators and investors, including information on underlying exposures, cash flows and the documentation underpinning the securitisation.

Note that the definition of “institutional investor” includes any firms “whose regular business is managing one or more AIFs”, thus extending the scope to sub-threshold and potentially to non-EU AIFMs (AIFMD previously having caught just EU AIFMs).

The Regulation also provides for a simple, transparent and standardised (“STS”) designation for securitisations that adhere to certain specified criteria. There will be “lightened” due diligence requirements for institutional investors investing in these securitisations and such securitisations may be able to benefit from preferential capital treatment under separate prudential regulation. ESMA will maintain a list of securitisations notified to it as STS.

FCA and EU News in Brief

  • FCA Dear CEO – LIBOR: The FCA issued a Dear CEO letter to major banks and insurers in September, inquiring about their approach to managing the transition from LIBOR and seeking assurance regarding the oversight and understanding of firms’ senior management in this area. The FCA has encouraged all firms that currently rely on LIBOR to take note of this letter, even if they have not received it directly.
  • Unexplained Wealth Orders (“UWOs”): The first UWO has been issued and upheld in court since they were introduced into UK law in January. Firms should consider how they assess source of wealth during their due diligence process, particularly in relation to high net worth individuals and Politically Exposed Persons (“PEPs”).
  • RTS 27 data: Execution venues should have now begun publishing their execution reports. Firms should take into account the data included in these reports when performing monitoring and reviews in relation to their Best Execution obligations.
  • PRIIPs: The European Commission is due to review the PRIIPs Regulation by 31 December 2018, however it is looking likely that this review will be delayed in order to take into account the delay in its initial implementation. The FCA has closed its call for input on PRIIPs and will be issuing a feedback statement in Q1 2019 which may provide further clarity for firms.

SEC news in brief


On 16 November 2018, the SEC’s Divisions of Corporation Finance, Investment Management, and Trading and Markets issued a joint Statement highlighting recent enforcement actions concerning digital asset securities. Generally, these enforcement actions can be broken out into three categories:

  • Initial offers and sales of digital asset securities (including initial coin offerings, or “ICOs”);
  • Investment vehicles, and those who advise others about, investing in digital asset securities; and
  • Secondary marketing trading of digital asset securities.

As noted in this statement, the SEC has begun bringing enforcement actions against issuers of digital assets that would qualify as an offering of securities, but have not registered these tokens under the Securities Exchange Act of 1934 (the “Exchange Act”). Most notably, these actions have been brought even when there has been no fraud or wrongdoing documented by the SEC.

Additionally, the SEC provides guidance on what activities require registration as a national securities exchange or registration as a broker-dealer. Entities that believe they may fall under the definition of an exchange under the Exchange Act should consider if registration as a national securities exchange is necessary or if there is a possible exemption from registration. The SEC also notes that any entity that facilitates the issuance of digital asset securities in ICOs and secondary offerings may also be acting as a broker or a dealer that is required to register with the SEC and become a member of a self-regulatory organization like FINRA. 

This statement makes clear that while the SEC encourages and supports “innovation and the application of beneficial technologies in our securities markets,” the SEC has a “well-established and well-functioning federal securities law framework” that must be followed.

March Form ADV Annual Updates

Those registered investment advisers and exempt reporting advisers with a 31 December fiscal year end should note that their Form ADV Annual Updating Amendment is due on or before 31 March 2019 in order to meet the requirement to file within 90 days after fiscal year end. Although 31 March 2019 is on a Sunday, there is no change to the deadline and the Investment Adviser Registration Depository (“IARD”) will be open on 31 March 2019 from 10 am to 6 PM Eastern Time.

For more information, please contact ACA Europe’s SEC Consulting Team or your regular ACA consultant.

For More Information

Please contact Martin Lovick or Christine MacVicar or your regular ACA consultant with any questions on the above.