ACA Digest June 2018

June 29, 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.

FCA Business Plan 2018/2019

The FCA has released its Business Plan for 2018/19 which sets out the key priority areas for the coming year. The FCA has identified a number of areas of priority, with five that will be of particular interest to firms in the asset management arena.

EU Withdrawal

It will come as no surprise that a significant proportion of the FCA’s resources are already focused on the UK’s exit from the EU, and that this will grow further in the next 12 months. The FCA is providing the Government with technical assistance on its legislative programme and is also advising it on how the UK’s future relationship with the EU will affect the financial services industry.


In line with the extension of its Senior Managers and Certification Regime, the FCA has stated that it will be continuing to focus on culture within firms and will be taking a broader look at remuneration arrangements, possibly through thematic work. The FCA has also released a set of essays on culture designed to provoke thought and debate within firms.

Financial Crime (including AML)

Combatting financial crime is a continuing priority of the FCA, and in 2018/19 they will be focusing their market abuse related supervision monitoring on the fixed income, commodity and “non-standard derivatives” markets.

Additionally, the FCA intends to conduct random sampling of small, lower risk firms and a thematic review examining the harms caused by money laundering in capital markets.

Data Security, Resilience and Outsourcing

The FCA will be conducting a variety of thematic and firm-specific work to better understand firms’ cyber resilience and outsourcing risks, and will also be strengthening its supervisory assessments of the highest impact firms.

Innovation, big data, technology, and competition

The FCA will be reviewing the use of data by financial services firms, including for algorithmic trading, and continuing to develop their relationship with the ICO post implementation of GDPR.

Omnibus Proposals

The European Commission (“EC”) has published two new proposals, summarised below, to amend the existing regimes under the AIFMD and UCITS for cross-border fund distribution in the EU and introduce new standardised requirements. These proposals are part of the Commission’s work to establish a Capital Markets Union (“CMU”), which is intended to remove regulatory barriers to cross-border fund distribution and encourage the development of a more integrated Single Market.

Many of the proposed provisions address areas already identified as problematic, such as the inconsistent national implementation of the AIFMD. The timeline for entry into force is currently uncertain, however, it is unlikely that the most significant provisions will apply before mid-2021 at the earliest. ACA will continue to track these proposals as they develop; in the meantime, please see below for a brief summary.

Proposed Omnibus Regulation

The proposed regulation primarily amends the current requirements for marketing and empowers national regulators (“NCAs”) to levy proportionate fees and charges. Under the proposals, marketing communications must be identifiable as such; be fair, clear and not misleading; and present all risks and rewards in an equally prominent manner. Firms should also ensure that marketing communications do not contradict or diminish the importance of any information contained in the fund documentation. In practice, the proposed regulation should not significantly increase the existing obligations for UCITS managers, although AIFMs may need to consider the equal prominence rule.

Fifth Money Laundering Directive

The European Parliament has voted to adopt the Fifth Money Laundering Directive, which will take the form of amendments to the Fourth Money Laundering Directive (4MLD) and forms part of the EC’s action plan to counter terrorist financing and money laundering. The date of implementation is as yet undecided, but is unlikely to be before mid-2019 based on statements in the proposal. Even though the implementation date is likely to fall after the UK’s withdrawal from the EU, it is probable that the UK will adopt these amendments either as part of a transition period deal, or based on its membership of FATF.

The proposals seek to harmonise the EU approach towards high-risk third countries, clarify existing provisions, including regarding the ability of Financial Intelligence Units to request information from obliged entities, and improve access to beneficial ownership information. The proposals relating to beneficial ownership will be of particular interest to firms, especially the lowering of the threshold at which a beneficial owner must be identified from 25% to 10% for entities which present a significant risk of being used for money laundering and tax evasion. Additionally, in respect of existing customers, the Commission proposes to request a systematic monitoring of beneficial owners of trusts and other legal arrangements/entities such as foundations.

Firms do not yet need to start altering their systems and controls, but should remain alert to developments or any implementation dates that are set. Firms, especially those which operate managed accounts, should review their KYC procedures, particularly those relating to the identification of beneficial ownership.

Proposed Omnibus Directive

The proposed directive mainly focuses on harmonising the approach to marketing under the AIFMD across Member States. The proposed new definition of pre-marketing is likely to be of particular interest to firms: certain promotional activities will no longer be considered pre-marketing if the fund vehicle is already in existence. Additionally, the circulation of draft offering documents or constitutional documents will constitute AIFMD marketing, which represents a significant divergence from the current UK interpretation.

Financial Crime Guide Updates

The FCA is consulting on a number of changes to the existing Financial Crime Guide (“Guide”), the most material of which are summarised below. Other changes relate to updating for provisions under 4MLD and removing outdated language.

Change of Section Names

The Guide is currently comprised of two parts named ‘Financial Crime Guide Part 1: A firm’s guide to preventing financial crime’ and ‘Financial Crime Guide Part 2: Financial crime thematic reviews’ These will be renamed ‘Financial Crime Guide: A firm’s guide to preventing crime (FCG)’ and ‘Financial Crime Thematic Reviews (FCTR)’ respectively. The FCG will contain practical assistance and information, while the FCTR provides summaries of and links to thematic reviews of financial crime risks. References to content in each part have been updated accordingly throughout both parts of the Guide.

Chapter Addition

The FCG will now contain a section dedicated to insider dealing and market manipulation. The content is broadly comparable to other topics in the Guide, with an overview of the relevant legislation, summary of the main requirements, and examples of good and poor practice based on the FCA’s observations during thematic work. The FCA has emphasised the different requirements under MAR, where the firm is obligated to detect and report instances of market abuse, and SYSC, where the obligation is extended to include the countering of the risk of financial crime.  The FCA also recognises that most firms will not distinguish between the criminal and civil regimes for the purpose of implementing surveillance and monitoring, so firms may consider the guidance as applying to all instruments that fall under MAR, the Criminal Justices Act 1993, and the Financial Services Act 2012.

Asset Management Reforms

Following its Asset Management Market Study, the FCA has published a Policy Statement and a Consultation Paper to address the concerns identified.  These two papers apply to Authorised Fund Managers (“AFMs”), as per the Handbook definition, so firms should check whether they fall under this bracket and take any appropriate actions.

Policy Statement

The Policy Statement contains the FCA’s final rules focusing on the duties of AFMs, and contains a number of new requirements such as an annual assessment of value, a prescribed number of independent directors on a board, and the treatment of box profits.


The FCA issued a statement, on 28 March 2018, welcoming the agreement in principle to an implementation (i.e. transition) period operating from 29 March 2019 to 31 December 2020 following the UK’s withdrawal from the EU.

The FCA emphasises that, in accordance with the withdrawal agreement, all EU legislation will remain applicable and firms’ relevant obligations will remain during this time. This includes continuing with implementation plans for any legislation due to come into effect before the end of December 2020. As this transition period will occur once negotiations are, in theory, complete, firms should take advantage of this level of certainty to progress swiftly with their Brexit planning.

Accordingly, the FCA expects firms to be preparing plans now for all levels of Brexit. In order to prepare for a hard Brexit, firms should be working on the assumption that the UK will leave the single market and considering whether it would appropriate for their business model to establish a base in the EU.

A major concern for many firms is the future of passporting into the EEA. Under the current agreement, which is still subject to negotiations, firms will be able to continue to utilise passporting arrangements until the end of December 2020. Additionally, if necessary, the Government plans to legislate for a Temporary Permission Regime to enable firms to continue to manage existing business and mitigate risks.

Industry bodies, such as AIMA, are encouraging the Government to strike a deal that will allow firms to utilise the transition period to get the necessary arrangements in place to take effect upon the UK’s withdrawal. However, until negotiations are finalised, uncertainties and technical questions will remain. In the meantime, firms should be considering which of their authorisations may change or cease to exist and how they are going to be able to continue providing services to their clients.

Consultation Paper

The FCA is also consulting on further proposals to require AFMs to provide better information on what they are offering. The Consultation closes on 5 July 2018 and proposes new requirements regarding how fund objectives are published, how the use of benchmarks is explained and referenced, and how performance fees are calculated.

 For further detail, please see ACA’s alert on this topic.

General Data Protection Regulation (“GDPR”)

As we are sure you are all more than aware, GDPR entered into force on 25 May 2018. The FCA continues to expect that firms are able to evidence what steps they have taken to comply with GDPR and FCA requirements, both for implementation and on an ongoing basis. Additionally, the FCA will consider compliance with GDPR as part of firms’ obligations regarding cyber security and technology under SYSC. We would advise firms to conduct a post-implementation assessment to ensure that all requirements are met and the relevant systems and controls are effective.

How ACA Aponix Can Help

ACA Aponix’s GDPR services include data processing reviews and compliance gap analyses, web-based staff training, and data processor due diligence. Please contact with any questions or for further information.

FCA and EU News in Brief

  • The FCA has released a statement regarding their position that cryptocurrency derivatives are capable of being financial instruments under MiFID II. The FCA reminds firms that conducting regulated activity in cryptocurrency requires the appropriate authorisation and compliance with all applicable FCA rules and EU regulations. Firms also under SEC supervision should be aware that the SEC is now including some standard requests in routine examinations regarding the firm’s policy on personal account dealing and any management or advisory services provided with regard to cryptocurrencies.

  • The FCA is continuing to engage with firms on concerns regarding KIDs required under PRIIPS. Firms should continue to assess whether their activities require the production of KIDs and to ensure any “opting-up” of investors is done correctly.

  • The FCA has written to all firms which have permissions to carry out activities falling within the SD01 FSCS funding block regarding their FSCS exemption with the aim of plugging a perceived gap in consumer protections. AIMA has additionally contacted the FCA expressing their stance that these changes were not fully explained in the proposal and requesting an extension of the application of the rules. The deadline for response was 15 June 2018, however, if further analysis is required, please contact your ACA consultant.

  • The JMLSG has published revised guidance for syndicated lending firms which considers specific issues that firms may want to take into account when conducting due diligence.

  • ESMA has updated its Q&A on short-selling, further specifying the requirements for easy-to-borrow and purchase lists.

  • Over this summer, the FCA will be relocating to 12 Endeavour Square (12ES), Stratford, London, E20 1JN. Any reference to the FCA’s Canary Wharf addresses in a firm’s literature, documentation or website should be amended accordingly.


On 12 April 2018, the SEC’s National Exam Program issued a Risk Alert highlighting the Most Frequent Advisory Fee and Expense Compliance Issues Identified in Examinations of Investment Advisers.

This Risk Alert is based on SEC deficiency letters from over 1,500 adviser examinations during the last two years.  The Risk Alert noted recurring deficiencies such as:

  • Billing clients based on incorrect account valuations, fee rates, or billing frequencies
  • Omitting rebates or applying discounts incorrectly
  • Providing fee disclosures that are inconsistent with actual practice
  • Misallocating expenses to client funds that should be paid by the adviser

Whenever a Risk Alert like this is issued, the SEC considers the industry to be fairly warned about an issue.  If SEC examiners find similar deficiencies going forward, the SEC will assume that the adviser brazenly ignored the Risk Alert and the deficiency is more likely to be referred to SEC enforcement.  SEC-registered advisers are therefore encouraged to review their fee and expense practices in light of this Risk Alert and either correct any similar practices as soon as possible or confirm that there are no similar practices.

Questions regarding this risk alert may be directed to Andrew Petillon or Crystal Christian.

Looking Ahead

  • Firms who use LIBOR need to plan for the possibility that LIBOR will not exist after 2021. The FCA is working with the Bank of England and others to develop SONIA as an alternative sterling risk free rate.

  • RTS 27 disclosures containing quality of execution data from trading venues must be reported on a quarterly basis and no later than three months after the end of each quarter. The first data will be available from 30 June 2018. For certain firms they are obliged to consider this data as part of their best execution monitoring processes, for other firms they ought to consider if the data may be of value.

  • The due date for the submission of Complaints returns on GABRIEL is upcoming for the period ending 31 March 2018. Firms are advised to check their returns schedule.

  • ACA has announced its acquisition of Cordium; please see our press release for further information.

For More Information

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