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Welcome to Legal Shorts, a short briefing on some of the week’s developments in the financial services industry.

If you would like to discuss any of the points we raise below, please contact me or one of our other lawyers.


Claire Cummings

020 7585 1406


ESMA statement clarifies clearing and trading obligations ahead of 21 December 2018 deadline

ESMA recently published a statement clarifying firms' clearing and trading obligations. ESMA explains that, under EMIR, the current derogation from the clearing obligation for certain intragroup transactions concluded with a third country group entity and the phase-in for non-financial counterparties (NFCs) in Category 4 (broadly speaking NFCs+), expire on 21 December 2018, for the interest rate derivative classes denominated in the G4 currencies subject to the clearing obligation. To address the challenges this presents, ESMA has:

  • Finalised draft regulatory technical standards (RTS) amending the current Commission Delegated Regulations to extend the deferred date of application of the clearing obligation. However, if the RTS have not entered into force by 21 December 2018, groups would need to start clearing these intragroup transactions.

  • Adopted a proposal to amend EMIR which would change the requirement so that NFCs+ would only be subject to the clearing obligation in the asset class or classes where they have exceeded the clearing threshold.

ESMA also explains that MiFIR exempts financial counterparties and NFCs, temporarily exempted under EMIR from the clearing obligation, from the trading obligation for derivatives. This means that, until the draft RTS and the proposed Refit Regulation enter into force, the relevant counterparties would also be subject to the trading obligation under MiFIR for those contracts. Given these difficulties, ESMA expects competent authorities to not prioritise their supervisory actions towards affected entities and to apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate way.


Renewed ESMA restriction on CFDs published in OJ

On 31 October 2018, ESMA Decision (EU) 2018/1636 of 23 October 2018 to renew and amend the temporary restriction in Decision (EU) 2018/796 on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients was published in the Official Journal of the EU (OJ). ESMA announced in September 2018 that it was renewing the restriction, which has been in effect since 1 August 2018, from 1 November 2018 for a further three-month period. It is renewing the restriction as ESMA considers that a significant investor protection concern relating to the offer of CFDs to retail clients continues to exist. The Decision was made under Article 40 of MiFIR, which gives ESMA the power to introduce temporary intervention measures on a three-monthly basis. Before the end of the three months, ESMA must review the measures and consider whether they should be extended for a further three months.


Draft statutory instruments for EuVECA and EuSEF Regulations published by HM Treasury

HM Treasury has published draft versions of the Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 and the Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018, with an explanatory information document. The purpose of the Regulations is to amend retained EU law relating to the Regulation on European venture capital funds (EuVECA Regulation) and the Regulation on European social entrepreneurship funds (EuSEF Regulation). Among other things, the Regulations:

  • Confirm that UK fund managers will be able to register or be authorised with the FCA to market qualifying funds in the UK under new labels (social entrepreneurship funds (SEF), registered venture capital funds (RVECA) and long-term investment funds (LTIF)). Existing UK managers that are already registered or authorised with the FCA will be automatically transferred to the new UK regime.

  • Maintain existing investment rules for EUVECAs, EuSEFs and ELTIFs domiciled in the UK.

  • Remove existing legislative provisions relating to co-operation and sharing information with EU authorities.

  • The explanatory information also contains details about how the temporary marketing permissions regime in the AIFMD (Amendment) (EU Exit) Regulations 2018 will apply to EuVECAs, EuSEFs and ELTIFs.


HM Treasury publishes updated advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions

HM Treasury recently published an updated advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions. The Money Laundering, Terrorist Financing and Transfer of Funds (Information of the Payer) Regulations 2017 require firms to put policies and procedures in place in order to prevent activities related to money laundering and terrorist financing. On 19 October 2018, FATF published two statements identifying jurisdictions with strategic deficiencies in their anti-money laundering and counter-terrorism financing regimes. In response to the latest FATF statements, HM Treasury advises firms to note the following:

  • Consider the Democratic People's Republic of Korea (DPRK) as high risk and apply counter measures and enhanced due diligence measures in accordance with the risk.

  • Consider Iran as high risk and apply enhanced due diligence measures in accordance with the risk.

  • For the Bahamas, Botswana, Ethiopia, Ghana, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen take appropriate sanctions to minimise associated risks which may include enhanced due diligence measures in high risk situations.

Additionally, the DPRK, Iran, Syria, Tunisia and Yemen are subject to sanctions measures which require firms to take additional measures.


Execution of documents: a deed is a specialty despite not being sealed (High Court)

The High Court has held that a share purchase agreement executed as a deed by an individual in accordance with the formalities set out in section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 (LP(MP)A 1989) was a specialty within the meaning of section 8 of the Limitation Act 1980 (LA 1980), and therefore subject to the 12-year statutory limitation period specified by that section, despite not being made under seal. The LA 1980 provides for a limitation period of six years for actions in respect of simple contracts (section 5) and 12 years for actions on a specialty (section 8). The word "specialty" is not defined in the LA 1980, but is generally understood to mean a document under seal. Since the requirement for all deeds to be made under seal was abolished by the LP(MP)A 1989, some uncertainty has remained as to whether modern deeds which are not sealed qualify as specialties attracting the longer 12-year limitation period. The decision in this case (which to the judge's knowledge is the first time the issue has been considered or decided by the courts) resolves that uncertainty, confirming that a seal is no longer necessary to make a deed a specialty for the purposes of the LA 1980, provided it complies with the requirements for a valid deed specified in section 1 of the LP(MP)A 1989. The court found that it is the parties' intent to import the special solemnity of a deed, rather than the presence of a seal, which makes a deed a specialty, and that compliance with the formalities set out in section 1 of the LP(MP)A 1989 is enough to demonstrate the requisite intent. The 12-year limitation period therefore applies to such a deed in the same way as if it had been sealed by the parties. (Case: Liberty Partnership Ltd v Tancred [2018] EWHC 2707 (18 October 2018) (Martin Griffiths QC, sitting as a deputy judge of the High Court)).


FATF annual report 2017-2018

FATF recently published its annual report for 2017-2018. Highlights of the annual report include the following:

  • The deployment of the FATF FinTech and RegTech Initiative.

  • The continuing need to improve transparency and the availability of beneficial ownership information.

  • The FATF's President's Paper encourages judges and prosecution bodies to a greater use of the available tools to combat money laundering and terrorist financing.

FATF is currently undertaking its evaluation of the UK's compliance with FATF's 40 recommendations and nine special recommendations on money laundering and terrorist financing. The evaluation will obviously include consideration of the work of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS). In July 2018, the presidency of FATF passed from Argentina to the United States of America.


FCA letter to proportionality level 1 firms on 2018/19 remuneration round

The FCA has published a Dear Remuneration Committee Chair letter it has sent to proportionality level 1 firms (that is, all UK banks, building societies and investment firms with relevant total assets exceeding £50 billion) regarding the 2018/19 remuneration round. In the letter, the FCA sets out its approach to the supervision of remuneration. Supervisors will discuss how a firm's remuneration policy reinforces a firm's values, ethics and culture, and promotes the right behaviour. This will include an assessment of how any issues fed back as part of the previous remuneration round have been addressed. Firms should also expect to engage with the FCA on the results of gender pay gap analysis and plans for addressing inequalities and any drivers of poor culture.


PRA publishes summary of regulatory reporting requirements for ring-fencing

On 31 October 2018, the PRA published a pack that contains a summary of the new regulatory reporting requirements and reporting system requirements relating to ring-fencing. The pack is aimed at UK banking groups falling within the scope of structural reform requirements from 1 January 2019. These firms will be required to submit ring-fencing regulatory returns from that date. The PRA explains that all the information included in the pack is based on, and does not supersede, the PRA Rulebook, the regulatory reporting and the structural reform sections of the Bank of England (BoE) website, and relevant and applicable published PRA policy. For the avoidance of doubt, it advises firms to continue to refer to the relevant Parts of the PRA Rulebook, the BoE website, and PRA policy to determine their regulatory reporting obligations.


FCA discussion paper on fair pricing in financial services

On 31 October 2018, the FCA published a discussion paper on fair pricing in financial services. The discussion paper focuses on price discrimination and loyalty/ inertia pricing. It sets out the FCA's general framework for assessing the fairness of and harm caused by price discrimination. It also explains how this framework might be applied in assessing loyalty/ inertia pricing. Finally, the discussion paper considers the remedies that the FCA may impose to address harm caused by such pricing practices. The discussion paper is intended to launch a public debate on these issues, which are relevant, in particular, to its market study on general insurance pricing. The FCA is intending to use the framework set out in its discussion paper to examine the fairness of pricing practices in the general insurance market The FCA seeks comments on the issues raised in the discussion paper by 31 January 2019.

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25 05 2019

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