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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


Government and FCA respond to House of Commons Treasury Committee report on cryptoassets

On 20 December 2018, the House of Commons Treasury Committee published its eighth special report of session 2017-19 (HC 1845). The report sets out the UK government's and the FCA's response to the Committee's twenty second report of the session on cryptoassets. In their responses, both the government and the FCA refer to the joint HM Treasury, FCA and Bank of England (BoE) Cryptoassets Taskforce October 2018 final report that clarifies many of the issues on which the Committee sought clarity.

The government points out that it shares the Committee’s concerns about the substantial risks to consumers and market integrity associated with cryptoassets, as well as their potential use for illicit activity. As such, the government and regulators' immediate priorities are to mitigate these risks, while also continuing to encourage innovation and responsible development of legitimate distributed ledger technology (DLT) and cryptoasset related activity. These priorities include a series of FCA and government consultations, announced by the Taskforce, on the most appropriate response to cryptoassets (including on the regulatory perimeter relating to cryptoassets, a ban on the sale of derivatives referencing cryptoassets and action to tackle the use of cryptoassets for illicit activities). The FCA addresses the steps it would take regarding market manipulation if the entire cryptoasset market was brought within its remit. It explains that it would not authorise or approve the listing of a transferable security or a fund that references exchange tokens (for example, exchange-traded funds) unless it is confident in the integrity of the underlying market and other regulatory criteria for funds authorisation are met. It would have to be satisfied that any listing of a security with cryptoassets as the underlying asset would not be detrimental to investors' interests. It confirms that it has not approved such a listing to date.

In a press release published alongside the report, the Committee states that it is clear that the government and the FCA share its concerns on crypto-assets, including the lack of regulation, minimal consumer protection, and anonymity aiding money laundering, and welcomes the series of consultations on how to mitigate these risks.


ESMA consults on integrating sustainability risks into UCITS Directive and AIFMD

On 19 December 2018, ESMA published a consultation paper on integrating sustainability risks and factors into the UCITS Directive and the AIFMD. ESMA is aiming to clarify that all authorised fund managers subject to the UCITS Directive and the AIFMD will need to incorporate sustainability risks into certain internal processes. Sustainability risks are the risks of fluctuation in the value of positions in a fund's portfolio due to environmental, social and governance (ESG) factors.

Proposed changes to the UCITS and AIFMD framework include:

  • Incorporation of sustainability risks into organisational procedures, consideration of the types of conflicts of interest that can arise, and systems and controls to ensure that they are properly taken into account in the investment and risk management processes.

  • Consideration of required resources and expertise for the integration of sustainability risks, including clarification that this is a senior manager responsibility.

  • Consideration of sustainability risks when selecting and monitoring investments, designing written policies and procedures, and implementing effective arrangements.

The draft technical advice shows that the proposed changes will be made by amending the Directive implementing the UCITS Directive as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (2010/43/EU) (Organisation Directive) and the Commission Delegated Regulation 231/2013 supplementing the AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (AIFMD Level 2 Regulation). The consultation closes on 19 February 2019. ESMA is aiming to submit the final technical advice to the European Commission by the end of April 2019.


Council of EU Decision incorporating MLD4 and WTR into EEA Agreement published in OJ

On 27 December 2018, Council Decision (EU) 2018/2059 of 29 November 2018 on the position to be adopted within the EEA Joint Committee amending Annex IX (Financial Services) to the EEA Agreement was published in the Official Journal of the European Union (OJ).

The Decision states that the following are to be incorporated into the EEA Agreement by amending Annex IX:

  • The revised Wire Transfer Regulation ((EU) 2015/847) (revised WTR).
  • The Fourth Money Laundering Directive ((EU) 2015/849) (MLD4).
  • Commission Delegated Regulation (EU) 2016/1675, which supplements MLD4.

The draft Decisions of the EEA Joint Committee relating to the above are attached to the Decision. The Decision entered into force on 29 November 2018. The European Commission adopted a proposal for the Council of EU's Decision on 12 October 2018.


MAR: FCA review of implementation

On 17 December 2018, the FCA published issue 58 of its Market Watch newsletter. In this issue the FCA details its findings on a review of the implementation of MAR. The FCA has met with firms, carried out surveys, and analysed its own data. It attempts to clarify some of the issues raised.

Among the topics discussed are:

  • The impact of the new market soundings regime on issuers, firms and investors. The FCA comments on different approaches to contacting investors, record-keeping, and post-sounding cleansing.

  • Insider lists. The FCA notes different approaches to the production of insider lists (and varying quality in the lists it has received) and comments on the use of other types of list, including 'above-the-wall' lists.

  • Obligations for issuers under MAR. The FCA comments on possible systems and controls for the identification and disclosure of inside information, including the use of disclosure committees and seeking the views of advisers.

The FCA states that it will continue to work closely with market participants to ensure a consistent and effective implementation of MAR.


FCA evaluates reducing barriers to entry into UK banking sector

On 20 December 2018, the FCA published an evaluation paper (EP18/3) on reducing barriers to entry into the UK banking sector. Key findings from the evaluation include the following:

  • There is a more efficient authorisations process. The time taken to assess firms' applications has reduced by three months.

  • The rate of entry into the UK banking sector is higher than before the 2013 review. While not all entry can be solely attributed to the changes in the authorisations process, firm interviews have indicated that the interventions have encouraged entry into the UK banking sector.

  • The increase in entry has in turn led to a greater range of product offerings in the retail market and benefits for consumers.

  • There has not yet been a substantial change to concentration in the retail banking sector and the FCA does not have evidence of significant competitive responses by incumbent banks.


Council of EU agrees position on revised AML proposal for Omnibus Regulation

On 19 December 2018, the Council of the EU published a press release reporting that it has agreed its negotiating position in relation to the revised legislative proposal for the Omnibus Regulation on reforms to the European System of Financial Supervision (ESFS).

The press release indicates that the EBA will be given responsibility for:

  • Collecting information from national competent authorities (NCAs) relating to weaknesses identified in the context of their action to prevent or fight money laundering and terrorist financing.

  • Enhancing the quality of supervision by developing common standards and co-ordinating between national supervisory authorities.

  • Performing risk assessments on NCAs to evaluate their strategies and resources to address the most important emerging anti-money laundering (AML) risks.

  • Facilitating co-operation with non-EU countries.

  • Addressing decisions directly to individual banks (as a last resort where NCAs have not acted).

The Commission published its communication on the EU framework for prudential and AML supervision for financial institutions, together with a revised legislative proposal in September 2018.


The Money Laundering and Terrorist Financing (Miscellaneous Amendments) Regulations 2018

The Money Laundering and Terrorist Financing (Miscellaneous Amendments) Regulations 2018 (SI 2018/1337) (the regulations) was laid before Parliament on 13 December 2018. It makes amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 (oversight regulations) and the Solicitors (Scotland) Act 1980.

  • Regulation 3 implements an amendment to Directive 2015/849/EU of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing by adding restrictions on the use of anonymous safe-deposit boxes.

  • Regulation 4 specifies the decisions of the FCA and of Her Majesty's Revenue and Customs which are subject to appeal under the MLR 2017.

  • Regulation 5 amends the oversight regulations which give the FCA powers to oversee certain anti-money laundering supervisors. Regulation 12 originally prevented the FCA from disclosing information to anyone other than relevant authorities (such as other supervisors) and law enforcement authorities. The amendment now allows the FCA to disclose information to other persons, provided that the disclosure is for purposes connected with enforcement proceedings or with the FCA’s functions.

  • Regulation 7 requires the Treasury to carry out a review of these Regulations by 26 June 2022.

The regulations come into force on 10 January 2019.


FCA final ex post impact evaluation framework

The FCA has published a paper setting out its final ex post impact evaluation (EPIE) framework.

The paper outlines the FCA's framework for measuring the impact of its past interventions on consumers, firms and markets. It explains why the FCA does EPIE, how it chooses specific interventions to study and how it ensures that its evaluations are robust, impartial, and therefore credible. Assessing the effectiveness and impact of its past interventions allows the FCA to develop a strong evidence base to guide its decisions.

The FCA consulted on the impact of its interventions in an April 2018 discussion paper (DP18/3) (see Legal update, FCA discussion paper on evaluating impact of its interventions). In a feedback statement published alongside the final framework the FCA explains that respondents generally welcomed and supported the FCA's proposals for EPIE of its interventions. Respondents noted that evaluation is central to any effective decision-making framework, and recognised the importance of assessing the impact of regulatory interventions to improve outcomes for customers, now and in the future. The FCA provides feedback on the responses and explains how it has amended the framework to take account of them in a number of areas including the:

  • Extent to which the FCA takes note of and follows other existing guidance.

  • FCA's approach to evaluating unintended consequences of its interventions.

  • FCA's commitment to publishing its evaluations in most cases.

  • Difference between post implementation review (PIR) and EPIE.

  • Timing of an evaluation and the commitment to undertake at least one EPIE per year.

  • Criteria used to select which interventions to evaluate ex post.

  • FCA's steps to ensure the independence of EPIEs.

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19 06 2019

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