Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
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Regulatory
Focus
Smith & Williamson Fund
Administration Limited
September 2019
For professional advisers only
2 Regulatory Industry Developments
Contents
Introduction 1
Regulatory change timeline 2
Benchmarks and Performance (FCA PS19/4) 4
FCA business plan 2019/2020 5
Assessment of value 6
Brexit 8
Building the UK financial sector’s operational resilience 10
Building a regulatory framework for effective stewardship 11
Guidance for firms on the fair treatment of vulnerable customers 12
Senior managers & certification regime 13
Assessing adequate financial resources 14
Duty of care and potential alternative approaches 15
Investment platform market study 16
European Legislative & Regulatory Developments 17
Fund Liquidity 19
Appendix 1 - References 20
Introduction
What is the SWFAL (Smith & Williamson Fund Administration Limited) Regulatory Focus
Our Regulatory Focus provides you with a summary This is the second time that SWFAL has published
of current and forthcoming regulatory changes this update. Many thanks to those of you who
that we feel may have an impact on our business provided feedback on the first edition.
partners over the coming months and in some cases We hope that you will continue to find it useful
into 2021! It also confirms the action, if any, that however as always we would welcome your
SWFAL will be taking in order to ensure that we and feedback. Please feel free to contact Brian McLean,
our business partners remain fully compliant. John McWilliam or Graham Duns should you wish to
discuss further any points that you may have.
Regulatory Industry Developments 1
Regulatory Change Timeline
FCA to publish
findings of the
second assessing
13th Sept 2019 suitability review
FCA results on
consultation framework BREXIT
for assessing adequate 31st October 2019
financial resources
30th September 2019
Prudential regime for
Deadline for AFM
MiFID investment firms
Boards to appoint
Independent Directors. FCA’s Investment
Platform Market
Study (CP19/12).
Policy statement plus
Revised Shareholder consultation paper on
Rights Directive II exit fees (Winter 2019)
September 2019
2020
Assessment of Value now Guidance consultation 5th Money Laundering
required for funds with (GC19/3) on guidance for Directive
year ends on or after 30th firms on the fair treatment
(10th January 2020)
September 2019. of vulnerable customers
(Consultation closes
FCA Policy Statement and new 4th October 2019)
rules on illiquid assets and
Assessment of Value
open-ended funds (CP18/27). ESMA final report on now included in fund
(FCA has delayed the release). fund liquidity stress Report & Accounts from
testing and leverage January 2020.
expected
Senior Manager & Certification
Regime (SMCR) including EU Benchmark
Prescribed Responsibilities FCA (FS19/2) – a duty Regulation
deadline for solo regulated firms of care follow up
(January 2020)
consultation expected
9th Dec 2019
Q3 2019 Q4 2019 Q1 2020
2 Regulatory Industry Developments
(H1 2020)
New rules on
Illiquid Assets
expected as the
result of CP18/27
however the release 2020/2021
has been delayed by
the FCA. LIBOR transition
Publication of
the FCA review of
FCA consultation Financial Advice
expected following Market Review
Competition & (FAMR) and RDR
Markets Authority findings
(CMA) remedies
2021
FCA’s Investment
Platform Market
Study (CP19/12)
implementation
Potential expected
consultation and (31st July 2020)
policy papers
on operational
resilience
(2019 / 2020)
Q2 2020 Q3 2020 Q4 2020 Q1 2021
Regulatory Industry Developments 3
Benchmarks and Performance
(FCA PS19/4)
Key Consultation Points The FCA explained that its intention was not to
The following is a reminder of the FCA rules around force all funds to use benchmarks, or, indeed, to
benchmarks. change how funds are managed, at all. However,
investors must be able to evaluate how well a
The new FCA rules identified three categories
fund is doing. Additionally, the FCA has stated
of benchmark:
that if a fund uses benchmarks, the benchmarks
• A ‘target’– A benchmark used to define the must be referenced consistently across the fund’s
fund’s target performance or to trigger a documents. As such, from 7th August 2019 you
payment from scheme property (such as a will not be allowed to refer to any benchmarks in
performance fee). factsheets etc. which are not referenced in the
• A ‘constraint’ – A benchmark which constrains prospectus. Additionally, if you choose to show past
the composition of the portfolio. performance of a comparator against a benchmark
in fund’s financial promotion materials, you must do
• A ‘comparator’ – A benchmark which is used as a so consistently across all fund’s documentation.
performance comparator for the fund.
The requirements for prospectuses as follows:
Type of Benchmark What is required
Target benchmark • Disclose the existence of all target benchmarks
• Explain the use of any target benchmarks
• Explain the choice of any target benchmarks
• Update the past performance information to show the performance
of any target benchmarks
Constraining benchmark • Disclose the existence of all constraining benchmarks
• Explain the use of any constraining benchmarks
• Explain the choice of any constraining benchmarks
• Update the past performance information to show the performance
of any constraining benchmarks
Comparator benchmark • Disclose the existence of all comparator benchmarks
• Explain the use of any comparator benchmarks
• Explain the choice of any comparator benchmarks
No benchmark • Explain that there is no benchmark
• Explain how investors can assess the performance of the fund
The above are the components that you need to Additionally the Investment Association (IA) notes
think about if you are launching a new fund. that ESMA continues to refine its UCITS Q&A’s which
We would also point out that the rules introduced incorporate a number of questions in relation to
by PS19/4 stand apart from the EU’s benchmark UCITS KIIDs and, more specifically, disclosures
regulation and while there may be certain practical relating to indices.
overlaps, the two regimes are conceptually
independent and one may be relevant where the
other is not.
Next Steps
Our Legal & Technical Team would be happy to answer any queries that you have.
They can be contacted initially at legal&technical@smithandwilliamson.com and
by telephone on 0141 22 5012.
4 Regulatory Industry Developments
FCA - Business Plan 2019/20
Published • Consultation aimed to improve firms’ disclosure
April 2019 of costs and charges and fiduciary management
services following the publication by the CMA
Proposed rules come into effect of their remedies which are due to take effect
Expected to be 2020/2021. at the end of 2019. The consultation will take
place once those rules are in place,
Scope of the Study / Key consultation points • The FCA wants to improve the standards of
The business plan for the year ahead was published liquidity management in firms managing funds
in April 2019 setting out some key priorities for the that invest in illiquid assets such as property.
next 12 months. The proposed changes to the rules and
One of the key areas that the FCA will focus on guidance were due to be published in a policy
is a consultation on introducing a new prudential statement in the first half of 2019. SWFAL awaits
regime for MiFID investment firms to create a more publication in due course,
“appropriate” set of requirements for their business • The FCA will shortly review MiFID
models than the existing Capital Requirements implementation to assess how well asset
Directive (CRD IV) regime. managers oversee the design of their product,
The FCA stated that the new regime with be identify their target market and monitor
aligned with the EU Investment Firms Directive and their products and distribution activities in
Regulation and is expected to be operational by compliance with MiFID II’s product governance
2020/2021. It is anticipated that the consultation requirements,
paper will be published in the second half of • The FCA will carry out a second Assessing
this year. The FCA stated that “the new regime Suitability Review during 2019 and publish their
aims to reduce unnecessary costs to firms. It will findings in 2020. This will examine advice and
include new rules and have implications for both disclosure firms given to different consumers,
our authorisation and prudential supervision of across different product types and by different
investment firms. There will also be changes to types and sizes of firm,
reporting requirements.”
• An analysis of the impact of the Retail
A number of other areas that the FCA will focus on are: Distribution Review (RDR) and Financial Advice
• Following the joint FCA/PRA discussion paper Market Review (FAMR) to check whether
in July 2018, Building the UK financial sector’s intended outcomes have been achieved and
operational resilience, the FCA will consult on clients’ expectations met. Findings expected to
policy proposals later in the year. The FCA is be published in 2020,
concerned with the high instances of operational • Implementing the remedies in the Investment
failures due to third party IT systems, system Platforms Market Study. See page 16 for
upgrades, data transfers, cybercrime and poor further details.
management processes. This is also an area that
• Continued focus on combating financial crime
SWFAL is concentrating on via due diligence and
and improving anti-money laundering practices.
the assessment of value,
• The implementation of the changes made
to the fund governance rules (Asset Market
Management Study - PS18/8) which clarifies and
strengthens authorised fund managers existing Next steps
duty to act in the best interests of investors
and also their rules and guidance to improve SWFAL awaits publication of the relevant
the quality, comparability and robustness of findings, consultation papers and final rules.
information for investors (PS19/4),
Regulatory Industry Developments 5
Assessment of Value
Fees & Charges 1 Range and quality of service
As a recap the following statement was issued to
delegated investment managers on Friday, 12th July. This includes the services that relate to the
operation of the SWFAL funds such as fund
From the 30th September 2019, it is SWFAL’s administration, fund accounting, custody, trustee
responsibility to conduct a detailed assessment on and depository services and audit services. It would
whether its funds are providing value to shareholders. also include services that relate to the broader
SWFAL must then publish publicly on an annual basis, shareholder ‘experience’ such as; the quality of
within four months of a fund’s year end, a statement the documentation, i.e. prospectus and factsheets;
setting out a summary of the outcome of the process redemption management; the quality of website
and whether or not SWFAL believes the payments out services and the ability to communicate with
of the scheme property are justified in the context shareholders on complaints and enquiries.
of the overall value delivered to shareholders. SWFAL
will publish this assessment in the fund’s annual SWFAL performs due diligence on all the delegated
report and accounts. investment managers on an annual basis, where we
look to gain assurance that the firm is both financially
Where the assessment has identified that the stable as well as having the necessary governance,
charges are not justified in the context of the controls, policies and procedures to allow them to
overall value delivered to shareholders, SWFAL comply with the regulations and carry out efficient
must provide a clear explanation of what action day-to-day management of the fund. All of the
has been or will be taken to address the situation. information gathered helps SWFAL form an opinion
Although the detailed assessment will be done on of how the delegate investment manager is able to
a share class level for each fund (or sub-fund of ensure shareholder protection, provide a quality of
an umbrella), the annual statement will be on a service on an ongoing basis and to identify any issues
fund (or sub-fund) level and share class would be that could affect the shareholders experience.
highlighted only where relevant.
SWFAL has created an Assessment of Value 2 Performance
committee, although ultimately the assessment will
The focus will be on fund objectives and policies
be subject to internal scrutiny by the SWFAL board
employed and the portfolio benchmark, which may
(which includes independent directors), before sign-
be a target, constraint or comparator. For example,
off by the chair of the SWFAL board.
where an objective refers to outperforming a
In carrying out the assessment, SWFAL must, benchmark, delivering income, managing risk
separately for each class of units in a fund, consider etc., SWFAL will pay particular attention to these
as a minimum, the seven criteria stipulated by principles to ensure they are being adhered to.
the FCA. SWFAL may consider other issues where Performance would also be measured over an
appropriate. The seven criteria are: “appropriate timescale” which is appropriate to
the fund’s investment objective and strategy. For
1 Range and quality of service funds designed to be held as medium to long-term
investments, performance over 3, 5 and 10 years
2 Performance would be of particular relevance.
SWFAL monitors fund performance (against its
3 Comparable services
benchmark, where relevant, and its peer groups).
4 Comparable market rates
3 Comparable services
5 Economies of scale
SWFAL continuously seeks to ensure that costs to
the fund, by virtue of services provided by lawyers,
6 AFM costs, and
depository etc., provide value for money. In addition
to individual fees, SWFAL looks at the scope of the
7 Classes of Units
services provided, the ease of interaction between
SWFAL and the service provider, and any value-
added service that SWFAL can benefit from, e.g.
periodic regulatory presentations, which can be
used for the benefit of the fund stakeholders. SWFAL
conducts biennial due diligence on the depository/
trustee, custodians and presents findings to the
SWFAL Board.
6 Regulatory Industry Developments4 Comparable market rates
Next steps
The criterion of comparable market rates involves
an external comparison of the funds at a share class SWFAL are now in the process of collecting
level with that of similar funds e.g. by doing a peer the data required for the first set of annual
group comparison of charges (where available). statements. In due course we will contact
you for clarification on some of the data
5 Economies of scale gathered in relation to your fund. SWFAL
will start the procedure for each fund
In looking at economies of scale, SWFAL is required approximately three months prior to the
to assess to what extent it is “able to achieve” fund’s annual accounting date. In the
any savings as a result of economies of scale and meantime, the current annual due diligence
whether they have been passed onto shareholders. exercise will continue.
Where savings could be achieved but will not be,
In summary, if your fund’s year end is 30th
or have been achieved and not been passed onto
September 2019, SWFAL will start gathering
shareholders, SWFAL would be required to further
the relevant data from the interim report
investigate and a justification provided for the course
onwards in order to be able to verify our
of action taken. As a result SWFAL will look at all of
assessment with delegate fund managers
the separate fee structures to examine the effect
from September onwards, thereby allowing
on the fund to potential and existing shareholders
the SWFAL Board to approve and the chair
should the fund increase or decrease in value and
of the Board sign-off the assessment before
what actions have been taken thus far.
being included in the Report and Accounts
in time for publishing in January 2020.
6 AFM costs Subsequent fund year ends will follow a
This criterion requires consideration of every similar pattern.
component within the OCF, the AMC, event-based
fees such as entry or exit fees, early redemption
fees, performance fees and charges that relate to
other ancillary services provided to the fund. SWFAL
has identified each of its charges and reviews its own
costs and charges on an annual basis comparing it to
similar services where it is able to do so.
7 Classes of units
SWFAL are planning to identify shareholders who
hold units in a share class subject to higher
charges than those applying to other classes in
the same scheme with substantially similar rights.
SWFAL has already been in contact with delegated
investment managers where it was believed that
there is a case to move a shareholder. Funds with
only one share class will not be affected.
Regulatory Industry Developments 7BREXIT Update
Brexit impacts not just the future of the UK’s Leaving the EU without a withdrawal
financial services sector, in particular the UK asset agreement (“no- deal”) scenario
management sector which is the second largest in the
The FCA published its final rules and guidance on 29
world at £7.7 trillion with £3.1 trillion1 managed for
March 2019 in its Brexit Policy Statement (PS5/19).
overseas investors, but also impacts firms within the
It follows its February 2019 publication of near-final
EU Member States (known as ‘EU27’) and elsewhere.
rules, which provides rules and guidance for a range
Since our last publication, there has been a number
of scenarios, including contingency measures for the
of political turn of events, yet, the future of the UK’s
possibility that UK leaves the EU without a deal or
financial services sector remains largely uncertain
implementation period. It sets out the changes to
and now lies in the hands of the UK’s new Prime
the FCA Handbook and to Binding Technical Standards
Minister, Boris Johnston to agree the final terms of the
(BTS) as a result of Brexit.
Withdrawal Agreement with the EU, if the UK should
leave the EU with one. The FCA announced on 25 July 2019 it intends to
extend the proposed duration of the directions issued
Extension of Brexit under the Temporary Transitional Powers (TTP) to 31
The UK’s first short extension of Article 50 period December 2020. This means, the TTP would allow
was approved to 12 April 2019 and later a longer the UK regulators to waive, modify, delay or phase
extension was granted on 11 April 2019, when the in changes to certain regulatory requirements made
European Council agreed to further extend the period, under the EU (Withdrawal) Act 2018 (the legislation
whereby the UK has to complete the ratification of that has enabled the ‘onshoring’ of EU legislation and
the Withdrawal Agreement or leave without it, to 31 rules into the UK rulebook), in the event of a no-deal
October 2019 (the UK’s new ‘exit day’ from the EU). scenario.
The FCA has also used the TTP to implement a
Changes to UK Legislation Temporary Permissions Regime (TPR) for EU firm’s
The European Union (Withdrawal) Act 2018 (EUWA) passporting their investment funds and services in
transfers and converts existing EU legislation at the the UK, to enable them to continue to operate in
point of ‘exit day’ into UK law and also preserves the UK if the passporting regime, should fall away
the existing UK legislations which also implement EU abruptly in the event of a no-deal scenario. The
obligations. It also gives powers to the UK Government closing date for submitting a TPR application for EU
to make secondary legislation, in order to amend firms or EU domiciled Investments has been extended
existing legislation to ensure it functions effectively to 20 October 2019. In the event of a no-deal Brexit
when the UK leaves the EU. however, reciprocal market access into the EU by UK
firms or UK domiciled investment funds under the EU
As part of the secondary legislation, UK Government
passporting regimes, would no longer be available.
has been using its powers to draft numerous EU Exit
Statutory Instruments (SI’s) to help with a range of Under a no-deal scenario there could be an impact on
legal and regulatory issues caused by the UK’s exit the Share Trading Obligation (STO) under Article 23 of
from the EU. The Government’s intention is that the MiFIR3, where there is an absence of an ‘equivalence’
same rules and legislation will apply after ‘exit day’ decision in respect of the UK by the European
as before, as far as possible, but with the necessary Commission. While the European Commission is
amendments to reflect the UK’s new position outside preparing equivalences decisions for the non-EU
the EU. Thus far UK Parliament has passed through jurisdictions whose shares are traded systematically
the UK Government 60 SI’s relevant to the FCA, with and frequently in the EU, ESMA published a public
another 12 expected before 31 October 20192. All EU statement on 29 May 20194, clarifying which shares are
Exit SI’s have a commencement date of ‘exit day’. in or out of scope of MiFIR’s STO.
When the UK leaves the EU on Exit Day, it will cease
to be an EU Member State but will become a “third
Leaving the EU with a withdrawal
country”. The UCITS Brexit SI introduces a UK UCITS agreement
regime for funds established and authorised in the Should the UK leave the EU with a withdrawal
UK, which will have the new label of “UK UCITS”. agreement by 31 October 2019, the UK has until
Furthermore on Exit Day, the EU would consider UK 31 Dec 2020 (the ‘implementation period’), during
UCITS as third country AIF’s, which has considerable which time the UK government and regulators would
impacts on cross border sales marketing of these UK work on getting all the legislative requirements in
funds into the EU. SWFAL funds are UK Domiciled and place and the terms of the Withdrawal Agreement
are not marketed into the EU finalised, but also gives businesses the necessary
time to get ready for the post-Brexit regulatory and
1
As at December 2017 published by the Investment Association in their annual survey of asset management
2
As per Andrew Bailey’s speech given at FCA’s annual public meeting on 17 July 2019
3
Markets in Financial Instruments and amending Regulation (EU 600/2014)
4
Impact of Brexit on the trading obligation for shares (Article 23 of MiFIR)
8 Regulatory Industry Developmentslegislative environment. The extension of Article 50 Concluding thoughts
to 31 October means the implementation period is The UK Government aims to continue its work on
now shorter (lasting 14 months instead of 2 years); ensuring a ‘state of equivalence’ between the UK and
however the implementation period could potentially EU regulatory framework, especially if there should
be extended by the UK Government for another two be a no-deal scenario. The FCA also confirmed in their
years until 31 Dec 2022. During the implementation recent annual report 2018-19 that preparing for and
period SWFAL and asset managers would be required implementing the changes resulting from the UK’s exit
to continue complying with existing EU legislations from the EU has been their number one priority.
and regulations, but would also have to comply with
any new EU legislations. Furthermore, EU passporting It is needless to say that the direction the UK will
regimes will still be applicable until the terms of the take on exit day remains very much unclear; however
EUWA terms are finalised. SWFAL has taken independent advice6 and can confirm
that from Exit Day, existing EU share or unitholders
It is anticipated that the UK Government should will be able to retain their holdings in SWFAL’s suit
provide legal certainty beyond the implementation of funds no matter which direction the UK takes post
period by introducing grandfathering provisions as Brexit. In the event of a no-deal Brexit, as SWFAL only
part of the EUWA, or through a separate bilateral markets to investors in the UK, SWFAL’s suit of funds
agreement, to ensure a smooth transition to a post should not be impacted if there is a sudden loss of the
Brexit environment. EU Marketing Passport such as in a no-deal scenario.
However should any new investors within the EU
Other impacts of Brexit intend on investing in any of the SWFAL suit of funds,
Brexit has naturally had an impact on the Sterling and they can still do so either through reliance on ‘reverse
its volatility in the market and fund managers would solicitation’ provisions available for their category
have witnessed the impact of these movements in of investor in their EU27 country, or through reliance
their funds, therefore close monitoring would be an on the National Private Placement Regime (NPPR)
essential contingency measure that should be put in of their EU27 country, which allows certain overseas
place by asset management firms. professional or sophisticated investors to invest in UK
SWFAL would have to amend the funds’ legal domiciled funds.
and regulatory documentation to update certain Despite all the legislative changes taking place as
terms, definitions and clauses. The London Stock a result of Brexit preparations, firm’s must not lose
Exchange (“LSE”) would no longer be recognised focus on the FCA’s rule making outside that context of
as an EU-regulated market and amendments to Brexit, which will focus on its core priorities set out
fund documentation will be required to ensure that in their Business Plan 2019/20. The FCA will continue
securities listed on the LSE can still be purchased. to progress important regulatory initiatives and
When the UK leaves the EU, the FCA will also become thematic reviews such as the implementation of the
the UK regulator of Trade Repositories (TRs) and any Senior Managers and Certifications Regime especially
TR wishing to offer its services in the UK will need to in the context of firms’ culture and governance,
be registered with, or recognised by the FCA, for the the next steps for Asset Management Market Study,
purposes of derivative reporting obligations under improving operational resilience within firms, setting
EMIR5. The FCA will also become the UK regulator of measures to improve liquidity management of open-
Credit Rating Agencies. ended retail investment funds and firms’ progress in
implementation MiFID II in their firms.
5
European Market Infrastructure Regulation
6
Legal advice valid as at December 2018
Regulatory Industry Developments 9Building the UK financial
sector’s operational resilience
(DP18/04)
Discussion Paper Published The FCA is seeking to achieve jointly with the PRA
5th July 2018 and BoE to ensure firm’s have effective operational
risk management processes in place, whereby
Responses to discussion deadline operational risk refers to the risk of loss from
inadequate or failed processes, people or systems
5th October 2018
or from external events. Effective processes would
include management of IT risks particularly during
Results / further updates due
periods of major IT change to prevent disruptions to
Potential Consultation Paper and policy papers in
systems, effective management of cyber threats and
2019/2020 on building the UK financial sector’s
cyber-fraud, appropriate oversight and control of
operational resilience
outsourced third party systems and management of
the complexity of changes to systems and processes.
Scope of the Study /
Key consultation points The FCA has analysed the responses to the DP and
their next step is to develop policy proposals jointly
Operational resilience failures pose a risk to the
with the PRA/Bank of England and consult later
supply of vital services on which the real economy
in 2019. The FCA have also highlighted in their
depends. They can also threaten the ongoing
Business Plan 2019/20 that operational resilience
viability of firms and cause harm to consumers and
is a key focus of theirs for 2019/2020. The FCA
market participants. In the Discussion Paper (DP)
has recognised that IT system upgrades or data
on operational resilience that the FCA published in
transfers to a new system, is the single highest
July last year (DP18/04), jointly with the Prudential
cause of failure and operational disruption and will
Regulatory Authority (PRA) and the Bank of England
therefore be conducting a review of some firms to
(BoE), the FCA set out their proposed approach
better understand their current approaches and the
towards strengthening their supervision in this
causes of problems, which would form part of their
area and the ability of firms to prevent, adapt and
consultation policy proposals.
respond to, recover and learn from, operational
disruption. The DP makes it clear that FCA regard
operational resilience as a board and senior
management responsibility of firms. Next Steps
SWFAL awaits publication of the relevant findings of the FCA
Discussion Paper, consultation policy proposals and the final
rules.
10 Regulatory Industry DevelopmentsFRC / FCA – Building a regulatory
framework for effective
stewardship (DP19/1)
Published The FCA is consulting on the implementation of the
30th January 2019 sections of the amended Shareholder Rights Directive
(SRD II) that are relevant to FCA-regulated asset
Consultation ended managers and life insurers in the UK. In implementing
these provisions, the FCA is catering for the scenario
30th April 2019
where an implementation period is in place after the
UK’s departure.
Results / further updates due
Later in the fiscal year 2019/20. SRD II will change the legislative landscape for
stewardship in the UK. The proposed implementation
The Discussion Paper (DP) is relevant to FCA-regulated
of the Directive in the UK will establish a minimum
asset management firms and life insurers. It will also
regulatory baseline, with the Stewardship Code
affect issuers, public companies and signatories to the
promoting higher standards beyond this. Due to the
Stewardship Code. It proposes new measures on how
global scope of UK capital markets, SRD II would have
to encourage effective stewardship in the interest
some relevance to regulated firms and corporate
of consumers. See also FCA CP19/7, which covers
issuers even in a scenario in which the Directive was
measures to implement the provisions of the amended
not implemented in the UK.
Shareholder Rights Directive (SRD II) and which came
into effect in June 2019.
At that point, SWFAL and their delegated Investment
Managers were required to develop and publicly Next Steps:
disclose (on a comply or explain basis) an engagement We await the outcome of the consultation, which closed on
policy. As a minimum, their website needed to state the 30th April 2019, the FCA stating that they will issue a
that they are currently in the process of developing feedback statement later in the fiscal year 2019/20.
or updating their engagement policy in accordance
with the new rules or are considering whether or not
to have one. It also requires them to disclose annually
how this policy has been implemented.
Regulatory Industry Developments 11Guidance Consultation on
Guidance for Firms on the
Fair Treatment of Vulnerable
Customers (GC19/3)
Discussion Paper Published being financially excluded from certain types of
25th July 2019 investments, at risk of being exposed to mis-selling,
or purchasing products and services which are not
Responses to discussion deadline appropriate for them due to their misunderstanding of
the nature of the product.
4th October 2019
The Guidance advices firms to develop an
Results / further updates due understanding of the needs of vulnerable customers
Consultation on revised draft Guidance along with a and translate them into practical action in a
cost benefit analysis, and finalised Guidance will be proportionate way to their business model and
published for firms on the fair treatment of vulnerable customer base, and ensure staffs have the necessary
customers, date to be confirmed. skills and capability to meet the needs of vulnerable
consumers. Furthermore, this understanding should
Scope of the Study / then be embedded in products and services design,
Key Consultation Points process and communications. This means firms
should understand the nature and scale of drivers of
The FCA published draft Guidance for firms to
vulnerability present a particular target market or
consult on. The FCA defines a vulnerable consumer as
customer base, including the impact of vulnerabilities
‘someone (natural persons) who, due to their personal
on the needs and experience of consumers, in order to
circumstances, is especially susceptible to detriment,
prevent gaps in the provision of suitable services and
particularly when a firm is not acting with appropriate
products and to prevent poor outcomes for vulnerable
levels of care’. The key drivers of vulnerability
customers.
identified by the FCA through their Financial
Lives Survey 2017 are health (physical or mental The draft Guidance provides the FCA’s view on
disabilities), life events (such as bereavement), what the Principles for Businesses (the Principles)
resilience (such as low savings or income) and require of firms involved in the supply of products
capability (such as low knowledge or confidence in or services to retail customers who are actually,
managing financial matters). or potentially, vulnerable. The FCA has said they
would use this guidance to monitor how firms treat
The complex nature of financial services may
vulnerable consumers and to hold them to account
negatively impact vulnerable consumers. Products
if they breached the Principles. This Guidance does
and services are often complicated, and can involve
not provide a checklist of required actions; rather it
entering into extended commitments. Subsequently,
provides options, including good and poor practices,
the financial impact of decisions can be life changing
for ways in which firms can comply with the Principles.
and poor decisions can have long-term effects. The
The FCA also expects firms to use their own judgement
overall impact of these consequences on consumer
about how they should treat their vulnerable
welfare may well be detrimental, and vulnerable
customers fairly.
consumers may be more likely to experience
harm. The types of harm vulnerable consumers
may experience are for example being scammed,
Next Steps
The FCA is seeking responses to their Guidance consultation
questions from all types of financial services firms which
provide products or services to retail customers. SWFAL
and investment management firms should be aware of
the requirements of this Guidance, whilst awaiting the
publication of the revised guidance with firms’ responses,
and eventually the finalised Guidance.
12 Regulatory Industry DevelopmentsFCA – Optimising the Senior
Managers & Certification Regime
and Feedback to (CP19/4) and
Final Rules (PS19/20)
Discussion Paper Published Scope of the Study / Key consultation
23rd January 2019 points:
• It will apply to solo-regulated firms from
Responses to discussion deadline December 2019.
23rd April 2019
• Near final rules for the SM&CR were produced
Proposed rules come into effect in July 2018.
9th December 2019
Results / further updates due
The FCA originally published its near final rules in
Next steps
July 2018 and have subsequently published their Final rules were published on the 26th July and come into
final rules in PS19/20 on 26 July 2019. force for solo-regulated firms (i.e. 9 December 2019).
When consulting on these rules, the FCA identified areas where change may be required. The final policy
statement PS19/20 sets out the changes, which are:
Changes Explanation
The head of legal excluded from The head of legal will, however, be included in the certification regime, and
the requirement to be approved will be subject to the conduct rules which the FCA believes will deliver most of
as a senior manager the benefits of the Senior Manager’s Regime (SMR) without compromising the
principle of legal privilege.
mendments to the intermediary
A This change ensures Non-Retail Mediation Activity (non-RMA) B firms are
revenue criterion for the brought into scope of the enhanced regime. Non-RMA B firms with the relevant
enhanced regime permissions are required to self-assess annually and notify the FCA where they
have (as a 3 year rolling average) over £35m in regulated revenue from the
relevant activities undertaken.
Amendments to the certification This change now ensures individuals with no scope to choose, decide or reach
regime – Client Dealing Function a judgment on what should be done in a given situation or investment activity,
and whose task does not require them to exercise significant skill, are excluded
from the certification regime. Firms now have flexibility to consider which
individuals should be included in the role. The relevant factors that firms will
now need to consider when making this assessment are whether the role
• Is simple or largely automated
• Involves exercising discretion or judgment
Applying SC4 to non-approved Senior Conduct Rule 4 (SC4) requires senior managers to ‘disclose appropriately
executive directors at limited any information of which the FCA or PRA would reasonably expect notice’. The
scope firms FCA has extended the application of SC4 to non-approved executive directors
at limited scope firms, to bring its expectations of their conduct in line with its
expectations on NEDs.
Systems and Controls functions The Certification Regime applies to individuals performing roles that were
Controlled functions under APER but which are no longer approved under
SM&CR, in order to ensure that firms assess the fitness and proprietary of such
individuals at least annually.
Regulatory Industry Developments 13FCA – Our Framework: Assessing
Adequate Financial Resources
(CP19/20)
Published CP19/20 sets out
13th June 2019 • the role of assessing adequate financial resources
Consultation ended • what we look for from firms when assessing
13th September 2019 adequate financial resources
• the FCA’s expectations as to the practices firms
Proposed rules come into effect should adopt in their assessment of adequate
TBC financial resources
Results / further updates due
TBC
The assessment should
• consider a forward-looking approach to risks and
The Consultation Paper explains the purpose of, and how these evolve throughout the economic cycle
the FCA’s approach to the assessment of adequate
financial resources, for all FCA solo-regulated firms • reflect the risks to which the firm is exposed and
subject to threshold conditions and/or the Principles the amount of risk it poses
for Businesses (PRIN), and provides further guidance
on the meaning of ‘adequate financial resources’ • be proportionate to the likelihood of the
under these. risks occurring
• ensure they are financially sound while avoiding
excessive costs, which could hinder firms from
Next steps carrying on their business in a viable way
The FCA is specifically seeking responses to questions
regarding whether stakeholders agree with its proposed • happen at least annually, reflecting the fact
text clarifying adequate financial resources and the that the business environment is dynamic so
FCA’s approach thereto. SWFAL awaits the results of their the assessments of risk and harm should be
consultation. dynamic too
14 Regulatory Industry DevelopmentsFCA – Duty of Care and potential
alternative approaches (FS19/2)
Published The FCA has also indicated that its primary focus in
April 2019 its future consideration of these issues, based upon
that feedback, is to seek to address any perceived
Further consultation to be published gaps in consumer protection by one or both of these
means:
Autumn 2019
• Reviewing how it applies the Principles for
Scope of the Study / Business rules (PRIN) in its authorisations,
Key consultation points supervisory and enforcement functions and how
In July 2018, the FCA published Discussion Paper it communicates this to firms, and/or
DP18/5 inviting views on whether the introduction
• Introducing new/revised PRIN to strengthen
of a new and pervasive duty of care, applicable
and clarify firms’ duties to consumers,
to firms in their dealings with consumers, would
including considering whether to make
enhance consumer protections and promote good
PRIN actionable (and what any unintended
conduct and culture in financial services.
consequences of that might be).
FS19/2 details the feedback received, saying that
the amount and quality of that feedback has given The FCA will publish a further paper in autumn 2019
it a strong foundation on which to advance its seeking detailed views on specific options for change.
consideration of these issues.
Next steps
SWFAL awaits publication of the resultant
consultation paper.
Regualtory
Regulatory Industry Developments 15FCA – Investment Platforms Market
Study Final Report (MS17/1.3)
Consultation on Investment Platforms
Market study remedies (CP19/12).
Published • CP19/12 sets out proposals to make it easier
14th March 2019 for consumers to move between platforms
without the need to be out the market.
Consultation ends • Platforms therefore should offer in-specie
14th June 2019 transfers or where particular classes of units
are not available on the new platform the
Proposed rules come into effect ceding platform should convert them before
31 July 2020 transfer.
Results / further updates due • The FCA are looking for views on how to define
Policy Statement and Consultation Paper on Exit an exit fee, the types of firms/service that this
Fees Winter 2019 should apply to and whether there should be a
total ban or cap on exit fees.
Scope of the Study /
• Covers platform service providers and firms
Key consultation points active in the distribution of retail investment
Addresses the issues raised in the original market products including fund managers, wealth
study in that: managers, financial advisors, life companies
• FCA investigated how investment platforms and banks.
compete to win new customers, how they
retain existing ones and what can be done
to improve competition and develop better Next steps
consumer outcomes.
SWFAL has already been looking at switching consumers
• Concerns raised that consumers often find it to cheaper share classes as a consequence of the Asset
difficult to move from one platform to another, Management Market Study (AMMS) and will be in a good
for reasons of time, complexity and cost. position to carry out any switches if requested to do so.
SWFAL will also review the final guidance once this has
been published in later in the year.
16 Regulatory Industry DevelopmentsEuropean Legislative &
Regulatory Developments on
Integrating Sustainability Risks
and Factors in MiFID II, UCITS
Directive and AIFMD
Published The EU Commission intends to clarify how asset
March 2018 managers, insurance companies, and investment or
insurance advisors should integrate sustainability
Consultation ended risks and, where relevant, other sustainability
factors in the areas of organisational requirements,
May 2019 - ESMA Final report on technical Advice to
operating conditions, risk management and target
EU Commission
market assessment. It will do it either by amending
existing delegated acts, or by adopting new
Scope of the Study /
delegated acts under the same Directives. Technical
Key consultation points advices in this respect have been requested from
In 2015, various international agreements, such as EIOPA and ESMA.
the Paris Climate Agreement and the United Nation’s
2030 Agenda and Sustainable Development Goals, ESMA provided a final report on technical advice
were finalised, and as part of their commitment to to assist the Commission on potential amendments
achieve these goals, the European Commission (the related to the integration of sustainability risks
“Commission”) developed and unveiled its Action and sustainability factors in the MiFID II Delegated
Plan on Sustainable Finance (the “EU Action Plan”) . Regulation, UCITS Directive and AIFMD. The advice
In May 2018, the EU Commission adopted a package was published by ESMA in early May 2019, and ESMA
of measures implementing several key actions will cooperate with the Commission on translating
announced in its action plan on sustainable finance. the advice into changes to the Delegated Act.
The package included proposals aimed at: EU Taxonomy Regulation
1. Establishing a unified EU classification system This Regulation will apply to financial market
(“taxonomy”) on what can be considered an participants, as defined by the EU Disclosure
environmentally sustainable economic activity; Regulation, offering financial products (including
2. Improving disclosure requirements on how segregated portfolios, an AIF, a pension product or
institutional investors and asset managers scheme or a UCITS) marketed as environmentally
integrate environmental, social and governance sustainable within the EU and environmentally
(ESG) factors in their risk processes; sustainable investments (or similar) within the EU.
The Regulation would apply to any transactions
3. Creating a new category of benchmarks undertaken by a credit institution as defined in EU
comprising low-carbon and positive carbon Capital Requirements Regulation (CRR) (including
impact benchmarks to provide investors with own portfolios and transactions in a capacity
better information on the carbon footprint of of arranger, underwriter, agent or distributor).
their investments. The Commission will need to come forward with
The EU Commission has been seeking feedback delegated acts specifying the criteria for compliance
from European Supervisory Authorities and industry with these requirements, which are to be adopted
bodies on amendments to delegated acts of by 31 Dec 2020. The Commission will review the
Markets in Financial Instruments Directive (MiFID minimum safeguards by 31 December 2021.
II), Insurance Distribution Directive, the Solvency II
Directive, UCITS and AIFM Directives to include ESG
considerations.
Regulatory Industry Developments 17EU Disclosure Regulation Low Carbon Emission Benchmarks Thus far, an agreement was approved between the In March 2019, the European Parliament in its plenary European Parliament and the EU Council in relation to session approved the agreement on low-carbon the text of the EU Disclosure Regulation. The Regulation benchmarks as part of the broader Benchmark applies to financial market participants if they Regulation. The text is expected to be published in manufacture financial products or to financial advisers the Official Journal of the EU in October 2019, with if they provide advice on investments or insurance. the Regulation entering into force at the earliest at Entities in scope of the Regulation will have to provide the beginning of November (compliance with the disclosure in relation to the integration of sustainability Regulation – by 31 December 2021). risks and adverse sustainability impacts into investment decision process on their websites, in pre-contractual documentation and through periodic reporting. Further work on amending the MiFID II Delegated Next steps Regulation, UCITS Directive and AIFMD, including the political process around it, will be resumed under SWFAL welcomes the progress made by EU legislators and the new Commission and Parliament and will likely policymakers on implementing the Sustainable Finance to happen after Q3 2019. European supervisory Action Plan and working towards a more sustainable, low- authorities (ESMA/EIOPA) have been tasked with carbon and climate resilient economy. developing technical standards for the content and presentation of the required disclosure information 12 months after the Regulation enters into force (i.e. around November 2020). 18 Regulatory Industry Developments
Market Issues
Fund Liquidity
Background Action taken
It has recently been reported that the Woodford SWFAL has reviewed each fund’s portfolio allocation
Equity Income Fund had been receiving redemption as at 31st May 2019. Our review found that no fund
requests for some time before the fund was that SWFAL is ACD for displays similar characteristics
eventually suspended. To meet these redemptions to the Woodford Equity Income Fund.
the fund witnessed liquidity decreasing over time as
it redeemed the most liquid assets first.
This led to a situation where the fund’s exposure
to unlisted / unquoted assets, that are illiquid Next steps
in nature, increased to a level where the fund
To ensure continued compliance, SWFAL will lower its
breached the COLL rule that allows no more than
internal monitoring limit for two COLL rules and to
10% of its NAV to be derived from unapproved
have a tighter than COLL policy formalised for another,
assets. In an attempt to remedy the situation the
detailed below:
Fund Manager resorted to actions that the FCA said
was outside of the “spirit of the rules”, including An update to SWFALs procedure which will state that
utilising a caveat in COLL that allows an asset to any request by a delegate to utilise COLL 5.2.8 (ii) –
be classed as approved if the asset will be ‘listed (marking an asset as ‘approved’ due to an affirmation
within one year’. that the asset will list within one year) is referred to
the SWFAL Risk Committee and it will then be marked
Current processes as unapproved. This procedural update will reflect
SWFAL reviews Liquidity for all funds on a daily basis; SWFALs ‘tighter than COLL’ internal policy.
performs forecasted redemption analysis for retail A reduction in our care notice tolerance levels for
funds with liquidity lower than 90% on a monthly Significant Influence. The care notice level for COLL
basis; and on an annual basis; performs in depth 5.2.27 (2), where SWFAL writes to the delegate to
redemption stress tests to determine underlying indicate caution may be required, will be reduced
liquidity at a 50% and 80% level. SWFAL also performs from 19% to 5% for UCITS schemes and reduced from
tests on liquidity in a tightening market scenario, 19% to 10% for NURS schemes.
i.e. a reduction in equity market liquidity, and a test
A reduction in our care notice tolerance levels for
where the prospective redemption of the largest
Unapproved Assets: The care notice level for COLL
registered holder is redeems.
5.2.8, where SWFAL writes to the delegate to indicate
Where issues are found with these stress tests, such caution may be required, will be reduced from 9% to
as the portfolio being unable to meet redemptions 5% for UCITS schemes and reduced from 19% to 10% for
due to the fund not having the required level of NURS schemes.
underlying liquidity; or being able to meet the
redemption request but within a timeframe greater
than the four days allowed per COLL; the fund
manager is provided with a list of the assets that
would be estimated to have caused breaches and
comment is sought and discussed at the SWFAL Risk
Committee.
Regulatory Industry Developments 19Appendix 1 - References
• FCA Business Plan 2019/20
• FCA Feedback Statement (FS19/2) - A duty of care and potential alternative approaches: summary of
responses and next steps.
• FRC / FCA Discussion paper (DP19/1) - Building a regulatory framework for effective stewardship
• FCA Consultation Paper (CP19/7) - Consultation on proposals to improve shareholder engagement
• FCA Market Study (MS17/1.3) - Investment Platforms Market Study Final Report
• FCA Consultation Paper (CP19/4) - Optimising the Senior Managers & Certification Regime and feedback to
DP16/4 – Overall responsibility and the legal function
• FCA Consultation Paper (CP19/20) - Our Framework: Assessing Adequate Financial Resources
• ESMA (34-45-277) - Asset segregation and application of depositary delegation rules to CSDs
• The Investment Association’s Consultation On Sustainability And Responsible Investment
• Bank of England / FCA Discussion Paper – Building the UK financial sector’s operational resilience
(DP18/04)
• FCA Guidance Consultation – Guidance for firms on the fair treatment of vulnerable customers (GC19/3)
• Morningstar, 10th June 2019
• Citywire, 29th March 2019
• Citywire, 3rd June 2019
• Citywire, 11th June 2019
• Citywire, 19th June 2019
• FCA speech at the Annual Public Meeting 2019
Important information:
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Views and opinions expressed herein are not intended to be and should not be viewed as advice or as a
recommendation and are valid as at 31st August 2019. This document contains sources of information believed
to be reliable but no guarantee, warranty or representations, express or implied, is given as to their accuracy or
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update or correct any information contained herein.
This document is for your information only and does not constitute an analysis of all potentially material issues nor
does it constitute a solicitation, an offer, a recommendation or an invitation by, or on behalf of SWFAL to buy or
sell any investment. Documents published by SWFAL may contain future statements which are based on our current
opinions, expectations and projections. SWFAL undertakes no obligation to update or revise any future statements.
Actual results could differ materially from those anticipated. SWFAL, any of its associated entities or other persons
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This communication is for the use of the intended recipients only and the contents may not be reproduced,
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20 Regulatory Industry Developmentssmithandwilliamson.com Our offices: London, Belfast, Birmingham, Bristol, Cheltenham, Dublin (City and Sandyford), Glasgow, Guildford, Jersey, Salisbury and Southampton. Smith & Williamson Fund Administration Limited Authorised and regulated by the Financial Conduct Authority. We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Ltd 2019. Code 146819hp
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