Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only

 
Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
Regulatory
Focus
Smith & Williamson Fund
Administration Limited
September 2019

                    For professional advisers only
Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
2   Regulatory Industry Developments
Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
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 Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
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
Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
(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
Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
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
Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
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
Regulatory Focus Smith & Williamson Fund Administration Limited September 2019 - For professional advisers only
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 Developments
4    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     7
BREXIT 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 Developments
legislative 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   9
Building 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 Developments
FRC / 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 11
Guidance 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 Developments
FCA – 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 13
FCA – 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 Developments
FCA – 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 15
FCA – 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 Developments
European 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 17
EU 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 19
Appendix 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
    completeness. Smith and Williamson Fund Administration Ltd (SWFAL) accept no obligation to any recipient to
    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
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    Conduct Authority under registration number 122401.

20 Regulatory Industry Developments
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