In this quarter’s issue we highlight fresh requirements and regulations for the sector, plus take a look at the new Financial Services Act
11 May 2021
New Prudential Regime Update
From January 2022, there will be a significant overhaul of FCA capital requirements under new rules called the UK Investment Firm Prudential Regime (IFPR). The long awaited consultation papers on how the FCA proposes to implement these rules have been released and can be read here and here.
The rules are proposed to be implemented largely as expected but, as a reminder, firms will fall into one of three classes.
- Class 1 is reserved for large systemic institutions,
- Class 3 is for firms which don’t hold client money, and have activities which sit below certain thresholds.
- All other firms fall under Class 2.
Class 2 firms have to hold capital at the higher of base, the fixed overhead requirement, and the sum of new ‘k-factor’ calculations. Class 3 firms have to hold capital at the higher of base and the fixed overhead requirement.
There is also now clarity around consolidation groups. If a firm has a UK parent (even just an unregulated holding company), this will now fall within the scope of consolidation groups for capital adequacy, and the firm will need to ensure it is holding sufficient capital at both firm level and at consolidated level. This will be a significant change for some firms who haven’t previously had to consider consolidated requirements.
Senior Manager and Certification Regime (SM&CR) New Requirement
You may have received a reminder to submit ‘Directory persons’ information to the FCA in respect of SM&CR. This is a new requirement as it is completed via the FCA Connect website. Each person undertaking a certified function needs to be added and this is then ultimately shown in the FCA register.
Financial Services Bill Receives Royal Assent
The government’s new financial services bill has just received Royal Assent. This has been largely driven by Brexit and the need for a new financial framework to apply to the UK now we have left the EU. The Act is intended to achieve four main goals:
- enhance the UK’s world-leading prudential standards and promote financial stability by enabling the implementation of the remaining Basel III standards and a new prudential regime for investment firms, and giving the Financial Conduct Authority the powers it needs to oversee an orderly transition away from the LIBOR benchmark
- promote openness between the UK and international markets by simplifying the process to market overseas investment funds in the UK and delivering a Ministerial commitment to provide long-term access between the UK and Gibraltar for financial services firms
- maintain an effective financial services regulatory framework and sound capital markets with a number of smaller measures, including measures to improve the functioning of the Packaged Retail and Insurance-based Investment Products Regulation and increase penalties for market abuse
- protect consumers who use a range of financial services, by bringing interest-free buy-now-pay-later products into regulation, and improving access to cash by making it easier for retailers of all sizes to offer cashback without a purchase.
Full details of the Act can be found here.
EMI/PSR Safeguarding Audit
In July 2020, the FCA released guidance for firms covered by the Payment Service Regulations (PSR) and Electronic Money Regulations (EMR) with respect to Coronavirus.
The document set out expectations on how firms under these rules should manage safeguarding customers’ funds, but for the first time included a requirement for these firms to have an ‘Annual Audit of Compliance with Safeguarding Requirements’.
There is still no clear guidance on when the rules come into effect, but it appears likely that firms with year ends from July 2020 onwards will now be required to have a ‘safeguarding audit’. This should be completed within four months of the year end. Further information can be found here.
Long Term Investment Funds (LTAFs) Proposal
There is a proposal for a new kind of Opem Ended investment Vehicle in CP21/12 called Long Term Asset Funds (LTAFs). This will give investors the opportunity to invest in an open ended investment company (OEIC) which invests in illiquid assets such as venture capital, private equity, private debt, real estate and infrastructure. These have traditionally been held within closed end structures.
Open-ended funds need to match the underlying liquidity of the assets in which they invest with the redemption terms that they offer to investors. Therefore there is the expectation that LTAFs would be set up with notice periods and other liquidity management features that take account of the liquidity profile of the underlying assets.
Initially the FCA proposes that LTAFs are restricted to professional investors or sophisticated investors, but the investor base may be expanded in the future. The FCA has asked for feedback on proposals by 25 June 2021.
MiFID II
The FCA is proposing to remove some of the requirements imposed on firms as a result of MiFID II in consultation paper 21/9. This will particularly impact broker dealers. The proposal is to remove two sets of reporting obligations on firms:
- the obligation on execution venues to publish a report on a variety of execution quality metrics to enable market participants to compare execution quality at different venues (known as RTS 27 reports)
- the obligation on investment firms who execute orders to produce an annual report setting out the top 5 venues used for executing client orders and a summary of the execution outcomes achieved (known as RTS 28 reports)
Making Transfers Simpler
In February 2021 the FCA introduced a package of rules affecting fund managers that introduce requirements for platforms to:
- offer consumers the choice to transfer units in investment funds that are common to both platforms via an in-specie transfer
- request a conversion of unit classes, where this is necessary to enable an in-specie transfer to take place
- ensure that consumers moving onto a new platform are given an option to convert to discounted units, where these are available for them to invest in
Part of the reason mentioned for the above was ‘tax advantages’ for consumers, but individual tax guidance should be sought before a transfer is taken place, as to whether switching units this will crystalise a tax gain.
Other news
The FCA have said a current area of focus will be on firms having the right level regulated permissions to carry out their activities and not having permissions they are not using.
A common permission which firms have, but may not be using, is permission to hold client money or assets. Firms should review and amend their permissions as necessary to ensure they remain appropriate – rather than find themselves under the spotlight of the FCA in this new ‘use it or lose it’ approach.
Also, the majority of firms will now be on the new RegData platform. We have noticed a number of technical issues on the new platform, around both user problems logging in, and certain forms validating. The log in screen for RegData lists known issues, so if you’re having problems it is worth checking there to see if it is something the FCA are aware of.
Can we help?
If you would like to discuss any of these developments or have questions for our specialist Finance Services team, please do get in touch.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
Copyright © Shipleys LLP 2021
Related Resources
Payment and E-Money Firms Safeguarding Audit
Financial Services Update December 2020
