2 September 2022
In this issue
- MIFIDPRU and Investment Firm Groups
- Improving the Appointed Representatives’ regime
- Authorised funds with respect to the Russian Invasion of Ukraine
- Consumer duty
- High Risk Investment Promotions
- Long-Term Asset Fund
Firms have now had two quarters of reporting under MIFIDPRU. We’ve noticed a few issues firms should be aware of regarding Investment Firm Groups.
1. Investment Firm Groups
As a result of the UK Investment Firm Prudential Regime (IFPR) a lot more firms are now considered to be in an Investment Firm Group. Where a group is sufficiently simple, it can apply to be exempt from consolidated reporting via the Group Capital Test (GCT) exemption.
Although the FCA sent a number of questionnaires to firms towards the end of 2021 asking about the impact of IFPR (which included questions on groups), this information doesn’t appear to have been used to populate RegData.
In addition, even where firms have applied for the Group Capital Test exemption, the FCA doesn’t appear to be aware that those businesses are in an Investment Firm Group. As a result, a number of firms have either:
- been asked to do consolidated reporting where they don’t need to (as have a pending GCT application), or
- have not had the MIF006 form which applies to groups taking the GCT exemption.
A number of firms who applied for the GCT exemption have received an email from the FCA asking for more information.
It appears that firms are required to explicitly inform the FCA that they are in an Investment Firm group, and firms need to do this via the form, MIFIDPRU 2.4.20R, which is available on Connect.
2. Group Capital Test Exemption and MIF006
We also understand that once the FCA is aware of an Investment Firm Group, the parent entity and other non-regulated entities will be issued with a Firm Reference Number. This will allow the completion of the MIF006 form with the correct details.
As another reminder, those firms which are in scope for the new Internal Capital Adequacy and Risk Assessment (ICARA) document will need to have this underway. It was up to firms to choose their deadline date for completion of the ICARA and most went for a date towards the end of 2022.
There is no requirement to send the ICARA document to the FCA, but it forms an important part of the capital adequacy calculation as derives any additional Pillar 2 capital which the firm (or group) needs to hold.
Improving the appointed representatives’ regime
The FCA has published new rules in PS22/11 which make authorised financial firms more responsible for their appointed representatives (ARs). The intention is that the change will help prevent consumers being mis-sold or mis-led by ARs and protect market integrity.
The FCA wants principals to do a better job of overseeing the ARs they appoint, and to provide more regular data to help them identify and tackle harm earlier.
The FCA plans to issue a Section 165 data request in December 2022 asking firms to provide information on new and existing ARs they have. This will include:
- reasons for any appointments
- nature of regulated business
- whether the AR conducts any unregulated business
- anticipated revenue
- nature of financial arrangements between principal and AR
- complaints information and whether the AR is part of a group.
Firms will have 60 days to respond.
Authorised funds with respect to the Russian invasion of Ukraine
The FCA released a consultation paper CP22/08 proposing ways authorised UK funds should protect investors with respect to exposure to asset classes directly impacted by the conflict and sanctions.
The Policy Statement has been released promptly (PS22/8) and implements the proposals from the consultation paper largely unchanged.
Affected funds can create a ‘side pocket’ class of unit/share. All affected assets will be moved into this separate class and holders at the time of the side pocket creation would receive shares in the new side pocket class. This has the effect of segregating the harder to price assets with the rest of the fund.
The FCA has provided feedback and final rules on a consultation paper on firm’s duty to customers (See PS 22/9). The aim is to set higher expectations for the standard of care firms give customers and is applicable to all regulated firms.
The FCA is introducing a new Consumer Principle, which requires firms to act to deliver good outcomes for retail customers. This will apply from July 2023 and will be phased in to ease the burden on firms.
High Risk Investment Promotions
The FCA is concerned about consumers being targeted with high-risk investments and has released stronger rules which come into effect in PS22/10 around promotions.
In our June 2022 update we mentioned crypto investments, and the FCA has said it is likely that these will also follow similar rules when they come into scope.
Long‑Term Asset Fund (LTAF)
This is a new category of authorised open‑ended fund, which has been designed to enable investors to invest in long‑term illiquid assets through an authorised fund vehicle.
Previous guidance meant promotion of LTAFs is currently restricted to professional investors, certified and self‑certified sophisticated investors, and certified high net worth individuals (HNWI).
The FCA is consulting on proposals to widen the availability of LTAFs to retail customers providing robust procedures are in place. See CP22/14 for more detail.
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.
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