Chartered Accountants and Professional Business Advisers

Financial Services News - July 2016


The news over the last month has of course been dominated by Brexit. The initial shock on financial markets wiped billions from the value of companies, although the decline in markets has since abated with the FTSE100 at the time of writing (at a higher level than it was before the Brexit decision).

The FCA’s position on Brexit is for all regulated firms to continue just as they were doing before, and continue to push ahead with any planned changes to adopt European legislation (MiFID II for example). Most of the 730k firms received a phone call from the FCA on the Friday after the result asking them about their capital position and ensuring they were stable.

So what is likely to happen from a financial compliance perspective? Aside for a temporary change to capital buffers for banks, the rest of the regulated industry has not had any change to capital adequacy rules. It must however be considered that the downgrading of the UK Government credit rating will most likely have a knock on effect on the ratings of banks, so if your capital adequacy hinges on the risk weighting of your bank exposure, it would be a worthwhile exercise to assess your position in the event of a change in credit rating.

In terms of what’s likely to happen in the long run, while purely conjecture, we think it’s likely that upon leaving the EU in two years, the FCA will voluntarily adopt the European rules we are subject to now anyway, in order to remain on a par with the rest of Europe. This will hopefully allow us to continue to passport into Europe so as to avoid a mass exodus of financial services entities to locations such as Dublin or Frankfurt, in order to remain within the EU and continue trading as before. Many US firms have UK subsidiaries in order to obtain access to Europe and it is likely that the FCA will do everything in its power to keep that industry here, and remain the gateway to Europe.

We may well be subject to all the European rules anyway as part of the negotiations to remain within the European common market.


The European Banking Authority (EBA) has released a consultation paper on the way they conduct reviews of firms’ Internal Capital Adequacy Assessment Process (ICAAP) documents (EBA/CP/2015/26). If your firm is subject to COREP, then this will affect you. The main thing that is changing is that the FCA is aiming to conduct SREP (Supervisory Review and Evaluation Process) visits (which will look at the ICAAP) of limited license firms more frequently (around three years). So if you are a more lightly regulated FCA entity and have not received a compliance visit for some time, expect one in the near future.

If the FCA deem that you have not considered all the business risks in the ICAAP and set aside sufficient capital, they will hit the firm with an additional amount they need to hold called Individual Capital Guidance (ICG). Reviewing and updating the ICAAP for these new standards now will mean there are likely to be fewer issues in the event of an FCA inspection.

Wind Down Plans

There are proposals to increase the level of detail a firm must hold about what it would do for an orderly wind down. This includes plans for customer communication, closing operations, and what happens with staffing. This will need to be laid out in a clear action plan of the order in which events need to take place, and who is responsible for doing them. When the FCA consult on things, it generally means that it will happen, so it would be a good idea to begin thinking about this.

UCITS V Level 2 Regulation

The initial UCITS V rules for investment funds came into effect in March 2016, and brought the regime in line with many of the provisions of AIFMD regulation. A second level of rules (“Level 2”) comes into effect in October 2016 and these are primarily aimed at Depositaries, to ensure they are acting independently and are adequately protecting the assets of the scheme.

Any scheme which is undertaking a Securities Financing Transaction (SFT) will be required to disclose this fact in the accounts of the fund from January 2017. Article 3(11) of the SFTR defines securities financing transactions as: a repurchase transaction, securities or commodities lending and securities or commodities borrowing, a buy-sell back transaction or sell-buy-back transaction, and a margin lending transaction. It may therefore no effect more straight forward investment funds.

There are also proposed changes to the CASS handbook in light of UCITS V which bring the rules in line with those which apply to Alternative Investment Funds (AIFs). These apply to depositaries, so although fund managers should be aware of them, it is unlikely to significantly affect the day-to-day running of the funds. (CP16/4).


Implementation of this has now officially been delayed until 3 January 2018. Key changes under MIFID II have been covered in previous newsletters and we will continue to update on new information.

Market Abuse Regulations (MAR)

These are regulations passed down from ESMA which seek to strengthen market integrity across a wider range of platforms and products.

Changes include more rules around insider information and disclosure. The range of financial instruments subject to MAR regulations has been expanded to include spot and commodities contracts for example, and it also covers new types of institutions such as Multilateral Trading Facilities (a product of MiFID II). Issuers and Emissions Allowances Market Participants (EAMPs) must also maintain a list of all those persons working for them who have access to insider information.

The offence of market manipulation has been extended to include attempted manipulation. The FCA now oversees a number of benchmarks which are within scope of market manipulation.

Suspicious Transactions and Orders Report (STORs) now include the obligation to report suspicious orders, rather than just transactions.

All this will apply from 3 July 2016, with those provisions relating to MiFID II coming into effect from January 2018. (PS16/3)

Fixed Income Fund Liquidity Risks

The FCA have been working with the Bank of England to assess risks posed by OEICs investing in the fixed income sector. The search for strong yields, post-financial crisis, has led some funds to invest in fixed income investments where liquidity is more limited. This can potentially pose a problem for investors wishing to redeem their units in the funds, as the fund may not have sufficient resources to meet the requirements. The FCA have reiterated the need for fund managers to have good liquidity management processes in these situations, and adequately disclose the potential impact of low liquidity in a portfolio, together with the ability of the fund manager to use tools and exceptional measures which could affect redemption rights.

These risks are particularly pertinent post-Brexit as a number of large property funds have frozen investor withdraws in order to protect the remaining investors as concerns over the property market spread. These contain assets even more illiquid than bonds of course.

Other news

Proposed changes to the Financial Services Compensation Scheme increase protection for consumers of certain insurance products in the event of the failure of an insurance firm. This protection was previously 90% and is now 100%.

The FCA now have a new website with a dedicated ‘hub’ for each sector, and advise firms to use this to find relevant issues which could affect them.

The European Parliament has agreed to set up a committee to investigate the alleged contraventions of laws relating to money laundering, tax avoidance and tax evasion as a result of the Panama Papers leak. They will report their findings in 12 months’ time. It will surely prove interesting reading, not least withstanding that the investigations involve six active heads of state, 128 politicians and 29 members of the Forbes 500 list!

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