Capital Markets Regulatory Newsletter: October 2023
Welcome to the latest edition of our compliance newsletter aimed at capital markets firms, including wholesale buy and sell-side firms and wealth managers. Since I last wrote to you in July, global markets have started to speculate that the current cycle of interest rate hikes is nearly over. It’s worth reflecting, however, that markets and, more importantly, central authorities have tended historically to underestimate the persistence of inflationary pressures, so high-interest rates may be around for a while yet. This concern seems particularly pertinent to the UK where political forces at this stage of the electoral cycle will favour monetary easing. Against this backdrop, raising investment funds in most market segments remains challenging.
As always, if you have any questions on the content in this edition of our Capital Markets newsletter, then please contact us here and we will be happy to help with your enquiry.
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UK news
The Investment Firm Prudential Regime (IFPR): plenty still to do
Prudential matters and in particular IFPR continue to present challenges to investment firms even though it has been in force for almost two years now. The new public disclosures under MIFIDPRU 8 were the subject of a recent Bitesize webinar (available on demand) presented by Jonathan Aseervatham, Director of our Prudential team. This examined what is required of the two main categories of firms, small non-interconnected (SNI) and non-SNI.
The Internal Capital Adequacy and Risk Assessment (ICARA) is another area that many firms are still grappling with. It was also the subject of an FCA multi-firm review published in February which shone a light on many of the inadequacies of firms’ implementation of this critical process. Julia Dearden, Associate Consultant within our Prudential team, discussed some of the main themes in Time to refresh your ICARA published in August.
Finally, IFPR’s rules on firms’ liquid assets, one of the twin pillars of prudential requirements alongside “own funds” (regulatory capital), is often poorly understood or overlooked altogether. On 11 October 2023, our Prudential team ran a webinar on this topic, click here to watch a recording of the webinar.
Progress update on the Edinburgh reforms
There has been significant progress on two of the key topics (research and short-selling) highlighted by the UK Chancellor’s Edinburgh Reforms announced last December:
1. Back to square one on paying for research? On 10 July, Chancellor Jeremy Hunt confirmed the UK government’s broad acceptance of the recommendations of Rachel Kent’s Investment Research Review. Although there is some detail to follow in an FCA consultation process that will be launched later this year, it is clear that the main proposal to introduce “optionality” into paying for research services (i.e. a return to rebundling payments with execution commissions) is fixed.
Click here for our analysis of all of the main proposals on reforming the rules for investment research.
2. Relaxation of the UK short selling regime: On 11 July, the UK Treasury published the Government Response to its own Call for Evidence on the Short Selling Regulation (SSR). Also announced was a Consultation on the Short Selling Regulation for Sovereign Debt and Credit Default Swaps (“CDS”). Together, these announcements contained 3 main reforms:
- Replacing public disclosure of individual short positions in shares, with an aggregate disclosure regime.
- Returning the threshold for reporting short positions from 0.1% back to its original 0.2%.
- Abolishing the short selling regime for UK sovereign debt and credit default swaps.
Click here for our analysis of the SSR reforms.
New FCA gateway for firms approving financial promotions
The FCA recently published details of the new application gateway for firms that wish to apply to approve financial promotions for unauthorised persons including cryptoasset firms. Under the new requirements, regulated firms must submit a variation of Permission (VoP) application for approver permission (Section 21 Approver) during the 3-month window that will open on 6 November 2023.
Firms that miss this window will need to stop approving financial promotions for unauthorised persons from 7 February 2024. After that, firms can still apply for permission in the usual way, but they will not be able to approve financial promotions until the FCA have approved their application.
Read David Rodriguez’s summary here including further details on the VoP application process.
FCA and PRA consult on the regulatory framework for Diversity and Inclusion (D&I)
Lastly, a joint Consultation Paper from the FCA and PRA published on 25 September announced the long-awaited regulatory framework for D&I. Although many of the ideas floated in the FCA’s earlier Discussion Paper from July 2021 have not been taken forward, some of the proposals look quite onerous, especially those affecting “large” firms, defined as those with more than 250 employees.
Subject to confirmation of the final rules, all regulated firms will be subject to new sections on guidance relating to D&I issues. These will affect the interpretation of what are serious breaches of the FCA’s Conduct Rules (COCON), the assessment of fitness and propriety of individuals working in financial services (FIT), and the definition of suitability in the context of the FCA’s Threshold Conditions for regulated firms. Arguably, the new guidance will only move the goalposts marginally in the context of assessing what is relevant to determinations on misconduct.
Larger firms will be required to make disclosures to the FCA on a range of topics, some voluntary, some mandatory, including setting themselves targets for key diversity and inclusion objectives.
Click here for an overview of the regulators’ proposals on D&I.
SEC news
SEC confirms final Private Fund Adviser rules
During August, the SEC confirmed its final Private Fund Adviser Rules in a lengthy statement (over 650 pages long!) which was first anticipated back in early 2022. Although the SEC has reined back on some of the more controversial proposals, the reforms still amount to some of the most far-reaching requirements to hit the private funds sector in recent decades. Many UK-based managers will be affected by the reforms as they catch Exempt Reporting Advisers (ERA) as well as Registered Investment Advisers (RIA).
The new requirements for documentation of compliance programs comes into effect as early as 13 November 2023, with most of the other provisions applying from September 2024 or 6 months later depending on size of firm. For more detail on the new Rules and who they apply to, click here.
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