European Systemic Risk Board
AIFMD and UCITS Directive - ESRB responds to European Commission’s proposed amendments - 23 March 2022
The European Systemic Risk Board (ESRB) has responded to the European Commission’s (the Commission’s) proposed amendments to the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) and the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) (UCITS Directive) by way of letters to the Council Working Party and the European Parliament. The proposed amendments cover delegation arrangements, liquidity risk management, supervisory reporting, provision of depository and custody services, and loan origination by alternative investment funds (AIFs).
The ESRB welcomes the proposed changes in broad terms, stating that they reflect most of the considerations the ESRB presented in response to the Commission’s 2021 consultation on the review of the AIFMD and the ESRB’s 2017 recommendation on liquidity and leverage risks in investment funds.
The ESRB also highlights three areas which it considers have not been addressed and invites EU legislators to enhance the proposals in relation to these. These are: (i) addressing liquidity mismatches in open-ended AIFs; (ii) access to data for monitoring systemic risk in order to enhance the work of macroprudential authorities; and (iii) more guidance on the use of macroprudential leverage limits.
ESRB Letter to Council Working Group: Review of the AIFMD and UCITS Directive
ESRB Letter to European Parliament: Review of the AIFMD and UCITS Directive
Financial Conduct Authority
Custody and fund services firms - FCA publishes portfolio letter - 22 March 2022
The FCA has published a portfolio letter (dated 23 March 2022), which it has sent to the CEOs of custody and fund services firms. It sets out the FCA’s view of the key risks of harm in the custody and fund services sector, outlines the FCA’s expectations, and provides an overview of the FCA’s strategy and its programme of work across certain areas, including in relation to:
- operational resilience and cyber: by March 2022, and further to Policy Statement PS21/3, in-scope firms must have identified their important business services, set impact tolerances for maximum tolerable disruption and carried out mapping and testing to a level of sophistication necessary to do so. Firms must have also identified any vulnerabilities in their operational resilience. As soon as practicable after March 2022, and no later than 31 March 2025, in-scope firms must have performed mapping and testing so that they are able to remain within impact tolerances for each important business service, and must have made the necessary investments to enable them to operate consistently within impact tolerances;
- protection of custody assets and money: in addition to complying with existing standards, the FCA expects firms to have considered and to be appropriately prepared for technological developments, such as the potentially increasing use of distributed ledger technology; and
- depository oversight: the FCA may seek evidence that firms have an appropriate level of access to an authorised fund manager’s (AFM’s) operations and adequate resourcing, and ask firms to demonstrate that they have been able to challenge AFMs effectively in investors’ and unitholders’ interests.
The letter also refers to speculative and illiquid investments, noting that although the FCA has not observed custody and fund service firms manufacturing or promoting these products, firms in this sector may contract with and provide services to the issuers or promoters of these products, such as trustee, safekeeping and administrative services. Where firms are engaged in unregulated activity related to speculative and illiquid investments, they are still subject to certain relevant regulatory requirements, including specific FCA Principles for Businesses.
Portfolio letter: FCA custody and fund services supervision strategy
National Audit Office
British Steel Pension Scheme - NAO publishes report - 18 March 2022
The National Audit Office (NAO) has published a report setting out the conclusions of its investigation into the FCA’s regulation of defined benefit transfer advice given to members of the British Steel Pension Scheme (BSPS) and subsequent redress. The NAO’s investigation was launched in October 2021. Gareth Davies, head of the NAO, notes that “the BSPS case demonstrates the costs and difficulties of remedying failures in financial services and the importance of preventing problems from occurring in the first place”.
The NAO acknowledges that the FCA has implemented measures to improve the regulation of the pensions advice market and, alongside the Financial Ombudsman and Financial Services Compensation Scheme (FSCS), is attempting to remedy the financial detriment suffered by BSPS members. However, it notes that the redress arrangements have not compensated all individuals fully and that the costs of redress have had an adverse effect on the wider financial services industry, with the number of firms providing define benefit pensions transfer advice halving.
With this in mind, the NAO recommends, among other things, that the FCA and HM Treasury should consider whether there are lessons to be learned about the way they work together to identify and mitigate risks to consumers as policy is being developed. Moreover, regulators and oversight bodies with responsibilities for protecting pension scheme members should consider what further changes can be made to minimise the risks associated with transferring out of a pension scheme.
NAO Report: Investigation into the British Steel Pension Scheme (HC 1145)
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