General

European Commission

Distance Marketing of Consumer Financial Services - European Commission launches consultation on Directive - 22 June 2021

The European Commission has launched a review of the Distance Marketing of Consumer Financial Services Directive (2002/65/EC) (DMD).  According to the accompanying press release, since the DMD entered into force in 2002:

“the retail financial sector has gone increasingly digital, with new products and actors available on the market and new sales channels being used. Several EU laws pertinent to financial services have also been adopted or updated. Whereas the Directive had clear value added when it entered into force, many of its substantial elements have been taken over by sectoral legislation that has been adopted afterwards, e.g. in the context and aftermath of the financial crisis”.

The European Commission particularly wishes to hear from consumers, retail financial services providers and the regulatory authorities that are responsible for supervising and enforcing the provisions of the DMD. Comments may be made by submitting a completed questionnaire before 28 September 2021. The Commission intends to publish its proposals in the first quarter of 2022.

Consultation paper: The Directive on Distance Marketing of Consumer Financial Services

Technical working document

Daily news (See section titled “Consumer protection: Commission launches public consultation concerning the distance marketing of consumer financial services”)

UK Government

London Capital & Finance - Treasury Committee publishes report and makes further recommendations to FCA and HM Treasury - 24 June 2021

The House of Commons Treasury Committee has published a report following an inquiry into the FCA’s regulation of London Capital & Finance plc (LC&F), launched in February 2021. The findings and recommendations set out in the report include the following:

• on FCA culture, the Committee’s summary notes as follows: “We welcome the FCA’s ongoing transformation programme which has cultural change as one of its priorities… We … recommend that the FCA Board sets itself an end date for the transformation programme and that it creates milestones at which improvements and evidence of changes in culture can be reviewed. These milestones and reviews should be put into the public domain”;
• it is not “readily justifiable” for the FCA to require the firms that it regulates to adhere to the principles of the Senior Managers Regime but seemingly not to apply similar principles internally when there are failings of practice and culture in the organisation;
• the FCA should ensure that it requires authorised firms to make clear the risks to customers associated with their unregulated activities. Any changes to the perimeter must be matched with appropriate changes in the FCA’s resources, and the FCA should republish its priorities. The Treasury should publish a policy statement on how it will analyse changes to the FCA’s perimeter and what factors it will take into account;
• HM Treasury should, as a priority, re-evaluate the Financial Promotion Order exemptions to determine their appropriateness and consider what changes are needed to protect consumers;
• the government should include measures in the Online Safety Bill to address fraud via online advertising. Pending any legislative changes, the FCA should continue to work with online platforms to remove misleading and fraudulent advertisements as quickly as possible; and
• HM Treasury’s ongoing consultation on the regulation of mini-bonds is welcome, but the committee notes the delay in its launch.

Report: The Financial Conduct Authority’s Regulation of London Capital & Finance plc (HC 149)

Summary

Conclusions and recommendations

Inquiry

Press release

UK Parliament

Financial Services Act 2021 (Commencement No 2) Regulations 2021 (SI 2021/739) published - 22 June 2021

These Regulations set out commencement dates for a number of provisions in the Financial Services Act 2021. The following provisions come into force on 1 July 2021:

• Sections 8 to 21 and Schedule 5 relating to benchmarks;
• Section 27 and Schedule 10 relating to access to financial services markets;
• Section 28 and Schedule 11 relating to variation or cancellation of permission to carry on a regulated activity at the FCA’s initiative;
• Section 29 on FCA rules about the level of care provided to consumers by authorised persons (referred to as the duty of care);
• Section 34 on the application of money laundering regulations to overseas trustees;
• Section 37 relating to regulated activities and the application of the Consumer Credit Act 1974;
• Section 38 on amendments to the UK Regulation on Packaged Retail and Insurance-based Investment Products (1286/2014) (UK PRIIPS);
• Section 39 relating to the retention of personal data under the UK Market Abuse Regulation (596/2014) (UK MAR);
• Section 40 on clearing and procedures for reporting OTC derivatives; and
• Section 43 relating to subordinated legislation made under retained direct EU legislation.

The Financial Services Act 2021 (Commencement No 2) Regulations 2021 (SI 2021/739)

Webpage

HM Treasury

Regulatory framework for approval of financial promotions - HM Treasury publishes response to consultation and next steps - 22 June 2021

HM Treasury has published a response to its July 2020 consultation on the regulatory framework for approval of financial promotions. As noted in a previous edition of this Bulletin, HM Treasury proposed in the original consultation to introduce a new FCA-operated regulatory ‘gateway’ through which authorised firms would need to pass before they are able to approve the financial promotions of unauthorised persons. Two policy options were suggested in this regard: restricting the approval of financial promotions through the imposition of FCA requirements (option 1); and specifying the approval of financial promotions as a ‘regulated activity’ (option 2). 

HM Treasury agrees with the majority of respondents to the consultation that a gateway should be introduced and that it should be implemented through option 1. This would achieve the intended outcome of strengthening the FCA’s ability to ensure that authorised firms comply with FCA rules when approving the financial promotions of unauthorised persons, without fundamentally altering the overall regulatory architecture of the financial promotion regime. 

As such, it is proposed that all new and existing authorised firms will be prohibited from approving the financial promotions of unauthorised persons through the imposition of a Financial Promotion Requirement on their permission. Firms that wish to approve financial promotions will be required to apply to the FCA for a ‘variation of requirement’ to have the prohibition removed either entirely (allowing them to approve all types of financial promotions), or partially (allowing them to approve certain types of financial promotions).

HM Treasury has also developed proposals to implement a transitional period (with three distinct phases) to allow for an orderly transition between the current and the future regime. It intends to bring forward the relevant legislation when parliamentary time allows. The FCA will consult on its proposals for implementing the gateway in due course.

Consultation response: Regulatory Framework for Approval of Financial Promotions

Financial Conduct Authority

Climate-related disclosure requirements for listed companies, asset managers, life insurers and pension providers - FCA publishes two consultation papers - 22 June 2021

The FCA has published two consultation papers setting out proposals on climate-related disclosure rules for listed companies and certain regulated firms. 

First, it has announced a consultation on enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (CP21/17). According to the press release:

“The new proposals are among the FCA’s first substantive policy proposals for the UK asset management and asset owner sectors since the end of the EU Withdrawal transition period. Given the global reach of regulated firms operating in the UK, the FCA has approached the design of the regime with international consistency in mind and to accommodate firms’ different business models.”

In summary, the FCA proposes to introduce the following rules and guidance, consistent with the recommended disclosures developed by the Task Force on Climate-related Financial Disclosures (TCFD), which would be set out in a new Environmental, Social and Governance (ESG) sourcebook in the Handbook:

• entity-level disclosures: relevant firms would be required to publish, annually, an entity-level TCFD report on how they take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers.  These proposals would apply to FCA-regulated firms with respect to their assets managed or administered from the UK, notwithstanding where the client, product or portfolio is based; and
• product or portfolio-level disclosures: firms would be required to produce, annually, a baseline set of consistent, comparable disclosures in respect of their products and portfolios, including a core set of metrics.

The proposed Handbook text is set out in Appendix 1, with a draft version of the Disclosure of Climate-Related Financial Information (Asset Manager and Asset Owner) Instrument 2021. The FCA is suggesting a phased implementation “beginning with the largest, most interconnected firms” and extending the application a year later to the remaining firms above a proposed £5 billion threshold for assets under management or administration.

The FCA has separately published a Consultation Paper (CP21/18) on proposals to extend the application of LR 9.8.6R(8) to certain issuers of standard listed equity shares, consistent with commitments in the roadmap towards mandatory climate-related disclosures, published by a cross-government and regulators taskforce in November 2020. This follows the implementation in December 2020 of a new disclosure rule for commercial companies with a UK premium listing, referencing the TCFD recommendations, finalised in PS20/17. 

In short, a new rule LR 14.3.27R would require in-scope standard listed companies to include a statement in their annual financial report setting out certain information about their climate-related disclosures, including whether they comply with the TCFD recommendations. The new rule would apply on a ‘comply or explain’ basis for accounting periods beginning on or after 1 January 2022 for issuers of equity shares in LR 14 (excluding standard listed investment companies and shell companies). The FCA invites views on whether the rule should be extended to issuers of global depositary receipts in LR 18 and standard listed issuers of shares other than equity shares, and whether and how issuers of standard listed debt and debt-like securities in LR 17 should be reflected in the scope of the rule.

In chapter 4 of the Consultation Paper, the FCA seeks to generate stakeholder discussion on certain other topical ESG matters, including issues related to green, social or sustainability labelled debt instruments; prospectus and ‘use of proceeds’ bond frameworks; the role of verifiers and second party opinion (SPO) providers; and ESG data and rating providers. 

The FCA is inviting feedback to both consultations by 10 September 2021 and intends to confirm its final policy on climate-related disclosures before the end of 2021. The FCA will separately consider stakeholder views on the ESG-related discussion topics in capital markets, with a view to publishing a Feedback Statement in the first half of 2022.

Consultation paper: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers (CP21/17)

Webpage

Press release

Consultation paper: Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets (CP21/18)

Webpage

Press release

The UK’s future regulatory environment - FCA publishes speech by its Chief Executive - 22 June 2021

The FCA has published a speech delivered by the FCA Chief Executive, Nikhil Rathi, on building and operating an effective regulatory regime for the firms and consumers of the future. Mr Rathi describes the following three ways in which the FCA is seeking to do this:

“first, meeting the needs of UK markets; second, setting the bar high at the gateway for entry to regulation and intervening assertively to deal with misconduct; and third, playing our part in international regulatory discussions.”

On the first point, Mr Rathi notes that Brexit has provided the UK with:

“the freedom to tailor our rules to better suit UK markets. We’re making them more efficient and targeted, and removing unnecessary barriers to entry. We are not diverging just for the sake of it, we are ensuring appropriate safeguards and upholding – in fact, building on - high, internationally consistent and outcome-driven standards and this may well involve in some areas standards that are tougher than those in the EU”. 

Among other things, he refers to the consultation on the research and best execution regime in the Markets in Financial Instruments Directive (2014/65/EU) (MiFID) and the FCA’s contribution to an HM Treasury consultation on the broader MiFID regime which is due to be published this summer. He also refers to an upcoming consultation on the purpose and effectiveness of the UK’s listing regime.  

On the second point, Mr Rathi warns that there will be a rigorous review of all firms seeking to enter the UK authorisation gateway via the Temporary Permissions Regime and that the FCA’s robust approach will continue in its supervision of firms. On international regulatory discussions, among other things, Mr Rathi referred to negotiations on the cross-border financial services agreement with Switzerland and the FCA’s “world-leading” work in the area of sustainable finance.

Speech by FCA Chief Executive, Nikhil Rathi: Building a regulatory environment for the future

Interim General Counsel and Senior Legal Advisor - FCA makes new appointments - 23 June 2021

The FCA has announced the appointment of David Anthony Scott as its Interim General Counsel. Mr Scott was most recently a litigation partner at Freshfields before retiring from the firm in October 2020. He also spent 18 months in an earlier part of his career on secondment to the Financial Services Authority (FSA) and has advised both the Bank of England and the FSA on various legal matters. The FCA will shortly launch an open and competitive global recruitment process for the permanent General Counsel role. To support Mr Scott, the FCA has also appointed Daniel Thornton as its Deputy General Counsel, who is currently FCA Director of Enforcement legal.

The FCA is also planning to appoint Raj Parker as a part-time Senior Legal Advisor. Mr Parker is an associate member at Matrix Chambers and a part-time judge and arbitrator. Recently, Mr Parker conducted the independent review into the Connaught Income Fund Series 1 and according to the relevant press release the FCA considers that he is ideally placed to offer critical and impartial advice as the FCA evolves its culture and transforms its organisation.

Press release