Global Financial Regulatory Blog

IOSCO Consults on Regulation of ESG Data and Ratings Providers

Posted in Environmental, Social and Governance (ESG)

By Paul A. Davies, Nicola Higgs, and Anne Mainwaring

On 26 July 2021, the Board of the International Organization of Securities Commissions (IOSCO) published a consultation report (the Report) that proposes a set of recommendations to mitigate risks flowing from activities of ESG ratings and data products providers and to address some of the challenges faced by users of ESG ratings and data products as well as the companies that are the subject of these ratings or data products.

This blog post provides of an overview of the ESG ratings and data market and outlines IOSCO’s proposed set of 10 recommendations. Continue Reading

UK to Adopt a New SPAC Listing Regime From 10 August 2021

Posted in Clearing and Settlement, Markets and Investments, Regulatory Reform

The revised criteria allow UK-listed SPACs to avoid a suspension of their shares when announcing a de-SPAC deal.

By Nicola HiggsDavid Berman, Chris HortonJames InnessRob Moulton, Anna Ngo, and Charlotte Collins

The UK, acting through the Financial Conduct Authority (FCA), will implement a new SPAC listing regime from 10 August 2021. This follows a consultation launched in April 2021 on the back of recommendations made by Lord Hill in his review of the UK listing regime.

The new regime removes the presumed suspension of a SPAC’s shares upon announcement of a de-SPAC until a prospectus on the enlarged group is published, which has been one of the main reasons that most recent SPAC activity in Europe has taken place on one of the Euronext exchanges, principally Amsterdam and Paris, rather than in London. Continue Reading

HM Treasury Initiates Post-Brexit Review of the UK’s AML and CTF Regime

Posted in Regulatory Reform

Recent publications come in light of UK’s “greater autonomy” in setting AML and CTF regulations following Brexit.

By Jon Holland, Rob Moulton, and Jonathan Ritson-Candler

Background to the review

On 22 July 2021, HM Treasury published both a Call for Evidence on a review of the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) regulatory and supervisory regime and a Consultation Paper on amendments, to be made via statutory instrument in Spring 2022 (the SI), to the UK’s key piece of AML and CTF legislation, the Money Laundering Regulations 2017, as amended (MLRs 2017). Despite both papers being published concurrently, they are “separate documents with distinct purposes”. The planned amendments to the MLRs 2017 by virtue of the SI are either “time-sensitive” or “relatively minor” and were proposals for change that were already in development. The SI will, therefore, be unaffected by the findings of the Call for Evidence and any amendments to the MLRs 2017 resulting from the Call for Evidence will be made separately. Continue Reading

“SOFR First” Initiative Takes Flight

Posted in Markets and Investments, Regulatory Reform

As the countdown to the LIBOR sunset enters its final six months, the CFTC staff is trying to help the market transition.

By Yvette D. Valdez and Deric Behar

With less than six months to go before the London Interbank Offered Rate (LIBOR) expires on December 31, 2021, regulators around the world have been amplifying already loud calls for market participants to switch to alternative reference rates. In many cases, those calls have been accompanied by significant regulatory efforts and policy shifts to ween the market off reliance on LIBOR. In particular, the US Commodity Futures Trading Commission (CFTC) has been focused on helping the trillion-dollar USD LIBOR interest rate swap market navigate the transition.

Along with other regulatory authorities such as the Federal Reserve Board, the Financial Stability Board, the International Organization of Securities Commissions, the Alternative Reference Rates Committee (ARRC), and the International Swaps and Derivatives Association, the CFTC has been working to steer the derivatives market to safety before the LIBOR clock runs down. On July 13, 2021, the CFTC’s Market Risk Advisory Committee (MRAC) adopted SOFR First, a market best practice recommendation developed by MRAC’s Interest Rate Benchmark Reform Subcommittee. The Subcommittee previously recommended SOFR First on June 8, 2021, and provided an informative set of frequently asked questions. Continue Reading

FCA Consults on Post-Brexit Changes to PRIIPS Regulation

Posted in Regulatory Reform

UK rules will diverge from the much-criticised EU framework.

By Nicola Higgs and Charlotte Collins

On 20 July 2021, the FCA published a Consultation Paper (CP21/23) on amending the UK PRIIPs Regulation. The FCA has long held concerns about the PRIIPs framework, and pre-Brexit had been heavily involved in efforts to persuade EU lawmakers to amend the rules. The UK government and the FCA had indicated that the UK PRIIPs Regulation would be a priority area for change post-Brexit, given the consumer protection concerns arising as a result of ambiguities and unintended consequences of the rules. Now that the FCA has the flexibility to amend the regime, the regulator is looking at how it can address some of the most serious concerns, which will come as welcome relief to market participants. Continue Reading

FCA Seeks to Improve Quality of ESG Fund Disclosures

Posted in Environmental, Social and Governance (ESG)

FCA has published guiding principles on the design, delivery, and disclosure of ESG and sustainable investment funds.

By Nicola Higgs, David Berman, Paul Davies, Anne Mainwaring, and Charlotte Collins

On 19 July 2021, the FCA published a letter sent to chairs of authorised fund managers, which sets out the regulator’s expectations regarding disclosures by funds that make ESG-related claims. The FCA aims to ensure that any ESG-related claims are clear and not misleading, both when a fund is applying for authorisation and on an ongoing basis.

The FCA has published these principles in response to the significant increase in funds applying for authorisation that have an ESG or sustainability focus. The FCA notes that applications are often poor quality and fall below its expectations, and many make claims that cannot be substantiated. The FCA observes that, in general, fund applications in this area often do not contain sufficient, clear information explaining their chosen strategy and how this relates to the assets selected for the fund. Continue Reading

FCA Business Plan 2021/22: Firms Should Expect a More Assertive FCA

Posted in Regulatory Reform

FCA signals that it aims to take a tougher stance.

By Rob Moulton and Charlotte Collins

The FCA published its Business Plan for 2021/22 on 15 July 2021. The Plan, and accompanying remarks made by Nikhil Rathi, FCA CEO, suggest that the FCA intends to take a more assertive and proactive approach in future.

While many of the policy objectives set out in the Business Plan will be familiar to firms, the FCA’s new ethos may not be. The FCA vows to be more innovative, assertive, and adaptive: the second of which may cause concern for firms.

Mr. Rathi speaks of a regulator that is “tough, assertive, confident, decisive, agile” and of a culture that embraces risk and acts decisively. He also indicates that the FCA will be prepared to “test our powers to the limit”, and that the FCA will not be afraid to take action, even if it may not always win. Mr. Rathi comments that not winning a case “will not be seen as failure” and emphasises that when the FCA’s perception of risk has prevented necessary action in the past, the lack of action was more problematic than any potential consequences of such action. Continue Reading

ESMA Publishes Guidance on SPACs

Posted in Markets and Investments, Regulatory Reform

ESMA warns against investor protection risks and provides guidance on expected disclosures.

By Nicola Higgs, Chris Horton, James Inness, Rob Moulton, Oliver Seiler, Isabella Porchia, and Charlotte Collins

On 15 July 2021, ESMA published a statement on the prospectus disclosure and investor protection issues raised by special purpose acquisition companies (SPACs). SPAC activity in the EU has increased significantly in recent months, but there is not a harmonised regulatory approach to SPAC transactions across the EU, partly because structures and approach will depend on what is permitted under national law. Therefore, ESMA intends to clarify regulatory expectations regarding SPACs so that potential investors are provided with clear, comprehensible, and comparable information when making their investment decisions.

ESMA’s guidance aims to ensure a coordinated approach across the EU, including expectations as to how issuers should satisfy the specific disclosure requirements of the Prospectus Regulation, and how SPAC shares and warrants should be considered under the MiFID II product governance regime.

Continue Reading

ESMA Statement Warns on Payment for Order Flow

Posted in Markets and Investments, Regulatory Reform, Retail Markets

New ESMA guidance less strict than the established UK position on PFOF.

By Rob Moulton, Axel Schiemann, Thomas Vogel, and Charlotte Collins

On 13 July 2021, ESMA published a statement on payment for order flow (PFOF), the practice of brokers receiving payments from third parties for directing client order flow to these third parties as execution venues.

ESMA warns that the increase in retail client activity in the past year has highlighted the use of PFOF, both in the US and in some EU jurisdictions. ESMA explains that PFOF causes an inherent conflict of interest, as it incentivises brokers to choose the execution venue offering the highest payment, rather than the venue that will achieve the best outcome for the brokers’ clients.

Therefore, ESMA is of the view that, in most cases, the receipt of PFOF is unlikely to be compatible with MiFID II. ESMA requires firms to thoroughly assess whether, by receiving PFOF, they are able to comply with relevant MiFID II requirements, in particular those on best execution, conflicts of interest, inducements, and cost transparency. Interestingly, this contrasts with the stricter UK position. The UK FCA has made clear for many years that the receipt of PFOF is not compatible with firms’ obligations regarding conflicts of interest, inducements, and best execution. This is because the FCA considers that the price quoted by the execution venue will always be influenced by the fact that any profit will be reduced by the PFOF they are paying. Continue Reading

UK Regulators Launch Discussion on Diversity and Inclusion

Posted in Conduct of Business, Environmental, Social and Governance (ESG), Regulatory Reform

Discussion Paper opens debate on potential new rules to improve diversity in financial services.

By Rob Moulton, David Berman, Paul Davies, and Charlotte Collins

On 7 July 2021, the FCA, the PRA, and the Bank of England published a joint Discussion Paper on diversity and inclusion in the financial sector. The regulators, in particular the FCA, have been focused on diversity and inclusion as regulatory issues for some time. According to the regulators, research shows there is a positive correlation between increased diversity and inclusion and better outcomes in risk management, conduct, culture, and innovation. Therefore, improving diversity and inclusion in financial services is seen as tying in closely with the regulators’ objectives. In the Discussion Paper, the regulators consider diversity and inclusion not only in terms of how a firm is run internally, but also how the firm serves its customers. Continue Reading