Financial Services Regulation and Compliance - Investment Firms Dec 2020

DOMESTIC          

Speech – Colm Kincaid: Protecting investors in a time of great change

The Central Bank of Ireland's (CBI's) Director of Securities and Markets Supervision, Colm Kincaid recently addressed the EY Funds Forum on a range of issues including investor protection, sustainability in the financial services industry, combatting financial crime, Brexit and COVID-19.

In the area of sustainable finance, Mr Kincaid noted that it was essential that the reputation of the emerging concept of green finance was not damaged and that special care is taken to ensure that the 'greenwashing' of financial products is avoided. 

On Brexit, Mr Kincaid noted that the decision by the UK to leave the EU will change the structure, composition and operations of securities market participants in both jurisdictions. Mr Kincaid indicated that firms must remain vigilant in the final stage of the UK's exit, as well as looking to the medium and longer term risks it presents to their business. 

CBI updates guidance on certain matters under the Prospectus Regulation

The CBI has issued updated guidance on a range of matters relating to the Prospectus Regulation. 

The following have been updated:

  • guidance on the submission of a final terms submission template
  • guidance on submitting a debt submission template
  • guidance on the omission of information
  • guidance on supplements and financial supplements
  • guidance on passporting
  • guidance on submission process
  • guidance on the payment of prospectus approval fees
  • guidance on transfer of approval

CBI issues latest Markets Updates

The CBI has published issues 14 and 15 of its Markets Update for 2020.  In domestic news, issue 13 focuses on the launch of the consultation on enhancements to the CBI's client asset requirements and the findings of the CBI's thematic review into investment firms' compliance with 'best execution' requirements for consumers. Issue 15 focuses domestically on updates to the CBI's Q&A on the payment of distributions and variable remuneration by MiFID investment firms during the COVID-19 pandemic. Internationally, both issues 14 and 15 focus on a multitude of ESMA updates.

CBI consults on enhancements to Client Asset Requirements

The CBI has launched a consultation on proposed enhancements to its Client Asset Requirements (the CAR). 

Key aspects of the proposed enhancements include:

  • extending the scope and application of the CAR to credit institutions undertaking MiFID investment business
  • introducing new requirements regarding client disclosure and consent, including enhancements applicable to investment firms that have obtained client consent to the use of client financial instruments and investment firms providing prime brokerage services
  • introducing new CAR guidance to clarify the CBI's expectations as to how client funds should be segregated
  • introducing new requirements, and placing some existing CAR guidance on legislative footing, in relation to the performance of reconciliations and the treatment of client asset discrepancies and reconciliation differences and shortfalls and excesses
  • introducing new requirements and CAR guidance on the contents of the Client Asset Management Plan

The CBI is seeking views from stakeholders in relation to the proposed enhancements. Responses should be submitted no later than 10 March 2021. 

CBI updates Q&A on the payment of distributions and variable remuneration by MiFID investment firms during the COVID-19 pandemic

The CBI has updated its Q&A on the payment of distributions and variable remuneration by MiFID investment firms during the COVID-19 pandemic. The updates take into account the European Systemic Risk Board's recommendation on 18 December 2018 relation to the restriction of distribution policies. The CBI will communicate with MiFID investment firms further on this matter in the coming weeks but expects firms to continue to follow existing guidance beyond 1 January 2021.  

CBI and IOSCO publish report on retail market conduct issues arising from COVID-19

The International Organization of Securities Commission’s (IOSCO) Retail Market Conduct Task Force, co-chaired by the CBI and the Australian Securities & Investments Commission, has published the Retail Market Conduct Task Force Report: Initial Findings and Observations about the Impact of COVID-19 on Retail Market Conduct. The report sets out common retail market conduct risks caused or exacerbated by COVID-19 and identifies common themes experienced by retail investors, market participants and regulators including high market volatility, heightened financial and psychological stressors, social distancing and remote working requirements. The report includes a number of case studies which highlight the issues member organisations have experienced during COVID-19 including a surge in retail investor trading and an increase in predatory scams and unlicensed financial advice. To address the risks identified, the report sets out a variety of practical regulatory tools which member organisations may avail of in order to promote investor protection including:

  • proactive supervisory monitoring, including of offerings targeting vulnerable investors
  • targeted and effective enforcement action
  • close cross-border cooperation and regulatory coordination
  • leveraging the experience from previous crises to enhance agile regulatory approaches

EUROPEAN

ESMA issues latest Double Volume Cap data – 7 December 2020

ESMA has updated its public register with the latest set of double volume cap (DVC) data under MiFID II. The updates include DVC data and calculations for the period 1 November 2019 to 31 October 2020. The number of new breaches is 22:12 equities for the 8% cap, applicable to all trading venues, and 10 equities for the 4% cap, that applies to individual trading venues. Trading under the waivers for all new instruments in breach of the DVC thresholds should be suspended from 11 December 2020 to 10 June 2021.  As of 7 December 2020 there are a total of 246 instruments suspended.

ESMA to recognise Euroclear UK & Ireland Limited (EUI) after Brexit transition period

ESMA has announced that Euroclear UK & Ireland Limited (EUI), the central securities depositary (CSD) established in the UK, will be recognised as a third-country CSD following the end of the Brexit transition period on 31 December 2020. ESMA's recognition decision will apply form 1 January 2020 until 30 June 2021, allowing EU issuers sufficient time to transfer their securities to EU CSDs. 

ESMA reports on annual market share of credit rating agencies

ESMA has published its annual market share calculation for EU registered credit rating agencies (CRAs). The purpose the market share calculation is to facilitate issuers and related third parties in their evaluation of a CRA with no more than 10% total market share in the EU.

EBA launches consultations on guidelines on internal governance and remuneration policies for investment firms

The EBA has launched public consultations on its new draft guidelines on (1) internal governance and (2) remuneration policies under the Investment Firms Directive. The draft guidelines specify the governance and remuneration provisions, respectively, that Class 2 investment firms should comply with, taking into account the proportionality principle. The consultation periods run until 17 March 2021.

EBA publishes final draft technical standards on the prudential treatment of investment firms

The EBA has published a package of seven final draft regulatory technical standards (RTS) on the prudential treatment of investment firms. The draft RTS aim to ensure a proportionate implementation of the new prudential framework for investment firms taking into account investment firms' activities, sizes and complexity. The RTS included in the package set out the main aspects of new prudential regime in relation to the calculation of regulatory capital requirements. They also provide further clarifications on the methodologies to be applied by all types of investment firms, including investment advisors, portfolio managers, execution brokers, firms trading on own account and commodity dealers. The package also provides clarifications on the requirements for certain specific investment firms to apply banking rules and to seek authorisation as credit institutions. 

ESMA renews its decision requiring net short position holders to report positions of 0.1% and above

ESMA has renewed its decision to temporarily require the holders of net short positions in shares traded on an EU regulated market to notify the relevant national competent authority if the position reaches, exceeds or falls below 0.1% of the issued share capital. The decision extends the measure taken on 17 December 2020 and will apply from 19 December 2020 for a period of three months. 

ESMA recommends more time to implement a mix of solutions for PSAs to clear

ESMA has published a second report on clearing solutions for pension scheme arrangements (PSAs) under the European Market Infrastructure Regulation (EMIR). The report reaffirms ESMA's commitment to a broad implementation of the clearing obligation, including by PSAs, while also acknowledging that more time is needed to make sufficient progress on solutions that would collectively enable PSAs to clear their derivative contracts. 

ESMA publishes draft technical standards under EMIR REFIT

ESMA has published its final report on RTS and implementing technical standards (ITS) under the EMIR REFIT Regulation. The report covers data reporting to Trade Repositories (TRs), procedures to reconcile and validate data, access of relevant authorities to data and the registration of TRs. 

ESMA publishes cloud outsourcing guidelines

ESMA has published the final report on its guidelines on outsourcing to cloud service providers (CSPs). 

Topics covered by the guidelines include:

  • risk assessments and due diligence to be undertaken by firms on their CSPs
  • governance, organisational and control frameworks that firms should put in place to monitor the performance of their CSPs and how firms should exit cloud outsourcing arrangements without causing undue disruption to their business
  • contractual elements that a firm's cloud outsourcing agreement should include
  • information that firms should notify to competent authorities

ESMA supports IFRS foundation’s efforts on international standardisation in sustainability reporting

ESMA has published its response to the IFRS Foundation's consultation on sustainability reporting. In its response, ESMA recommends establishing high-quality international standards, while also accommodating the needs of jurisdictions that are at different stages of their sustainability efforts.

ESMA consults on the impact of algorithmic trading

ESMA has launched a consultation seeking input from market participants on the impact of requirements under MiFID II/MiFIR to algorithmic trading, including high-frequency algorithmic trading. The consultation paper covers the overall approach under MiFID II/MiFIR to algorithmic trading, including:

  • the authorisation regime
  • provisions for algorithmic and high frequency traders
  • provisions applicable to trading venues allowing or enabling these market participants

The consultation closes on 12 March 2021

ESMA issues 2020 report on accepted market practices under MAR

ESMA has published its annual report on the application of accepted market practices under the Market Abuse Regulation (MAR). The report, which will be submitted by ESMA to the European Commission, covers the second semester of 2019 and the first semester of 2020. 

ESMA updates Q&A on costs and charges

ESMA has updated its questions and answers on the implementation of investor protection topics under MiFID II and MiFIR. The updated document contains a new Q&A on ‘Information on costs and charges’, which aims to give guidance on how firms can present ex-post cots and charges information to clients in a fair, clear and not-misleading manner. 

ESMA updates guidance on waivers from pre-trade transparency

ESMA has published an updated opinion on pre-trade transparency waivers for equity and non-equity instruments.  The updated opinion now covers guidance relating to quote systems, guidance on how trading venues should apply for a waiver to their national competent authority and updates on frequently encountered issues when assessing waiver notifications. 

ESMA consults on fines and penalties for benchmark administrators and data reporting service providers

ESMA has launched two separate consultations on specific procedural rules for imposing fines and penalties on benchmark administrators and data reporting service providers (DRSPs) under ESMA's direct supervision. The consultation paper sets out ESMA’s proposals for a delegated act to be adopted by the Commission which will clarify relevant aspects of fines and penalties for DRSPs and benchmark administrators. The closing date for responses to both consultations is 23 January 2021. 

ESMA updates Q&A on EMIR

ESMA has updated its Q&A on over the counter (OTC) requirements and reporting issues under the European Markets Infrastructure Regulation (EMIR). The updated Q&A clarifies the status of post-Brexit transition period of legacy derivative transactions executed on UK markets and is relevant for EU counterparties in order to determine the applicable EMIR requirements. 

ESMA sees significant increase in EU Market Abuse Sanctions

ESMA has published its annual report on administrative and criminal sanctions, as well as other administrative measures, under the MAR in 2019. The report indicates that national competent authorities (NCAs) and other authorities imposed a total of €88m in fines relating to 339 administrative and criminal actions under MAR. This represents a decrease in the number of administrative sanctions from 472 in 2018, but an increase in the overall financial penalties imposed from €10m.

For more information on these topics please contact any member of A&L Goodbody's Financial Regulation team.

Date published: 7 January 2021