Financial Services Regulation and Compliance - Investment Firms July 2023
Financial Services Regulation and Compliance - Investment Firms July 2023
New SI recognises status of dematerialised securities under company law
On 7 July 2023, notice of the making of SI no 353 of 2023 was published in Iris Oifigiúil. This regulation makes a number of amendments to the Companies Act 2014 to strengthen the legal position of dematerialised securities, in line with the Central Securities Depository Regulation (Regulation (EU) No 909/2014). Dematerialisation of all newly issued applicable securities will be required from 1 January 2023 and for all other applicable securities from 1 January 2025.
CBI publishes MCAR guidance as CAR goes live
On 4 July 2023, the Central Bank of Ireland (CBI) issued updated guidance (the guidance) on the Monthly Client Assets Report (MCAR) to accompany the refreshed MCAR template. This guidance coincides with the client asset requirements (CAR) becoming binding on Irish investment firms from 1 July 2023, and precedes CAR becoming applicable to credit institutions carrying out MiFID activities from 1 January 2024.
The guidance is intended to be read in conjunction with the CAR and the investor money requirements (IMR). Its primary purpose is to assist investment firms and credit institutions subject to the CAR and fund service providers subject to the IMR in complying with CAR and the IMR.
ESMA updates its guidance on the definition of ‘advice’ under MiFID II
On 11 July 2023, the European Securities and Markets Authority (ESMA) published a supervisory briefing (the supervisory briefing) on the definition of advice under second Markets in Financial Instruments Directive (MiFID II). This updated the 2010 Committee of European Securities Regulators (CESR) Q&A on ‘Understanding the definition of advice under MiFID’. The supervisory briefing illustrates the key tests and the thought process that a firm needs to go through to determine whether its services constitute ‘investment advice’. It also covers issues such as
the form of communication, including use of social media posts
perimeter issues around the definition of personal recommendation
guidance on when recommendations will be viewed as based on a view of a person’s circumstances
the provision of personal recommendations and whether other forms of information could constitute investment advice
The supervisory briefing is intended for use by NCAs in their supervisory activities, but it is expected that it will also be used by firms. The guidance does not constitute new policy.
Provisional political agreement reached on proposal to strengthen market data access and transparency
The European Parliament and Council have issued a press release announcing provisional political agreement on significant revisions to the Markets in Financial Instruments Regulation (MiFIR) and MiFID II. The reforms will see the creation of EU-level ‘consolidated tapes’ or centralised data feeds for different types of assets, allowing investors near real time access to key information, such as the price of instruments and the volume and time of transactions. The agreement also imposes a ban on payment for order flow (PFOF). Member states may exercise a discretion to exempt investment firms under their jurisdiction servicing national clients from this ban until 30 June 2026. In addition, the MiFIR review provides for improved rules on transparency of ‘non-equity instruments’, such as bonds and derivatives, as well as a set of rules aimed at making robust markets for commodity derivatives.
The rules are expected to apply from 1 January 2024.
EBA publish draft guidelines on use of group capital test for investment firm groups
On 25 July 2023, the European Banking Authority (EBA) published draft guidelines (theguidelines) on the application of the group capital test for investment firm groups under the Investment Firm Regulation (IFR). The guidelines aim at setting harmonised criteria to address the observed diversity in the application of the group capital test across the EU. The guidelines provide qualitive and quantitative criteria to assist national competent authorities (NCAs) in their assessment of the simplicity of the group structure and the significance of the risk posed to clients and the market.
A public consultation on these draft guidelines will run until 25 October 2023.
ESMA publishes final report on revised technical standards for passporting under MiFID II
On 11 July 2023, ESMA published a final report on the review of the technical standards for passporting under Article 34 of MiFID II (thereport). ESMA’s proposals include targeted amendments to the existing RTS and ITS that would add new information requirements to the list of details investment firms have to provide at the passporting stage. A new investment services and activities passport notification will also provide NCAs with additional information on a firm’s planned or existing cross-border activities.
The report has been submitted to the European Commission, who will provide further guidance should they decide to proceed with the review.
ESMA publishes manual on post-trade transparency
On 10 July 2023, ESMA released a new manual on post-trade transparency to be used by NCAs and market participants. It includes such details as which instruments and transactions are subject to post-trade transparency; the timing of when post-trade information has to be made public (real-time vs deferred); and the common aspects, as well as the differences, between the post-trade transparency regime and the transparency calculations in relation to the scope of instruments and transactions.
The manual integrates ESMA’s final report on the public consultation on additional Level 3 guidance on RTS 1 and 2; the updated classification of financial instruments code – MiFIR identified mapping; and Q&As on MiFID II and MiFIR transparency topics.
ESMA warns of risks of securities lending in relation to retail client financial instruments and clarifies MiFID II investor protection requirements
On 12 July 2023, ESMA issued a public statement on the risks of securities lending and other securities financing transactions (SFTs) in relation to retail client financial instruments, which it warned can be difficult for retail clients to understand. ESMA highlighted that investment firms are required to secure an investor’s prior written consent, as per Article 5 of the MiFID II Delegated Directive on safeguarding client assets. This consent should not be sought by way of the firm’s general terms and conditions. Firms are also obliged to adopt specific arrangements to ensure that the borrower of client financial instruments provides appropriate collateral, and that the value of this collateral continues to be balanced with the client’s financial instruments.
ESMA also warned that firms that do not arrange for revenues arising from these activities to directly accrue to the retail client may be in breach of their obligation to act fairly and professionally in accordance with the best interests of its retail clients.
ESMA publishes reports on suspicious transactions and order reports
On 17 July 2023, ESMA published a report on suspicious transaction and order reports (STORs), mainly covering 2021 and 2022. ESMA found that the number of notifications received from Member States was broadly stable and that other indicators, such as the type of reporting entities, the type of instrument, as well as the type of violation the notifications cover, point towards very similar results.
ESMA publishes final report on review of RTS with respect to the procyclicality of CCP margin
On 19 July 2023, ESMA published its final report on the review of the regulatory technical standards (RTS) with respect to the procyclicality of central counterparty (CCP) margin under Commission Delegated Regulation (EU) No 153/2013. This review was inspired by observed disharmony in anti-procyclical tools employed by EU CCPs amidst market turmoil caused by the onset of the COVID-19 pandemic. ESMA’s proposals include targeted changes to the existing RTS to better mitigate the potential procyclical effects of big-step margin changes on clearing members and clients, as well as limit the spread of liquidity stress to other parts of the financial system.
The final report has been submitted to the European Commission for review and adoption of the RTS by amending delegated regulation within three months.
ESMA publishes statement on compliance with disclosure requirements for costs and charges under MiFID II
On 6 July 2023, ESMA published a statement on its 2022 Common Supervisory Action (CSA) on compliance with disclosure requirements for costs and charges under MiFID II. While compliance with most elements of the cost and charge regime was strong, ESMA found room for improvement regarding the format and content and disclosure. Notable shortcomings include:
differing practices and sometimes no disclosure of information on inducements
poor disclosure of implicit costs to clients
lack of consistency in the way firms illustrate the cumulative impact of the costs and charges on the return of the investment
the disclosure of cost figures only in nominal amounts and not also the corresponding percentages
ESMA also coordinated a mystery shopping exercise on the ex-ante cost and charges information provided to retail clients. While most mystery shoppers received information about costs and charges before the investment service was provided, the quality and the timing of the information provided differed between firms.
Next, ESMA will develop new Q&As and work on a possible standardised EU format for the provision of information about costs and charges to clients.
ESMA does not find evidence to ban pre-hedging but warns on risks
On 12 July 2023, ESMA published the results of its 2022 call for evidence on pre-hedging. ESMA concluded that pre-hedging is a voluntary market practice which might give rise to conflicts of interest or abusive behaviours but did not find arguments to ban the practice at this stage. These risks will be kept in mind when issuing future guidance.
ESMA withdraws recognition of three UAE CCPs following European Commission decision on strategic deficiencies in AML / CFT regime
ESMA has withdrawn recognition decisions in respect of Dubai Commodities Clearing Corporation, Dubai Clear LLC and NASDAQ Dubai Ltd. This follows the European Commission’s decision to add the UAE to the list of high-risk third countries presenting strategic deficiencies in their AML / CFT regimes. This withdrawal was mandated by the terms of the European Markets Infrastructure Regulation (EMIR).
In order to minimise potential market disruption, ESMA has provided for an adaptation period of three months until 25 October 2023.
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