Financial Services Regulation and Compliance - Investment Firms June 2020
Financial Services Regulation and Compliance - Investment Firms June 2020
CBI markets update
The Central Bank of Ireland (CBI) has published issue 6 2020 of its markets update. It contains updates from the CBI, ESMA and IOSCO. CBI updates include notification of the EBA consultation on the new regulatory framework for investment firms, more on which you can read below.
Dear CEO Letter - Central Bank of Ireland's expectations of investment firms when engaging in unregulated activities
On 25 June 2020, the CBI issued a Dear CEO letter setting out its expectations of investment firms when engaging in unregulated activities. The CBI noted that some firms are offering products outside the scope of regulation, and as a result, consumers may not be aware of the protections that may or may not be afforded when investing in such products.
Firms must make clients fully aware of the regulatory status of products they are receiving and at a minimum:
include warnings in all information provided to clients at all stages and in all materials
not use the firm's regulatory status as a promotional tool – firms may only use regulatory disclosure statements in communications with a consumer in communications relating to a regulated activity
distinguish regulated and unregulated activities on the firm's website
Firms must enhance measures to protect consumers when selling complex investment products – Central Bank of Ireland
On 29 June 2020, the CBI published findings from an inspection of investment firms' compliance with their legal requirements to determine whether a product is appropriate for their customers. The CBI issued a press release to flag that it uncovered evidence that some firms are not paying sufficient attention to requirements, and are instead placing undue reliance upon 'box-ticking' to demonstrate compliance.
Other key findings of the report include:
weak processes, systems, and controls undermine firms’ practical application of the requirements, which result in errors and assessments proceeding with incomplete information
firms have a blanket approach for gathering client information, failing to consider differences in risk between investment products
it was unclear in many cases how firms reached the appropriateness decision
warnings to clients were not strong enough in some cases, or were vague and unclear, and warnings should not act as disclaimers through which firms may avoid their obligations
CBI engagement with relevant investment firms is continuing, and a letter has been sent to CEOs of all MiFID firms setting out the findings of the investigations along with action points for firms. The Dear CEO letter sets out the findings of the investigation, and instructs all firms to take any remedial action necessary to ensure they are acting in the best interest of consumers when selling complete products on an execution-only basis.
ESMA's Supervisory Coordination Network concludes its work
The European Securities and Markets Authority (ESMA) has announced the finalisation of the work of the Supervisory Coordination Network (SCN). The SCN was established in May 2017 as a response to emerging supervisory convergence risks with respect to the treatment of authorisation requests by EU27 national competence authorities (NCAs) in the context of the UK's withdrawal from the EU. The SCN has worked to foster convergence in the way NCAs approach the assessment of authorisation requests by firms, activities or functions relocating from the UK to the EU27.
The SCN will hold a final follow-up meeting before the end of 2020 to assess the relocation situation and close its work. ESMA will continue to work with NCAs in preparation for the end of the Brexit transition period.
ESMA publishes final report on FRANDT commercial terms for clearing services under EMIR
On 2 June 2020, ESMA published its final report with technical advice to the European Commission on the fair, reasonable, non-discriminatory, and transparent (FRANDT) commercial terms for the provision of clearing services. Under the EMIR Refit Regulation (2019/834), clearing members and clients who provide clearing services are required to do so under FRANDT terms by June 2021. The European Commission is mandated to develop a delegated act to define the requirements for such FRANDT terms and tasked ESMA in June 2019 with producing technical advice on the FRANDT terms as input for the development of the delegated act.
The technical standards aim to:
facilitate comparability of the information disclosed
address the process of on-boarding clearing clients
standardise the information disclosed to clients bilaterally
encourage further standardisation of contractual terms
ESMA updates transparency and position limit opinions for third country venues
On 3 June 2020, ESMA published updated opinions on post-trade transparency and position limits under MiFID II (Directive 2014/65/EU – Markets in Financial Instruments Directive II) and MiFIR (Regulation 600/2014/EU) following its assessment of over 200 third-country trading venues against criteria published in opinions in 2017.
The updated opinion on post-trade transparency includes an annex with a list of 136 venues from 25 countries. Most have a positive assessment for all the instruments available on the venue, while several have a partially positive assessment. The instruments for which the assessment is not positive are specified.
The updated opinion on position limits includes a list of seven venues from four countries. All venues have a fully positive assessment. Commodity derivatives traded on venues included on that list should not be considered as economically equivalent to OTC contracts for the purpose of the position limits regime.
ESMA updates Q&A on the Securitisation Regulation
On 28 May 2020, ESMA updated its Q&A regarding the Securitisation Regulation, providing guidance on how to complete specific fields in templates contained in the draft technical standards. In particular the Q&A advise on completing questions specific to fields in the ABCP template, and clarify questions addressed to securitisation repositories.
ESMA renews its decision requiring net short position holders to report positions of 0.1% and above
In light of the ongoing COVID-19 pandemic, ESMA has renewed its decision requiring net short position holders to report positions of 0.1% and above to national competent authorities. The decision applies for an additional three months from 17 June 2020 to persons, natural or legal, irrespective of where they reside, and does not apply to shares admitted to or traded on a regulated market where the principal venue for trading the shares is a third country, market making or stabilisation activities.
EBA starts delivering on the implementation of the new regulatory framework for investment firms, launches consultation papers
On 4 June 2020, the EBA published its roadmap for the implementation of the Investment Firms Directive and Investment Firms Regulations, which were signed into law in late 2019. The implementation takes place over four phases between 2020 and 2025. As part of phase 1, the EBA launched four consultation papers on the subject of prudential requirements, reporting requirements, and two on the subject of remuneration requirements. The EBA will take the findings of these papers into account when finalising implementing technical standards and regulatory technical standards.
Interested parties may comment on the papers until 4 September 2020.
ESMA publishes its Annual Report and updates 2020 Annual Work Programme
On 15 June 2020, ESMA published its Annual Report for 2019 which reviews achievements from 2019 against its mission of enhancing investor protection and promoting stable and orderly financial markets in the EU.
In 2019, ESMA's key achievements and highlights included its work in relation to:
promoting Supervisory Convergence in relation to MiFID II, investor protection and product interventions
assessing risks to investors through stress testing and ensuring ESMA's annual reports are supplied with good-quality data from external participants
preparing for expanded ESMA mandates as a result of regulatory change, and for Brexit by monitoring the risks associated with it
completing a single rulebook for EU financial markets
directly supervising specific financial entities through enforcement proceedings
ESMA also updated its annual work programme. The updated programme reprioritises its work and deliverables in light of COVID-19.
Euronext launches a suite of ESG products to allow European capital markets to fuel sustainable growth
Following the pan-European exchange's decision to set sustainable finance as one of its new pillars of strategy this year, Euronext has launched its new social, environmental and governance (ESG) index. The move follows increased desire from investors to make a positive impact on society.