Funds Legal Update | 15 April 2019

Another busy week at ESMA; we bring you some of the highlights, including a report on ESMA's opinions on product intervention measures taken by the National Competition Authorities.

We take a look at the Capital Markets Union's stronger and more integrated European financial supervisory architecture, along with the FCA and FRC's discussion on the role of asset managers and the growing interest in ESG matters.

All this, and more (and Brexit free) below.

General

Product intervention

Prohibitions (ESMA and UK)

On 2 April 2019, the European Securities and Markets Authority (ESMA) issued several positive opinions on product intervention measures taken by the National Competent Authorities (NCAs), including the UK's, in connection with binary options (which involve 'betting' on whether an event will happen or not). ESMA’s opinion finds that the proposed measures are justified and proportionate and that it is necessary for NCAs to take product intervention measures that are at least as stringent as ESMA’s measures. Amongst the FCA's concerns are that being listed and subject to minimum contract terms does not mean these products meet a genuine investment need, and that they are not widely (if at all) offered to retail clients by UK product providers as they are treated as gambling products.

Exploitation

Pointing to the example of UK providers of contracts for differences (CFDs), who produced new products with similar features to CFDs to avoid the application of ESMA's temporary restriction on CFDs, the FCA believes there is a similar risk of circumvention with binary options. There is significant investor protection concern raised by the cross-border offer of binary options to retail clients and it is essential that product providers cannot exploit differences in treatment by NCAs across Member States. You can read the press release, which has links to all the opinions.

Prohibition and definition

A few days before, the FCA released its final policy and feedback received to its earlier consultation (CP18/37 found here). The final policy, PS19/11 (found here) sets out the Handbook rules to permanently prohibit the sale, marketing and distribution of binary options to retail consumers by firms that carry out activity in, or from, the UK. These rules came into force on 2 April 2019.

The FCA's rules will apply alongside ESMA’s temporary measures (prohibiting the sale on a temporary basis until 2 July 2019), and will eventually replace them when the UK leaves the European Union, and/or the ESMA measures expire. Firms which comply with the FCA's new rules will also be in compliance with the ESMA restriction. However, the FCA's prohibition goes further than ESMA’s by capturing all binary options, including ‘securitised binary options’ (as defined by ESMA), which are exempt from their ban.

CMU stronger supervisory architecture: money laundering

On 1 April 2019, the European Commission published a fact sheet called Capital Markets Union: Creating a stronger and more integrated European financial supervisory architecture, including on anti-money laundering. The Commission has proposed strengthening EU anti-money laundering supervision by reinforcing the coordination role of the ESAs and attributing new direct supervisory powers to ESMA. This is a response to the opportunities and challenges for supervision presented by sustainable finance and fintech. Find the factsheet here.

Stewardship, sustainability and supportive regulatory framework

On 3 April 2019, the FCA published a speech given by Edwin Schooling Latter, FCA Director of Markets and Wholesale Policy, at the LSE conference. The role of asset managers is considered alongside the growing interest in ESG matters and he comments that the unprecedented interest in stewardship may be driven by the increasing number of sustainability initiatives. The speech can be found here, which contains links to the recent joint discussion paper by the FCA and FRC and consultation paper CP19/7 on implementation of the Revised Shareholder Rights Directive.

European System of Financial Supervision (ESFS): update

On 4 April 2019, the UK government published two letters concerning the progress of negotiations towards the proposed ESFS legislative reform package. These cover issues such as, for example, supervisory convergence and the establishment of "co-ordination groups", ESMA's supervisory competence, and the role of ESAs in monitoring third country equivalence. You can find the letters here and here.

Retail investment funds: costs and performance

On 3 April 2019, Steven Maijoor, the Chair of ESMA, delivered the keynote speech at Better Finance 10th Anniversary Conference. The speech focused on the costs and performance of retail investment products, drawing on ESMA's first annual costs and performance report on these products. Read the speech and the press release.

Variations... not another review of market abuse?

In this article published on 4 April 2019, Will Dennis, Co-Head of Policy at AFME, questions whether two years since its inception, it is time to review the EU's Market Abuse Regulation. Different applications of MAR have occurred across EU member states, not to mention administrative and practical challenges. Read the article here.

FCA policy development page: quick reference tool

On 5 April 2019, the FCA updated its policy development webpage which lists all the most recent publications. You can find it here.

Funds

EFAMA responds to ESMA consultation on liquidity stress testing

EFAMA has published its response to the ESMA consultation paper on the guidelines on liquidity stress testing in UCITS and AIFs. EFAMA strongly argues that whilst liquidity stress tests are used to highlight potential problems, stress tests cannot be treated as a standalone tool to be relied upon as a way of preventing future liquidity crises.

"It is also critical to stress that whilst fund managers provide liquidity as part of their fiduciary role in buying and selling investments for individual funds and ensuring they can meet investor redemptions' requests…managers do not exit to make markets or to supply the financial system with liquidity. In their efforts to carry out their fiduciary duties, managers are subject to the dynamic and evolving nature of market liquidity in the same way as other market participants."

Please find the response here.

PRIPPs KID: an updated Q&A Tool

On 4 April 2019, the ESAs released an updated version of the Q&As on the KID requirements for PRIIPs. There are new Q&As listed under the general topics (on the recommended holding period) section, and on the subject of multi-option products.

First pan-EU overview of use of supervisory sanctions for UCITS

ESMA has published a report looking at the penalties and measures imposed under the UCITS Directive in 2016-2017. The report contains an aggregated overview of the applicable legal framework and information on the penalties and measures imposed by NCAs for 2016/2017. Read the report here and the press release here.

If you would like to discuss any of these developments, please get in touch with one of the experts listed below.