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The Ellis Wilson round-up: more winter regulatory news

Jonathan Wilson, Ellis Wilson Ltd, Director, London, 11 January 2021

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The year 2020 ended with a small wintry flurry of regulatory activity from the UK’s Financial Conduct Authority. The regulator did enough to remind practitioners that it was still there, but its decisions during these days are unlikely to cause disruption.

Remuneration code subject to SYSC 19A

Some finalised guidelines from the FCA took effect on 29 December on the subject of ‘frequently asked questions’ or FAQs for IFPRU (the prudential part of the FCA's rulebook for investment firms) investment firms.

This superseded previous FAQs and are not intended to be a complete summary of remuneration-related rules and guidelines. Included within are FAQs on material risk takers, governance, consolidation groups, proportionality and variable remuneration.

Of interest to IFPRU firms that may be seeking guidance about the way in which the remuneration rules apply or where BIPRU (the FCA's prudential sourcebook for banks, building societies and investment firms) firms may be part of a British consolidation group. The FCA is consulting interested parties about a new domestic prudential regime for all British investment firms. It considers that EU non-legislative material will remain relevant in the post-Brexit world, taking into account changes in British domestic legislation.

Blue Gate: on the Good Ship Hardship

In the long-running Connaught Income Fund saga, the FCA has imposed a fine of £203,007 on Blue Gate Capital Ltd to pay restitution for its role as operator of the fund, the sum representing the profit that it made while operating the fund. £10 million would have been the actual fine had Blue Gate not provided verifiable evidence that it was suffering financial hardship.

Capital Financial Managers Ltd was the fund operator between April 2008 and September 2009. Blue Gate took over as operator between September 2009 and the fund's liquidation in December 2012. In 2017 the FCA fined Capita £66 million for its part in the fund’s demise and loss to investors. The subject of this REIT is the latest enforcement action against Blue Gate.

The fund was an unregulated collective investment scheme or UCIS. By their very nature, UCIS are unrestricted in the types of assets in which they can invest – these include highly volatile, speculative and illiquid assets that pose an inherent risk to customers. The fund was marketed as “The Guaranteed Low-Risk Income Fund” until 2009 (renamed the Connaught Income Fund Series I Fund). The fund’s offering memorandum was promoted as “low-risk investment offering guaranteed, fixed return of between 8.15% and 8.5% per quarter.” Yet the fund’s investment strategy was anything but "low risk" when it was being marketed to investors. In fact, the fund provided short term bridging finance to commercial borrowers in the UK property market.

Investors were found to have been misled. Moreover, an independent review of the FCA's handling of the fund's collapse spotted institutional failures at its offices. The regulator could, the reviewers said, have protected the investors in the fund more promptly and effectivel. The FCA has since issued a public apology to George Patellis, the informant who told it of his concerns about the fund.

FCA SM&CR Covid-19 webpage update

There is to be limited further dispensation for the previous flexibility that the FCA allowed to firms because of the depredations of the virus. Previously available temporary provisions ended on 7 January and other modifications-by-consent are to end after 30 April. These include the following.

  • Significant changes to Statements of Responsibilities (SoRs). The FCA does not expect firms that needed to make temporary arrangements to submit updated SoRs. As of 7 January, firms are expected to apply the notification requirements as normal and submit a Form J when changing SoRs significantly.
  • Temporary arrangements for people who perform senior management functions or SMFs. Firms are able to take advantage of a modification-by-consent to the 12-week rule whereby temporary arrangements last longer than 12 weeks. Still available to firms until 30 April, this modification will come to an end then.

At the outset of the pandemic, the FCA said that it still expected firms to comply with the rules of the Senior Managers and Certification Regime (SM&CR) when possible. The latitude that it is affording firms is due to come to a close.

DTR notifications

Disclosure, Guidance and Transparency or DTR rules require investors to notify the FCA of changes in major shareholding within certain thresholds. During this quarter, as announced last month, the FCA will change the way in which firms submit the TR-1 forms to it. They will have to do so on a new online portal in the FCA’s Electronic Submission System (ESS). The online form will be available in a “DTR 5 portal” (DTR 5.1 being the rule that calls on people to notify the FCA about their acquisitions or disposal of major shareholdings) and will mark a more efficient method of submitting returns.

Complementary to this is a publicised list of financial instruments that are subject to the FCA’s “notification requirements.” Every so often, the FCA is required to publish a list of financial instruments.

The FCA's informative webpage merely indicates a date of ‘Q1 2021’; presumably this means that firms are now obliged to use the online portal because the FCA will not accept TR-1 forms by email.

A two-step registration process is required if reporting on behalf of position holders. Step 1 is to access ESS; step 2 is to access the DTR reporting system on ESS.

Firms that have sent off notifications within the last 12 months ought to have received emails in late November with instructions about how to register. If not, they will be able to register once the portal is operational. If a firm is not already registered, the FCA thinks that it ought to do so before it has to notify it of something new, the better to avoid delays. Firms should note that the submission of a TR-2 form can still happen on email.

Who will pass the SNI(F) test?

Also last month, the FCA released a consultative paper about the Investment Firm Prudential Regulation which it is modelling on the EU’s Investment Firms Regulation and Investment Firms Directive (IFR/IFD). Not much has changed since it released a discussion paper on the subject last summer, although it is promising to consult the market throughout 2021. Its final plans, then, are still unknown. Nevertheless, every firm should start planning for these changes now, beginning with what we call the "SNIF test," which ought to help it understand the effects that these proposals are likely to have on it. An SNI is, in FCA parlance, a “small and non-interconnected investment firm.” The regulator, for some reason, does not put an F at the end.

A firm must fall below a series of thresholds if it is to be classified as a SNI(F). The most relevant to investment managers are as follows.

  • Assets under management: < £1.2 billion.
  • Client orders handled – cash trades: < £100 million per day.
  • Client orders handled – derivative trades: < £1 billion per day.
  • Assets safeguarded and administered and client money held: Zero.
  • Total annual gross revenue from investment services and activities: < £30 million.

These thresholds apply to the activities that a firm undertakes in relation to the EU’s Markets in Financial Instruments Directive or MiFID. Odd results might occur for firms with mixed FCA ‘permissions.’ A small alternative investment fund manager or AIFM with “MiFID top-up permissions” could be drawn into the more complex non-SNIF regime simply because it holds one client asset for a discretionary mandate, even though all the other assets that it holds for AIFs are excluded.

It would be wise for firms to look carefully at their ‘permissions,’ to check to see if they require them and, if they do, to check to see that they are not exceeding the SNI(F) thresholds. Implementation gap analysis can then start.

Sustainable listing disclosures

A policy statement made on 21 December is in line with the FCA's original proposals to require a company with a premium listing in the UK (even if it is a sovereign-controlled commercial company) to include a statement in its annual financial report which says:

  • whether it has made disclosures consistent with the Task Force for Climate-related Financial Disclosures’ recommendations and recommended disclosures in its annual financial report;
  • why it has not made disclosures consistent with some or all of the TCFD’s recommendations and/or recommended disclosures, if that is the case, while also describing any steps that it is taking (or plans to take) to be able to make consistent disclosures in the future – including relevant timeframes for being able to make those disclosures;
  • why it has included some, or all, of its disclosures in a document other than its annual financial report, if that is the case; and
  • where in its annual financial report (or other relevant document) the various disclosures are to be found.

This is the first of many sustainability-related changes in disclosure that we expect to discuss with firms this year. Investment managers should take account of the new reporting requirements as appropriate.

* Jonathan Wilson can be reached on +44 (0)20 3146 1869 or at jon@elliswilson.co.uk

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