Regulatory Round-up: July 2021

Welcome to AQMetrics regulatory round-up, a monthly initiative that keeps readers abreast of all the latest regulatory news and events.

July proved to be an action packed month for regulators. Where liquidity and new potential fund structures dominated May and June, this month saw the huge news that the second phase of the landmark SFDR regime would be delayed by a further six months, to July 2022. The delay will be warmly welcomed by ESG managers, many of whom warned that implementing the sweeping rules on 1 January 2022 would not leave them with enough time to get ready.

ESG was also a hot topic overall last month, with the Bank of England and FCA publishing a joint discussion paper on diversity and inclusion in the financial sector, while the Financial Stability Board released its Roadmap for Addressing Climate-Related Financial Risks.

Elsewhere, ESMA released reports on penalties and sanctions under UCITS, AIFMD and MiFID II. Sanctions and fines increased across the board, with MiFID II firms hit especially hard; NCAS dished out a total of €8.4 million in fines for MiFID II breaches last year, with a total of 613 sanctions, a stark increased from 2020, which saw €1.8 in fines and 371 sanctions.

And in the US the SEC said that it was looking to restart its swaps regulation effort and harmonise its swaps rules with the CFTC in the wake of several high-profile blow-ups, including the dramatic collapse of family office Archegos Capital.

European Commission – delays to phase 2 of the SFDR

9 July – by far the biggest news in July was the confirmation that the EU was delaying the second phase of the landmark SFDR rules, which require asset managers to show how they take environmental and other issues into account, by six months. Managers will now have until 1 July to get ready.

Following months of rumours, John Berrigan, the head of the European Commission’s financial services unit, said in a letter to the European Parliament that a delay of six months was needed to avoid a last minute rush for market participants, many of whom had complained about the unworkable deadline.

‘Due to the length and technical detail of those regulatory technical standards, he said, ‘we deem it necessary to facilitate the smooth implementation of the standards by product manufacturers, financial advisers and supervisors.’

He added: ‘We therefore plan to bundle all 13 of the regulatory technical standards in a single delegated act and defer the dates of application of 1 January 2022 by six months to 1 July 2022.’

Although the delays will be warmly welcomed by ESG managers, many will still find the 1 July deadline challenging, and much work needs to be done to ensure that they’re fully compliant with SFDR and aligned with the EU Taxonomy.

FSB – Roadmap for addressing climate-related financial risks

7 July – The Financial Stability Board (FSB) submitted to the G-20 an ambitious roadmap aimed at addressing climate related risks to the global financial system. A key objective, it said, is to coordinate the numerous central bank and financial regulatory initiatives and to identify and mitigate the financial risks that may arise due to climate change,

According to FSB Chair Randal Quarles, who also serves as Governor and Vice Chairman of the U.S. Federal Reserve, these initiatives reflect ‘the increasing attention paid to the topic as well as the global and cross-sectoral nature of climate-related financial risks. The interconnected nature of climate-related financial risks and the growing body of work to address them reinforce the need for coordinated action. With its diverse membership, the FSB is well placed to coordinate internationally, and give visibility to the work to address climate-related financial risks.

FCA – Diversity and inclusion discussion paper

7 July – ESG was also a hot topic in the UK, with the FCA, PRA, and Bank of England releasing a joint discussion paper seeking the view of stakeholders when it comes to improving diversity and inclusion in the financial sector.

The regulators said their ultimate aim is to produce a set of minimum regulatory expectations, from which they can take action when shortcomings are present – particularly when there is a negative effect on consumers and market outcomes.

They added that they want to see meaningful steps taken to achieve greater representation at all levels, in particular at the Board and senior management levels.

In order to measure this, they said they plan to issue a one-off, voluntary survey that will help them better understand the levels of diversity in firms.

Feedback is open until 30 September 2021, with the FCA and PRA also intending to consult on more detailed proposals next year, with a final policy statement slated for Q3 2022.

FCA – Dear AMF Chair outlines tough position on UK funds ESG-related claims

19 July – The FCA published a letter to the Chairs of authorised fund managers (AFMs), after it received a number of “poorly drafted” applications for authorised funds, falling far below expectations.

The UK regulator clarified its expectations, and set out new guiding principles as to how its existing rules and requirements should be applied – particularly when it comes to funds supposedly pursuing a responsible investing or ESG mandate or theme. It said it expects improvements in the quality investor disclosure documents.

While not framed in such a way, some legal experts remarked that the letter can be seen as the FCA effectively following Article 8 and 9 of the SFDR, which requires EU funds to make detailed disclosures on how they intend to follow an ESG strategy or theme.

More concrete rules and regulations likely to follow in coming months. Earlier this year, for instance, the FCA confirmed that it will be working closely with the Bank of England to produce a UK green taxonomy that is similar to that of the EU’s, although an exact timeline is yet to be announced.

FCA – business plans highlights a new direction

15 July – in its latest business plan, the FCA said it plans to become more innovative and assertive in the next 18 months, with a particular focus on scams, pensions and ESG.

As well as taking advantage of data and technology, it said that it wants to become more assertive when testing the limits of its powers. To achieve this, it said it will invest £120m into its data strategy over the next three years.

‘The FCA must continue to become a forward-looking, proactive regulator. One that is tough, assertive, confident, decisive, agile,’ said Nikhil Rathi, CEO of the FCA.

He added: ‘Over the next 18 months you will continue to see an FCA that looks and feels even more different. One that operates differently, partners differently, and communicates differently.’

For more information on what financial firms can expect, you can read the FCA’s regulatory roadmap, released earlier in May.

ESMA – penalties for MiFID II, AIFMD and UCITS

13 and 20 July – Sanctions and measures related to MiFID II, AIFMD and UCITS failings imposed by National Competent Authorities (NCAs) across Europe were up markedly in 2020.

MiFID II fines were most notable, with NCAs issuing a total of 613 sanctions, reaching a value of €8.4 million across 23 of the 30 EEA member states. That was a more than fourfold increase from 2019, when total fines were €1.8 million.

Firms have been caught out by EU regulators regarding data and reporting issues in the last year, underlining the importance of getting regulatory reporting right.

For AIFMD firms, meanwhile, a total of 11 NCAs imposed 61 penalties, totalling some €3.35 million. That was down from 63 penalties that totalled €4.46m in 2019.

And 13 NCAs imposed a total of 57 penalties relating to UCITS failings in 2020, totalling some €1.1m. That represents a significant drop from 2019, when 11 NCAs imposed 43 penalties totalling €4.15m.

ESMA – areas for improvement with MiFID II suitability requirements

21 July – ESMA published the results of its 2020 Common Supervisory Action (CSA) on MiFID II suitability requirements.

The 2020 CSA found that firms overall comply with key elements of the suitability requirements that were regulated under MiFID I, such as the understanding of products and clients and their processes and procedures to ensure the suitability of investments.

However, shortcomings and areas of improvement have emerged about some of the new requirements introduced by MiFID II, particularly the requirement to consider the cost and complexity of equivalent products, the costs and benefits of switching investments and suitability reports.

Based on the CSA results, ESMA said it will soon update its guidelines on suitability to address areas where a lack of convergence has emerged or/and to further clarify some of the new MiFID II requirements.

Similarly, NCAs will undertake follow-up actions on individual cases to ensure that breaches as well as other shortcomings or weaknesses identified are remedied.

ESMA – consultation on EMIR reporting guidelines

13 July – ESMA launched a public consultation on its draft Guidelines for derivatives reporting under EMIR.

The consultation includes draft Guidelines on a wide range of topics related to reporting, data quality and data access under EMIR Refit, including:

• Reporting logic, including the use of action and event types;

• Reporting in the case of delegation as well as under provisions on allocation of responsibility for reporting;

• The population of specific sections of fields; and

• The correct population of fields for different reporting scenarios and different products.
  The closing date for responses is 30 September 202, with ESMA likely to finalise the proposed Guidelines in a final report in Q4 2021 or Q1 2022.

The closing date for responses is 30 September 202, with ESMA likely to finalise the proposed Guidelines in a final report in Q4 2021 or Q1 2022.

ESMA – Disclosure and investor protection on SPACS

15 July – ESMA issued a public statement on the prospectus disclosure and investor protection issues raised by special purpose acquisition companies (SPACs).

The statement sets out ESMA’s expectations on how issuers should satisfy the specific disclosure requirements of the Prospectus Regulation to enhance the comprehensibility and comparability of SPAC prospectuses.

SEC – Restarts swaps effort to harmonise rules with CFTC

The US Securities and Exchange Commission (SEC) announced its intentions to implement much-anticipated rules for the regulation of security-based swap execution facilities, in a move that would bring it in alignment with the Commodity Futures Trading Commission (CFTC).

In one of his first major speeches since taking over as SEC chairman in April, Gary Gensler said he wanted to see the SEC harmonise its derivatives rules with similar laws already in place at the CFTC, which would spell stricter oversight to the derivatives market overall, as directed by the Dodd-Frank Act.

The SEC is likely to take particular aim at security-based swap execution facilities (SEFs), including reporting, clearing, SEFs trading, and substituted compliance.

When it comes to position sizing and limits, meanwhile, Gensler highlighted the recent collapse of family office Archegos Capital, in which a number of banks enabled Archegos to run large levered positions in a handful of single stock names using total return swaps.

He said SEC staff have been directed to consider new rules under SEA Section 10B. Requirements that are likely to be imposed on such firms include including counterparty protections, capital and margin requirements, internal risk management, supervision, record-keeping and reporting procedures.