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Q1 2013 Investment Management Regulatory Update

Developments this quarter

Welcome to the sixth edition of our Investment Management Regulatory Update which summarises the key regulatory developments affecting the UK investment management sector.

In this edition we cover key international, European and UK developments including:

FSA transition to the FCA 

On 1 April 2013 the Financial Services Act 2012 came into force, removing the Financial Services Authority (FSA) from the scene and delivering a new regulatory structure for the UK, comprising the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The Deloitte EMEA Centre for Regulatory Strategy has produced a briefing note exploring some of the unanswered questions about how the new regulators will operate.

In future, investment managers in the UK will be supervised by the FCA. During the first quarter of 2013, in the build-up to the transition to the FCA, the FSA released a number of publications framing how the FCA would operate. The key topics are outlined below.

FSA FG13/01: Final Guidance on risks to customers from financial incentives
On 16 January, following a thematic review which found that most incentive schemes were likely to drive people to mis-sell and that these risks were not being properly managed, the FSA published its final guidance (FG13/01) to help firms address the risks to retail consumers that may result from their financial incentive schemes.

Martin Wheatley, CEO-designate of the FCA, said that he hoped the guidance would mark a “key step in changing the culture of viewing consumers as a sales target to somebody to serve”. The guidance provides examples of good and poor incentive scheme features and of their appropriate governance and risk management.

The FCA will carry out a wider review over the coming year to assess how firms have responded to the guidance and whether their schemes and controls avoid the risk of mis-selling.

FSA DP13/01: How the FCA could be more transparent
On 5 March, the FSA published a discussion paper (DP13/01) to consider the FCA’s two new principles relating to transparency: the desirability of publishing information about regulated firms/individuals, or requiring such persons to publish information; and the exercise of its own functions as transparently as possible.

DP13/01 considers that being transparent is about disclosing relevant information in a way that can be clearly understood. For the FCA, this may mean disclosing more information than has previously been disclosed by the FSA; it may also mean disclosing a smaller amount of more meaningful and relevant information that can be used more effectively. Accordingly, the FCA has identified the following areas on which to focus its efforts to become more transparent:

  • More information about firms, individuals and markets: the FCA will look to publish more aggregated information about authorisations, anonymous aggregated information about the results of thematic work and more details about redress schemes in final notices;
  • Processes and actions taken: the FCA may look to publish more aggregated information about supervisory and enforcement activity (e.g. number of planned and unplanned supervisory visits that have taken place across different sectors and average length and cost of investigations);
  • Regulatory failures: the FCA will investigate and report to the HM Treasury if it identifies any regulatory failures, particularly those that involve a failure to secure an appropriate degree of protection for consumers;
  • Changing approach to publishing information: the FCA will strive to make its publications easier to locate and easier to understand. The regulator will also work towards producing a greater number of publications with the aim of keeping firms, consumers and other external stakeholders fully informed of its activities and areas of focus.

The FSA invites comments on this discussion paper until 26 April 2013.

FSA PS13/03: The FCA’s use of temporary product intervention rules
On 25 March, the FSA published a policy statement (PS13/03) confirming the FCA’s approach for using its new powers of temporary product intervention rules (TPIRs). The FCA is now empowered to make emergency product intervention rules without going through a consultation process to ensure consumer protection.

There are several ways in which the FCA could make use of TPIRs. At the most extreme end, the regulator could choose to impose an outright ban on the sales and marketing of a product to all (or certain types of) consumers. However, other methods may involve requiring firms to include, exclude or modify certain features of their product(s) and/or promotional material(s). Any breaches of the temporary rules could result in an authorised firm having to reimburse customers for any money or property paid/transferred under the relevant agreement and provide compensation for losses sustained by the customer as a result of the payment/transfer. In cases where sales have taken place after the introduction of the TPIRs, the agreements could be rendered unenforceable.

These temporary rules are designed for short term use where significant risks to the consumer have been identified and will only apply for a maximum of 12 months. However, during this period the FCA will work towards finding a long term solution which may include a consultation process in order to establish a permanent set of rules.

FCA Business Plan and Risk Outlook published
On 25 March, the FSA published the FCA’s Business Plan and Risk Outlook for 2013-14. The Risk Outlook addressed, in particular, the drivers of conduct risk and identified five priority risks for the FCA in achieving its consumer protection, market integrity and competition objectives. The Business Plan drew on the Risk Outlook, setting out the activities the FCA intends to carry out in 2013-14 to meet its objectives and how it plans to use its resources.

The Deloitte EMEA Centre for Regulatory Strategy has published a detailed briefing note outlining the FCA’s likely areas of focus its activities on over the coming year and offering guidance on what steps firms should take to prepare.

The new FCA Handbook and FCA website
On 1 April, the new FCA Handbook officially came into force and the FCA website has now superseded the FSA website.

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There have been a number of key developments in the last quarter in relation to the implementation of the Alternative Investment Fund Managers Directive (AIFMD). To keep advised of further developments and for further detail and analysis of the AIFMD Level 2 implementing measures, visit our AIFMD publications page at

ESMA final report - guidelines on sound remuneration policies under the AIFMD
On 11 February, the European Securities and Markets Authority (ESMA) published its final report setting out guidelines for the remuneration of alternative investments fund managers (AIFMs) under the AIFMD. The guidelines will apply to managers of AIFs including hedge funds, private equity funds and real estate funds. Non-EU AIFMs which market funds to EU investors will also be subject to the guidelines after a transitional period.

Deloitte has published an alert summarising the key changes from the draft guidelines previously issued by ESMA in June 2012. Affected firms should be considering their existing arrangements and the extent to which changes, if any, will need to be implemented in light of this final guidance.

HMT’s further consultation - March 2013
On Wednesday 13 March, HM Treasury (HMT) published a further consultation on the Transposition of the AIFMD. Most notably the Government is not proposing to require directors of internally managed investment companies to become 'approved persons', nor it is proposing to require Common Investment Funds (CIFs) and Common Deposit Funds (CDFs) to become authorised AIFs, i.e. they can remain unauthorised but the AIFM will need to seek authorisation if they are over the relevant thresholds. These proposals fit within the Government commitment not to ‘gold-plate’ the Directive European Commission AIFMD Q&A document.

On 27 March 2013, the European Commission published on its website a series of questions and answers on the application of the AIFMD 2011/61/EU. The Q&A section provides responses to several technical questions raised in relation to AIFMD, including the key topic of the transitional arrangements for pre-existing AIFMs. Further questions can also be submitted directly to the Commission online. We have compiled the entire Q&A into a single document which you can download here.

FSA CP13/09: Consultation on AIFMD implementation - Part 2
On 19 March, the FSA published Part 2 of its consultation paper (CP13/09) on rules and guidance to implement the AIFMD in the UK. Due to continuing European transposition work on the AIFMD, and the recent FSA change to the FCA on 1 April, this consultation does not cover all of the issues set out in the first paper and so a third consultation is expected in the near future.

Deloitte has produced a briefing note highlighting some of the key messages that arise from the 306 page consultation. This note should be read in conjunction with our notes on the FSA’s Part 1 consultation published in November 2012, and HM Treasury’s first consultation published in January 2013 and further consultation published In March 2013.

The deadline for comments on CP13/09 is 10 May 2013 and the FCA proposes to issue a full AIFMD Policy Statement in June 2013 ahead of the transposition deadline of 22 July 2013.

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The implementation date of the Retail Distribution Review (RDR) has now passed and all affected firms are now required to comply with all RDR rules and guidance. However, the FSA continued to issue publications designed to assist firms with complying with the RDR requirements.

RDR Newsletter #9
In February, the FSA published the latest RDR Newsletter which covered a number of operational considerations, updates and reminders on key points, including:

  • Passive Investment - confirmation that passive investments are not a ‘relevant market’ and therefore cannot solely be relied upon to satisfy the independence criteria.
  • Social investments - guidance that if an adviser recommends a social investment where making a financial return may need not be a client’s only or primary objective, the adviser will need to consider and record all relevant factors and explain any disadvantages to the client.
  • RDR data requirements - a reminder to firms about their data requirements under RDR (including new RMAR sections, professional standing data and individual adviser complaints).
  • Receiving adviser charges over a period of time - reiteration that adviser charges can only be paid over a period of time when related to either on-going services or regular contribution plans.
  • Adviser readiness research - summary of the output of the FSA’s most recent adviser readiness survey covering adviser numbers, post RDR intentions and qualification progress.
  • Systems and controls - guidance that firms should consider reviewing their new RDR related systems and controls to ensure that they are operating effectively.

The FSA published another suite of RDR Q&As to help firms understand its expectations in relation to some general and specific questions covering: general topics; independent and restricted advice; adviser charging; and professionalism. The majority represented a reminder of the regulator’s previously stated position but the paper did provide some additional insights and new emphasis. These included:

  • Restating the legacy commission rules and reminding advisers that they needs to consider how best to explain the position to the client but are free to offer to offset trail commission against new adviser charges if they wish.
  • A reminder to firms that they need to have robust systems and controls to ensure that if paraplanners are meant as fact-finders, they do not inadvertently give advice.
  • On retaining independence with appropriate continuing professional development (CPD), the FSA has stated that it would question a firm that was holding itself out as independent where the firm did not have any mechanism for assessing certain retail investment products and did not sell them in practice.
  • Confirmation that it is acceptable to charge clients with a lower investment amount more and still treat that customer fairly. The FSA acknowledged that it can see circumstances where it would be feasible to charge a client with less to invest a proportionately higher fee. However, it flags that firms are also able to set costs at a certain level for an individual case to keep a client or attract a new one.

Professional standards data collection and on-going complaints notification web pages
The FSA has also created two separate specific pages covering ‘Professional standards data collection’ and ‘On-going complaints notification’. These pages are designed to help firms submit data to the FSA correctly and contains FAQs, templates and a summary of the requirements.

For further information, visit

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There has been some progress in respect of the Markets in Financial Instruments Directive II (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR) this quarter, following a new compromise text released by the Irish Presidency. Agreement is still required in some areas, such as access to trading venues, and the European Council had been expected to reach agreement by May, however it is not clear whether this will now occur. This delay could impact the timetable for the trialogues under the Lithuanian Presidency.

ESMA recently issued its 2013 Work Programme, which builds on the 2013 work programme it initially published, and provides a comprehensive list of areas in which ESMA technical advice in respect of MiFID II/MiFIR can be expected.

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Capital Requirements Directive 

CRD IV / CRR provisional agreement reached
In February 2013, the European Commission, Council and Parliament announced that provisional agreement on the Capital Requirements Directive IV (CRD IV) package, which will implement the internationally agreed standards on capital and liquidity across the EU, had been reached. The European Parliament and the Council officially approved the provisionally agreed CRD IV package in March 2013 and published the final consolidated CRD IV / Capital Requirements Regulation (CRR) texts.

While EU Member States will have to transpose the Directive into national law, the Regulation is directly applicable, without the need for any further action on the part of national authorities. CRR, for example, contains detailed and prescriptive provisions on capital, liquidity, leverage and counterparty credit risk, whilst CRD IV contains requirements relating to sanctions, corporate governance and capital buffers amongst others.

The consolidated legislative texts will have to be checked by technical specialists and translated, before being published in the Official Journal of the EU (expected in Q2 2013). Firms will then have a transition period lasting up to the implementation date, during which they need to ready themselves for compliance. Having missed the original 1 January 2013 deadline for implementing Basel III, the overall CRD IV package is now likely to enter into force in the EU on 1 January 2014. In addition, the various provisions in CRR and CRD IV will be progressively phased-in by 2019.

EU Commission publishes FAQ on CRD IV
On 21 March, following the approval of the provisional agreement on CRD IV, the European Commission published a FAQ covering the following areas:

  • why the CRD IV package is required in the context of the recent financial crisis;
  • requirements under Basel III and how CRD IV meets and implements these requirements;
  • structure of the new regulatory framework;
  • calculation of capital/liquidity requirements, leverage ratio, counterparty credit risk and capital planning buffer; and
  • corporate governance.

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Other European highlights 

On 16 January, the Joint Committee of the European Supervisory Authorities (ESMA, EIOPA and the EBA) issued its 2013 Work Programme.  This sets out a number of key areas of focus for the committee including; consumer protection and risk analysis, as well as continuing its planned regulatory work which was initiated in 2012.

  • Consumer Protection - focus on a number of areas including: templates for complaints handling; the development of a set of high level principles for the product approval process; and the development of draft regulatory technical standards in the area of disclosures for packaged retail investor products (PRIPs).
  • Risk Assessment - the submission of two Reports on Risks and Vulnerabilities to the European Council’s Economic and Financial Committee’s Financial Stability Table as part of their joint bi-annual reporting on micro-prudential analysis of cross-sector developments and research into key trends and threats to financial stability.
  • Regulatory Work - the committee will pursue regulatory work initiated in 2012 in key areas such as the European Market Infrastructures Regulation (EMIR), financial conglomerates and anti-money laundering.
  • Supervisory Practice - the authorities will work together on the joint cross sector Training Programme, which will assess the likes of anti-money laundering supervisory practices.

ESMA seeks feedback for review of the Short Selling Regulation
On 12 February, ESMA published a call for evidence on the evaluation of the Regulation (EU) No236/2012 on short selling and certain aspects of credit default swaps. The feedback will form part of ESMA’s technical advice on the appropriateness, impact and operation of the Regulation’s requirements and restrictions.

The call for evidence focused on six main areas: transparency and reporting requirements; restrictions on short selling of shares and sovereign debt; restrictions on entering into uncovered sovereign credit default swap positions; settlement discipline, including buy-in procedures; exemptions from provisions of the Regulation; and intervention powers and emergency measures.

The call for evidence closed on 15 March, and advice is now expected to be delivered to the European Commission by 31 May as part of its report on the review of the Regulation for the European Parliament.

Financial Transaction Tax tabled by the European Commission
On 14 February, the European Commission set out a proposal for the implementation of the Financial Transaction Tax (FTT) which will be adopted by 11 Member States (although not in the UK). The proposal suggests an approach of taxing all transactions with an established link to the FTT-zone and proposes a rate of 0.1% for shares and bonds and 0.01% for derivatives. Once implemented, the tax is expected to deliver revenues of 30-35 billion euros per year.

The FTT will be implemented using a “residency principle”, meaning that the tax will be due if any part to a transaction is located in a participating Member State, regardless of where the transaction is taking place. Based on this principle, the tax will apply to firms established in the UK which transact with other firms which are based in the 11 Member States. However the tax will not apply to day-to-day finance activities such as loans, payments and deposits.

The European Commission’s Commissioner responsible for Taxation, Algirdas Semeta, has described the FTT as being “an unquestionably fair and technically sound tax, which will strengthen our Single Market and temper irresponsible training”.

ESMA publishes Q&As on ETFs and other UCITS issues
On 15 March, ESMA published Q&As intended to promote common supervisory approaches and practices in the application of the UCITS Directive and its implementing measures, with a specific focus on the guidelines on ETFs and other UCITS issues. The Q&As provide responses to questions posed by the industry and competent authorities in relation to the practical application of those guidelines.

European Parliament Econ committee votes on bonus caps for fund managers
On 21 March, the European Parliament’s Economic and Monetary Affairs Committee voted by 22-16 in favour of a draft law limiting asset managers’ bonuses to the same level as their fixed salaries and requiring 50% of the variable remuneration to be paid in the units of the UCITS concerned.

The MEP Sven Giegold, said "The UCITS bonus cap will help strengthen investor protection and reduce risky speculation. It will also complement the recently-adopted EU rules capping bankers' bonuses, ensuring these rules cannot be circumvented and providing for a level playing field".

The rules will be put to a vote at the European Parliament in April and, if passed, will need to be considered by the European Commission and EU finance ministers before becoming EU law.

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Q1 2013 FSA enforcement summary 

There were 36 final notices published in the quarter ending 31 March 2013. Over half of these were against individuals and included cases on market abuse and failure to act with integrity. In relation to action on firms, suitability failings were once again a key theme with one high profile organisation being fined over £9 million for a number of deficiencies in this area including:

  • Failure to provide adequate training on suitability requirements to its advisers;
  • Failure to adequately capture customers’ risk tolerances;
  • Failure to send customers suitability reports; and
  • Lack of compliance monitoring reviews which could have identified the above failings.

This quarter also saw action taken on firms breaching the Listing Rules including, for the first time, a penalty being imposed on a firm for breaching the Model Code.

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