April 2020
Regulatory Round-up - Q1 2020

In this edition we cover:

United Kingdom

  • Business continuity arrangements (Covid-19)
  • FCA business plan for 2020/21
  • Short selling bans
  • Senior Managers and Certification Regime ("SMCR")
  • RTS 28 statements
  • 10% depreciation notifications
  • General Data Protection Regulation ("GDPR")
  • Disclosure Regulation
  • UK Stewardship Code
  • Outsourced service providers


United States

  • ADV filing extension
  • Proposed changes to definition of 'Accredited Investor'

Business continuity arrangements (Covid-19)

The Financial Conduct Authority (“FCA”) is working closely with the financial services sector to ensure it is responding effectively to the Covid 19 outbreak. At this stage, the Regulator has been largely focusing on the retail market to ensure consumers are appropriately protected. The FCA recently launched a dedicated Covid 19 area on its website where it will maintain related news, advice and guidance.


Portman reminds firms that, where it has been necessary to invoke their Business Continuity Procedures, it should consider whether it will be necessary to inform the Regulator under Principle 11 (relations with Regulators). 


The FCA has been liaising with firms to discuss their continuity arrangements, we remind firms that they will be expected to be operational “as usual”. We encourage firms to focus on the following key areas:


1. Operational resilience

2. Access to compliance (both internal and external)

3. MAR surveillance

4. Best Execution

5. Trade and Transaction reporting

6. Client reporting

7. FCA filings (GABRIEL)

8. Electronic Communication and recording

9. Capital adequacy

10. Compliance Monitoring

FCA business plan for 2020/21

The FCA released its business plan for 2020/21 on 07 April 2020 and used it as an opportunity to highlight its finite resources which results in it having to focus its efforts on the areas of greatest potential harm. The impact of Covid 19 and the UK leaving the European Union are high on the FCA’s agenda.


In the short term, the Regulator intends to focus its efforts on ensuring that:


• Markets function well

• The most vulnerable are protected

• The impact of firm failure is minimised

• It tackles scams

• It seeks to ensure consumers and small firms are treated fairly


Over the medium term, the Regulator will seek to ensure that:


• Consumers can rely on safe and accessible payments

• Consumers can make effective investment decisions

• Consumers are treated fairly and not saddled with unaffordable debt

• That pricing remains fair in a digital age.


Over the longer term, the Regulator will continue to transform its own operations for the digital age.


Portman’s assessment of the business plan for 2020/21 has found that while it does not introduce any significant changes for wholesale firms, it doubles down on the Regulators existing areas of concern (e.g. conflicts of interest, treating customers fairly and business continuity). Firms should take this opportunity to consider their ongoing compliance requirements and ensure that they are in line with the Regulator's expectations.


The full business plan is available on the FCA website (linked here). 

Short selling bans

The FCA recently published an updated version of its statement on short selling bans and reporting (released 31 March 2020). The Statement highlights the European Securities and Markets Authority’s (“ESMA”) decision to temporarily amend the threshold for notifying net short positions to EU financial regulators under the Short Selling Regulation (“SSR”) from 0.2 percent of issued share capital to 0.1 percent (released 16 March 2020).


The FCA has updated its systems to enable notifications at the lower threshold and requests that firms make best efforts to report at the lower threshold from 6 April 2020.


Portman expects the majority of firms to be able to update their systems to achieve the 6 April 2020 deadline and reminds any firm that is unable to make the required changes to contact the FCA via PMU@fca.org.uk to discuss this further.

Senior Managers and Certification Regime

The SMCR was implemented on 9 December 2019 and firms should now be operating under the new Regime. Portman notes that many firms have elected to utilise ‘grandfathering’ arrangements for existing personnel, which enables existing personnel (who held the CF30 Customer Function on the 8 December 2019 prior to the transition to the new Regime) to continue in their role subject to the Certification process being carried out during 2020.


Portman reminds firms that ‘grandfathering’ arrangements are only available for personnel who held the CF30 Customer Function at your specific firm on 8 December 2019. Anyone outside of this group, whether existing personnel or new joiners must be appropriately Certified ahead of conducting investment management/advisory activities.


Portman reminds all firms that the FCA requires a complete list of Certified individuals to be uploaded via its Connect system ahead of the 8 December 2020 deadline. On 9 December 2020 Certified individuals will be listed on the updated FCA Directory.

RTS 28 statements

The FCA wrote to CEOs of firms providing services to retail investors to set out its approach to Covid 19 on 31 March 2020. The communication confirmed that the Regulator “has no intention of taking enforcement action where a firm does not publish an RTS 28 disclosure by 30 April 2020 subject to them being published by 30 June 2020”.


Portman notes that many firms who are required to make RTS 28 disclosures failed to receive this communication from the Regulator and, whilst we would always encourage firms to meet the initial disclosure deadline, firms that are unable to meet said deadline can take comfort in the Regulators confirmation that it will not take enforcement action so long as the 30 June 2020 deadline is met.

10% depreciation notifications

MiFID firms are required to inform investors where the value of their portfolio or leveraged position falls by 10% or more compared with its value in their last periodic statement, and for each subsequent 10% fall in value.


However, in its 31 March 2020 letter to CEO’s of firms providing services to retail investors, the FCA also confirmed that, until 1 October 2020, it has no intention of taking enforcement action where a firm chooses to cease providing 10% depreciation reports for any professional clients. In regards to retail clients, firms must have issued at least one notification to a client within a current reporting period, indicating their portfolio has decreased in value by at least 10%, and subsequently provide general updates through its website, other public channels (such as social media) and/or generic, non-personalised client communications.

General Data Protection Regulation

The United Kingdom formally left the European Union on 31 January 2020 and entered a transitionary period, which lasts until 31 December 2020. During this period, EU data protection law will continue to apply (in particular, the GDPR), and the status quo is mostly maintained, albeit without the Information Commissioner’s Office (“ICO”) participating in the European Data Protection Board.


The UK is expected to apply to the European Commission for an “adequacy” decision to enable the continued free flow of personal data between the EU and the UK after the transitionary period ends. However, recent announcements from the Prime Minister in particular, alongside issues concerning the UK’s far reaching surveillance laws, could put the adequacy decision at risk.


Portman advises firms to continue to monitor the situation as the absence of an adequacy decision will likely result in firms needing to revise contacts to legitimise continued EU UK data transfers post 31 December 2020.

Disclosure Regulation

The Disclosure Regulation came into force in December 2019 and will apply from March 2021. This will integrate environmental, social and governance (“ESG”) considerations into the investment decision making and advisory processes of Alternative Investment Fund Managers (“AIFMs”) and Undertakings for the Collective Investment in Transferable Securities (“UCITS”) management companies.


Rules include:


• Financial market participants (i.e. manufacturers of products) shall publish on their websites information about their policies on the integration of sustainability risks in their investment decision making process.

• Financial advisors (including AIFMs, UCITS companies and MiFID investment firms) shall publish on their websites information about their policies on the integration of sustainability risks in their investment advice or insurance advice.


Financial market participants are also required to publish and disclosure on their websites:


• Where they consider principal adverse impacts of investment decisions on sustainability factors, a statement on due diligence policies with respect to those impacts, taking due account of their size, the nature and scale of their activities and the types of financial products they make available; or

• Where they do not consider adverse impacts of investment decisions on sustainability factors, clear reasons for why they do not do so, including, where relevant, information as to whether and when they intend to consider such adverse impacts.

UK Stewardship Code

The Financial Reporting Council (“FRC”) completed a revision of the UK Stewardship Code which came into effect on 1 January 2020. The new code substantially raises expectations for how money is invested on behalf of UK savers and pensioners. It establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society.


Firms wanting to become signatories to the new UK Stewardship Code 2020 are required to produce an annual Stewardship Report explaining how they have applied the Code and submit this to the FRC. Firms wanting to be amongst the first signatories, must submit their annual report by 31 March 2021.

Outsourced service providers

The UK Regulators are aware that firms are increasingly relying on third party service providers and outsourcing to facilitate the provision of their services and will be focussing on this area in 2020. Outsourced service arrangements give rise to risk of operational disruption and harm to consumers where they are not effectively managed. The Regulators expect firms to be operationally resilient by having a comprehensive understanding and mapping of the people, processes, technology, facilities and information necessary to deliver each of your important business services, which includes any dependencies on third party providers.


The Bank of England (“BoE”), Prudential Regulation Authority (“PRA”) and the FCA recently launched a co-ordinated consultation on the extent to which their existing policies should be supplemented to improve the resilience of the system as a whole, and to increase the focus on this area within individual firms. The consultation is primarily aimed at UK banks, building societies and PRA designated investment firms and insurers but may result in FCA providing additional guidance or feedback to the wider industry.


The FCA wrote to the CEOs of all regulated asset management firms on 27 February 2020 to set out its expectations for firms as they prepare for the end of LIBOR. The Regulator set out next steps for firms as follows:


• Determine if the firm has LIBOR exposure or dependencies.

• The FCA expects transition activities to be underway and reminds firms that have not yet started to take immediate action to develop and execute an appropriate plan.

• If the board decides that no LIBOR transition plan is needed, the FCA may seek to understand and, where appropriate, challenge the reasons for this decision.

• If, following careful review, the board decides that a barrier to transition is insurmountable, or transition preparations will not be completed in time, the FCA will expect to be notified immediately and kept up to date on developments.

ADV filing extension

The Securities and Exchange Commission (“SEC”) recently published a temporary exemption from certain requirements of the Investment Advisers Act of 1940 (released on 13 March 2020). Registered Investment Advisers and Exempt Reporting Advisors impacted by Covid 19 must file “as soon as practicably possible, but no later than 45 days after the original due date”.


Portman advises firms to continue to meet their existing filing deadline wherever possible, as firms that require use of the extension are required to inform the SEC via IARDLive@sec.gov. In addition, they must also publicly disclose the reason behind its failure to meet the deadline and its anticipated completion date on its website.

Proposed changes to definition of ‘Accredited Investor’

The SEC continues to assess the implications of its proposed amendments to the definition of ‘Accredited Investor’. The proposed amendments would add additional categories of natural persons that may qualify as accredited investors based on certain professional certifications or credentials designated from time to time by the SEC.


The proposed change would result in wealth, which is the basis of the current test for natural persons that are not insiders, no longer being the sole means of establishing financial sophistication for the purposes of defining an Accredited Investor. In practice, this would mean that employees of fund managers (investment advisors in US terminology) that have completed the relevant examination requirements would be able to invest in funds despite them not meeting the wealth requirements.