April 2021
Regulatory Round-up - Q1 2021

In this edition we cover:

United Kingdom

  • FCA reminds firms to review regulatory permissions
  • Brexit: EU/UK Memorandum of Understanding
  • Investment Firm Prudential Regime
  • FCA new online fees portal
  • Extension of the Annual Financial Crime Reporting obligation
  • Review of the Funds Regime
  • The UK's National Security Investment Bill
  • FCA Product Governance Review of Asset Managers
  • Transaction Reporting to be extended to EU AIFMs and UCITS ManCos
  • SMCR Certified Functions
  • Sustainable Finance Disclosure Regulation (“SFDR”)
  • RegData Validation/Submission Issues


United States

  • SEC examination priorities for 2021

FCA reminds firms to review regulatory permissions

On 18 January 2021, the FCA issued a statement reminding firms that they have an obligation to regularly review their regulatory permissions to make sure they are up to date and remove any permissions that are not needed. The FCA expect firms to remove regulatory permissions where they have not carried out any regulated activities that need those permissions for 12 months or more and where they have no current plans to do so.  


The FCA wants firms to comply with these obligations to ensure that the Financial Services Register, which provides the public with information on the regulatory status of firms, is accurate. The regulator also considers regular regulatory permission reviews to be one means by which senior management at firms can demonstrate that they maintain effective oversight of their businesses.  


The FCA is reminding firms of this obligation now because the regulator expects to shortly have new powers to remove a firms regulatory permissions via a fast-track process where it considers this appropriate.

Brexit: EU/UK Memorandum of Understanding

The EU and the UK have agreed the text of a Memorandum of Understanding (“MoU”) which is expected to be signed off by both sides shortly. The agreement covers how the EU and the UK intend to work together in setting rules for firms in the financial sector. Under the MoU a “Joint UK-EU Financial Regulatory Forum” will be established to discuss rulemaking.


The MoU is the first step towards EU equivalence decisions which would allow UK firms to conduct business in EU member states. However, in the absence of any EU equivalence decisions actually being made, UK firms must continue to consider the local rules of each member state where they intend to conduct business to determine the extent they can provide cross-border services, including any conditions that need to be complied with.

Investment Firm Prudential Regime

In its Q4 2020 Regulatory Round-up, Portman reported that the FCA had released Consultation Paper (CP20/24) in December 2020, seeking views on the first tranche of its proposed rules for its new prudential regime for MiFID Firms, the Investment Firm Prudential Regime (“IFPR”).  The IFPR will come into force on 1 January 2022.


The consultation period for CP20/24 closed on 5 February 2021.  Two further Consultation Papers on the IFPR are expected from the FCA in Q2 2021 and Q3 2021, with final rules expected to be published later in 2021.


Portman will continue to monitor developments relating to the IFPR and will provide further updates in its future regulatory roundups.

FCA new online fees portal

The FCA is launching a new Online Invoicing portal on 12 April 2021 that will allow firms to access their annual fees and levies information and pay outstanding invoices. 


The new portal will function in a similar way to Chrysalis (the FCA’s previous fees portal), however, will utilise the same login credentials as the FCA’s Connect and RegData systems.

Extension of the Annual Financial Crime Reporting obligation

On 31 March 2021, the FCA released Policy Statement (PS21/4) which confirms its proposals to extend the Annual Financial Crime Reporting obligation. 


Currently, firms with total annual revenue of £5 million or more are required to report to the FCA on an annual basis, providing various information relating, but not limited to: the clients with which it has engaged in the period; the jurisdictions in which it has operated; details on whether such clients or jurisdictions are high risk; and details on any Suspicious Activity Reports submitted in the period. Firms report this information to the FCA via the Annual Financial Crime Report (“REP-CRIM”).


The Policy Statement (PS21/4) extends the REP-CRIM reporting obligation to firms that carry on activities the FCA consider pose higher money laundering risk, irrespective of their total annual revenue. This includes firms conducting any of the following activities:


• Holding client money or assets;

• Dealing in investments as agent;

• Dealing in investments as principal;

• Managing investments;

• Establishing, operating, or winding up a collective investment scheme;

• Managing an AIF or UCITS; and

• Safeguarding assets.


Firms that need to complete the REP-CRIM for the first time will be required to submit their first report within 60 business days after the first Accounting Reference Date falling after 30 March 2022.


Portman advises firms that the FCA have brought into the scope of the obligation for the first time to make sure they are prepared to submit the return when it is due.

Review of the Funds Regime

In the Budget 2020, the Government committed to reviewing the UK funds regime in order to enhance the attractiveness of the UK as a location for asset management.  The Government has now released its consultation paper which focus on the following areas:


The UK approach to funds taxation – specifically; how effective have previous reforms (e.g., unit trusts) been in achieving their aims? Could those reforms be made more effective in terms of making the UK an attractive place to set up funds?  Could improvements be made in respect of suggested changes to multi-asset funds? Would introducing tax-exempt status for funds influence decisions about whether to set up funds in the UK?  Would changes to the REIT regime increase investment in the UK?  What are the barriers to use of UK domiciled LP funds and PFLPs and how might tax changes help to address them?


The UK approach to funds regulation – specifically; what benefit does fund authorisation bring to product providers beyond access to retail investors?  Is the FCA’s authorisation of a product relevant to its appeal in both the UK and international market?  Could the current FCA authorisation process (processing times set out in law) be improved?  Is there value in providing greater certainty (i.e., in law) about the timescales for FCA authorisation and how do they compare internationally?  What are the limitations of the QIS (Qualified Investor Scheme) structure and how can proposed changes improve the attractiveness of this vehicle?


Opportunities for wider reform – should the Government focus on enhancing the attractiveness of the UK funds regime for entirely new funds to be set up? Why do Firms choose to locate in other jurisdictions with comparable offerings e.g., ETFs?  Should reforms focus on appealing to AIFs targeting international markets?  What policy interventions could encourage the creation of fund administration jobs outside London?  Should the distribution of capital be permitted?  If so, what are the possible advantages, disadvantages, and risks for investors? Would new proposed unauthorised fund structures add value alongside existing authorised and unauthorised UK fund structures? Are there any specific tax treatments that would be either necessary or desirable to support the successful introductions of new unauthorised fund vehicles in the UK?  Are there any other proposals the Government should consider as part of this review of the UK funds regime?


The Government is particularly keen to understand which changes/proposals should be prioritised in order to secure the UK’s post Brexit, post-pandemic economy and to assist in achieving its goal of a carbon neutral economy by 2050.  It should be noted that the Government has been consulting separately on the tax treatment of asset holding companies and that it does not intend to make any changes to the relatively recently (due to Brexit) ‘onshored’ legislation i.e., relating to UCITS and AIFMD.

The UK’s National Security Investment Bill

The UK Government has proposed wide-ranging reforms to its powers to scrutinize, and potentially refuse, foreign investment in certain UK “entities” and “assets”. The National Security Investment Bill (“NSIB”) seeks to strengthen the UK Government’s ability to intervene in transactions to protect UK national interests and security concerns.


The sectors in scope of the notification regime were recently consulted on with the process which closed on 6 January 2021. The proposals referenced 17-sectors that will be scope of new notification requirements: civil nuclear; communications; data infrastructure; defence; energy; transport; artificial intelligence; autonomous robotics; computing hardware; cryptographic authentication; advanced materials; quantum technologies; engineering biology; critical suppliers to government; critical suppliers to the emergency services; military or dual-use technologies; and satellite and space technologies.


The NSIB does not provide any exclusion thresholds. Therefore, if an entity falls into one of the ‘in-scope’ sectors then a notification obligation will arise irrespective of the entities turnover or market share. A “trigger event” takes place, resulting in a mandatory notification needing to be made, when either:


• 15% of the shares or voting rights of an entity in one of the ‘in-scope’ sectors is acquired; or

• Control is acquired in an entity in one of the ‘in-scope’ sectors.  


The Bill is yet to be introduced; however, firms are advised to be aware that it includes proposals whereby the Secretary of State (“SoS”) will be able to retrospectively request notification (called “call-in notices”) for transactions taking place between 12 November 2020 and the date on which the NSIB takes effect.


The SoS will have up to 30 working days to assess a mandatory notification before providing a decision.  This period can potentially be extended to 45 working days if the SoS believes that a national security risk has arisen that warrants further investigation.


Portman will continue to work with its clients to ensure they are suitably prepared for any changes to notification requirements.

FCA Product Governance Review of Asset Managers

On 26 February 2021, the FCA published a report detailing the findings of its product governance review of asset managers.  


MiFID II’s introduction in January 2018 brought about obligations, known as the product governance rules, for firms that design (i.e. manufacture) and distribute financial products; its aim being to better protect investors by regulating each stage of a product’s life cycle.  The FCA, therefore, visited 8 asset managers to understand whether funds they had launched since 2018 had been manufactured and/or distributed in line with the product governance rules.


The FCA found that some asset managers are not undertaking activities in line with product governance rules and that there is significant scope for asset managers to improve their product governance arrangements.  In particular, the FCA’s review notes that:


  • Governance & Oversight: While most firms had a formal annual product assessment review in place, there were examples of poorly defined committees/’second lines of defence’, meaning the potential for meaningful challenge was limited.  Further, in most instances, record keeping was found to be poor, with an inability to evidence robust challenge and oversight, raising concerns against the individuals accountable for this function under the Senior Management and Certification Regime.


  • Training: While training was generally found to be in place, this did not always highlight the importance of the needs of and outcomes for the end investor based on the characteristics of the firm’s own financial instruments and its investment services.


  • Conflicts of Interest: While all firms visited had conflicts of interests frameworks, these were not all effective.  Specifically, firms are reminded to consider whether there are certain product characteristics, such as charges, objectives, or its general operation, that could benefit the firm at the expense of the end investor or may create incentives to favour one set of investors over another.


  • Target Market: Firms were generally found not to be considering the ‘negative target market’ for their products (i.e., those the product was not compatible with).


  • Product Testing & Disclosures: A varied approach to scenario and stress testing was found, with the FCA reminding firms that that the primary purpose is to assess how a product might perform under volatile market conditions.  In addition, the FCA found that most of the firms appeared to leave out certain charges, particularly portfolio transaction costs, from their cost disclosures.


  • Distributors: The quality of due diligence conducted on third-party distributors varied.  Further, the FCA found that asset managers were not always receiving ’end-client’ information from distributors, nor monitoring management information to help identify and monitor key trends that may lead to emerging risks.


As a result of its findings, the FCA expects to undertake further work in this area which, along with further reviews, may also include consideration of whether it needs to make further changes to the product governance rules and guidance for both asset managers and distributors.


Firms are reminded to ensure their activities prioritise good customer outcomes and that they comply with the product governance rules. Portman will continue to monitor the FCA’s work on the product governance rules and will provide further updates as and when they arise.

Transaction Reporting to be extended to EU AIFMs and UCITS ManCos

Whilst UCITS Management Companies and AIFMs had been excluded from the transaction reporting requirements upon MiFID II, this may be about to change for EU Firms.  ESMA published its Final Report on 23rd March in which it reviews transaction reporting obligations under Art 26 of MiFIR.  The report recommends (in section 4.1) that transaction reporting requirements are extended to EU UCITS and AIFM firms where they provide “at least one MiFID service to third parties”.  Although this will not, if passed, apply in the UK, FCA authorised Firms should be aware of this change and keep abreast of the FCA’s stance on whether they adopt similar or gold-plated requirements to remain equivalent.

SMCR Certified Functions

Solo-regulated Firms were required, by the end of Q1, to have uploaded the details of all relevant persons onto the Directory of Certified and Assessed Persons (part of the Financial Services Register).  Note that the requirement included Non-Executive Directors who are not performing Senior Management Functions such as SMF9 (Chair).

Sustainable Finance Disclosure Regulation (“SFDR”)

The EU SFDR took effect on 10th March with the aim of increasing transparency in relation to green investment strategies and reduce “greenwashing”.  SFDR requires financial market participants, “FMPs”, (broadly Portfolio Managers, AIFMs, UCITS Management Companies) and relevant financial advisers to publish information on their websites about whether they consider adverse impacts of investment decisions (or investment advice, for financial advisers) on sustainability factors.  For most, this applies on a “comply or explain” basis.  However, for FMPs with an average no of 500 employees, it is a requirement to comply, and financial advisers employing fewer than three persons are exempt.  SFDR is not directly applicable in the UK as it comes into force after Brexit.  However, UK Firms should have considered whether they are brought into scope if they are (non-exhaustive):


• A UK Portfolio Manager marketing Funds into the EU via National Private Placement Regime (‘NPPR’);

• A UK Portfolio Manager acting as the delegated manager for an EU Firm;

• A UK Firm which wishes to opt-in due to investor/client expectation;

• A UK Firm which decides to opt-in as it is part of a Group containing EU entities which decides to implement SFDR on a consistent and best practice basis.


Although the UK has not on-shored SFDR, it intends to adopt more stringent requirements in line with the ‘Taskforce on Climate-related Financial Disclosures’ (TCFD) by end 2025.  A joint Government and Regulator task force published a roadmap in Nov 2020 whereby mandatory climate related disclosures will be required across seven categories of organisation: listed commercial companies; UK-registered companies; banks and building societies; insurance companies; asset managers; life insurers and FCA-regulated pension schemes; and occupational pension schemes.  This would be implemented gradually, granting smaller Firms more time to prepare.

RegData Validation/Submission Issues

Portman is aware that there are ongoing issues regarding the submission of certain regulatory returns on the new RegData system, mainly: REP-CRIM, RMAR and FSA data items.  Firms are advised to ensure that they prepare returns in good time before the submission due date in case they encounter any problems.

SEC examination priorities for 2021

The Securities and Exchange Commission’s (“SEC”) Division of Examinations (the “Division”) recently (Mar21) published its examination priorities for the 2021/22 financial year. The priorities pertinent to UK based Registered Investment Advisors (“RIAs”) are summarised below:



The Division highlighted that it is aware that recent market volatility and industry pressures may have impacted fees and other revenues collected by firms and that these conditions may cause increased financial stress on firms and their personnel, which has the potential to lead to increased instances of fraudulent conduct. The Division will therefore consider the potential for increased conflicts when conducting its examinations throughout the 2021/22 review period. 


Compliance programmes:

The Division stated its intention to continue to review the compliance programmes of RIAs to ensure the programme and associated policies and procedures are reasonably designed, implemented, and maintained. 


The Division will prioritise the examination of firms that have not yet been examined and those that have not been examined for several years.  


Examinations typically assess a firms compliance programme in one or more core areas, including:


• Portfolio management practices.

• Custody and safekeeping of client assets.

• Best execution.

• Valuations.  

• Fees and expenses.

• Business continuity.  


ESG related investment strategies:

The Division highlighted a growing appetite for investment strategies that focus on sustainability, including products and services that are referred to by a variety of terms such as sustainable, socially responsible, impact, and environmental social governance conscious. The Division stated its intention to focus on products and services in these areas that are widely available to investors (such as open-ended funds and ETFs, as well as those offered to accredited investors, such as qualified opportunity funds).  


The Division will review the consistency and adequacy of the disclosures RIAs provide to clients regarding these strategies, determine whether the firms’ processes and practices match their disclosures, review fund advertising for false or misleading statements, and review proxy voting policies and procedures and votes to assess whether they align with the strategies.


RIAs to private funds:

The Division stated its intention to examine advisors to private funds to assess compliance risks, including a focus on liquidity and disclosures of investment risks and conflicts of interest, including:


• Preferential treatment of certain investors, particularly in funds that have experienced liquidity issues.  

• Liquidity related conflicts.  

• Portfolio valuations and the resulting impact on management fees.

• Adequacy of disclosure and compliance with any regulatory requirements of cross trades, principal investments, or distressed sales.  


Information security and operational resiliency:

The Division highlighted that over the past year, the increase in remote working brought about by the Covid-19 pandemic has increased information security and operational resiliency concerns.  


The Division will review whether firms have taken appropriate measures, including:


• Implement a suitable incident response framework.  

• Monitor malicious email activities.  

• Oversee vendors and service providers.  

• Manage operational risk (due to the disbursement of employees).

• Maintain suitable controls surrounding electronic storage of books and records (including personally identifiable information and investor records).