January 2021
Regulatory Round-up - Q4 2020

In this edition we cover:

United Kingdom

  • Brexit update
  • Investment Firm Prudential Regime
  • General Data Protection Regulation (“GDPR”)
  • FCA experiencing delays processing approved persons applications
  • The Certification Regime & The FCA Directory
  • RegData replacing Gabriel reporting system
  • FCA ‘Dear CEO’ letters on Adequate Client Assets Arrangements
  • Extension of Annual Financial Crime Reporting obligation
  • FCA Regulatory fees and levies proposals
  • SFDR: Delay to level 2 implementation


United States

  • Investment Adviser applications with the SEC
  • SEC Proposes Exemption from Broker-Dealer Registration for Finders in Private Placements



Brexit update

Despite the UK reaching a “deal” with the EU on Christmas Eve, UK Firms are still struggling to determine the extent to which they may continue to conduct business with EU member states, as the deal does not clarify the treatment of Financial Services. Firms appear to be faced with a “financial services no-deal Brexit” scenario in the absence of an EU equivalence decision or where the local laws (in the country where they wish to conduct business) has not granted special dispensations.  


Currently, UK Firms are in a no-man’s-land between the end of the transition period (31st December 2020) and, potentially, an EU equivalence decision (expected end March 2021). In response to this situation, some member states have made amendments to their local laws/regulations to permit UK Firms to continue to provide services into their own jurisdiction. The terms under which this has been granted vary and can be conditional upon notifications being made to the relevant local regulator.  


For example, the Belgian regulator (FSMA) permits certain UK Firms to continue cross-border provision of services without an establishment in Belgium provided that the UK Firm provides those services in the UK AND services are limited to eligible counterparties/per se professionals/UK nationals habitually resident in Belgium (subject to certain criteria). Similarly, Liechtenstein and Luxembourg announced (well in advance of the UK Trade & Security Deal) that UK authorised Firms could provide cross-border services following a notification to the relevant regulator (FMA and CSSF respectively).


It should be noted an EU equivalence decision takes precedence and therefore the above state-by-state determinations may fall away. Looking beyond March, such measures could potentially be more “sticking plaster” than corrective surgery. Furthermore, Firms must carefully scrutinize what the relevant post-Brexit cross-border notifications allow them to do e.g. what regulated activities are permitted? Are continued cross-border services only permitted in relation to existing contracts?


Several states have taken a more prohibitive stance such as Germany, France and the Netherlands. The financial services regulator in the Netherlands, the AFM, states “This transition period has now expired. Because financial services do not form part of the new partnership, a no-deal Brexit applies to financial institutions. British financial institutions without a licence may no longer provide their services in the Netherlands from 1 January 2021. This can have consequences for their customers based in the Netherlands if British Parties do not have a licence in the Netherlands. They actually have to discontinue their services”.  


Passporting is no longer available to UK Firms and these have now been removed from the FCA Register (with the exception of Gibraltar).


The FCA is advising Firms to ensure that they check with the local regulators in the member states in which they wish to continue to do business. Firms should also familiarise themselves with the guidance posted on the FCA’s Brexit webpages

Investment Firm Prudential Regime

In its Q2 2020 Regulatory Round-up, Portman reported that the Financial Conduct Authority (“FCA”) had set out, in Discussion Paper (DP20/2), its initial views on a new Investment Firm Prudential Regime (“IFPR”). The IFPR will be applicable to MiFID investment firms.


In DP20/2, the FCA indicated that the proposed implementation date for the IFPR was June 2021. However, in November 2020, the FCA confirmed that it would now instead target the 1 January 2022 for the implementation of the IFPR.


In addition, on 14 December 2020, the FCA released Consultation Paper (CP20/24) seeking views on the first tranche of its proposed rules to introduce the IFPR. CP20/24 builds on the proposals set out in DP20/2 and, in particular, provides further clarification on:


• Prudential Categorisation: Current categorisations of MiFID investment firms, such as ‘BIPRU’, ‘IFPRU’ and ‘Exempt CAD’ firms will cease to exist; instead moving to two broad categories: either ‘small and non-interconnected’ (“SNI”) investment firm or non-SNI investment firm. Non-SNI investment firms will typically be larger firms (e.g. those with AUM of £1.2bn or more) or those performing higher risk activities (e.g. dealing as principal, holding client money or safeguarding client assets).


• Own Fund Requirements: Requirements will consist of the higher of a new ‘permanent minimum requirement’ (which in most cases will be higher than the current ‘base capital requirement’) and the Fixed Overhead Requirement. ‘K-Factor’ calculations will also apply to those firms categorised as non-SNI investment firms.


• Concentration Risk: Firms will be required to monitor and control their sources of concentration risk arising from its own cash deposits, earnings, the location of client money or assets, exposures in a trading book, assets (for example, trade debts) not recorded in a trading book and off-balance sheet items. Reporting requirements on concentration risk will be applicable to non-SNI investment firms.


• Regulatory Reporting: A new set of regulatory returns will be introduced under the IFPR, providing a consistent reporting framework for all MiFID firms. These will replace current reporting requirements, which vary depending on a firm’s prudential categorisation. The FCA has set out its templates for reporting under the IFPR.


The FCA confirms that the final rules on the IFPR will be set out in a new prudential sourcebook for MIFID investment firms (“MIFIDPRU”).


The FCA has welcomed comments on its proposals and firms that wish to do so must respond by 5 February 2021.


Two further Consultation Papers on the IFPR are expected in Q2 2021 and Q3 2021.


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

General Data Protection Regulation (“GDPR”)

The UK formally left the EU on 31 January 2020 and entered a transition period which ended on 31 December 2020. The UK Government is seeking an “adequacy decision” from the European Commission to enable the continued free flow of data between the EU and the UK. To allow the EU time to consider whether to grant such an “adequacy decision”, as part of the new trade deal, the EU has agreed to delay transfer restrictions for at least four months.  


One means of transferring data from the EU to countries that have not been granted an “adequacy decision” is through the use of Standard Contractual Clauses (“SCCs”). On 12 November 2020, the European Commission published a draft set of updated SCCs for consultation; the public consultation period ended on 10 December 2020. Once finalised and approved, the new SCCs will replace the current SCCs for personal data transfers.


Portman advises firms to continue to monitor the situation as the absence of an adequacy decision will likely result in the need for contracts to be reviewed, including any use of SCCs, to legitimize continued EU-UK data transfers after the transitional arrangements expire.  

FCA experiencing delays processing approved persons applications

The Senior Managers and Certification Regime (“SM&CR”) was introduced in December 2019. The FCA has said that in the lead up to the introduction of SM&CR it received many applications for new approvals. As a result of the large number of applications previously received it expects applications to take longer to determine over the next few months as it continues to deal with a backlog.


To determine applications as quickly as possible, the FCA advises firms to:


• Check the application before submission to ensure it has been fully completed;


• For Senior Managers Regime (“SMR”) applications, complete a Disclosure & Barring Services (“DBS”) check before submission;


• Conduct all appropriate due diligence checks, including regulatory references before submission and include details of those checks with the application; and


• Respond promptly and fully if contacted by the FCA for further information about an application.

The Certification Regime & The FCA Directory

The FCA’s public register detailing individuals who have been certified under the Certification Regime (i.e. The FCA Directory) went live on 14 December 2020 for solo regulated firms.  


Firms who have yet to complete its assessment of all Certified Staff and issue certificates confirming their fitness and propriety are reminded that this process must be completed, and the FCA notified for inclusion on the FCA Directory, by 31 March 2021.

RegData replacing Gabriel reporting system

As reported previously by Portman, the FCA has confirmed that RegData will replace Gabriel as its new regulatory reporting system. 


The FCA is managing the transition of firms onto the new system in tranches and Portman has noted that the FCA began moving firms to the new system in Q4 2020.  


Firms are reminded that the FCA will send emails to their existing GABRIEL principal and associated users three weeks before their move date. Further reminders will be provided five days before and, then again, one day before the move date. As such, Portman advises firms to review their user and contact details in Gabriel and to monitor communications from the FCA around their transition to the new system.

FCA ‘Dear CEO’ letters on Adequate Client Assets Arrangements

The FCA has issued a letter to the CEO’s of firms that are authorised to hold client money or safeguard client assets to remind firms of their regulatory obligations around maintaining adequate client assets arrangements in the current environment. Specifically, the regulator has noted that events such as the Covid-19 pandemic and Brexit has meant that firms are being affected in a way that may not have been predicted.


As a result, the FCA has highlighted the need for firms to remain compliant with their obligations under the Client Assets Sourcebook (CASS) and, in particular, has highlighted the need for firms to ensure that they:


• have adequate governance and oversight arrangements in place;


• have appropriate oversight of third-parties, including reviewing due diligence to ensure that client assets will not be subject to increased risk as a result of Brexit;


• keep appropriate records and conduct frequent reconciliations;


• ensure that all client money bank and transaction accounts have an acknowledgement letter; and


• maintain a complete and up to date CASS Resolution Pack


Portman would highlight to firms to which this applies that the FCA has stated that it will continue to conduct assessments of firms’ client assets arrangements and review the annual independent external auditors’ client assets reports. Further, that it may contact firms about their arrangements in the future. Firms should be prepared to explain the actions taken in response to the ‘Dear CEO’ letter.

Extension of Annual Financial Crime Reporting obligation

On 24 August 2020, the FCA released Consultation Paper (CP20/17) consulting on its proposals on the extension of Annual Financial Crime Reporting obligation. This consultation closed in November 2020 and the FCA has confirmed that it expects to publish its final rules in Q1 2021.


By way of reminder, firms with total annual revenue of £5million or more are currently 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”).


Under the proposals of CP20/17, the REP-CRIM reporting obligation will be extended 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:


• Managing investments;


• Managing an AIF or UCITS;


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


• Dealing in investments as agent or principal;


• Holding client money; and


• Safeguarding client assets.


Portman will provide a further update once the FCA has released its final Policy Statement.

FCA Regulatory fees and levies proposals

On 19 November 2020, the FCA released Consultation Paper (CP20/22) setting out the regulator’s proposed policy changes to the way it will raise fees from 2021/22.


Within the CP, the FCA proposes increases to its application fees for any businesses considering applying for FCA authorisation or registration, as well as existing FCA authorised firms that may vary their permissions. By way of summary, FCA authorisation application fees for ‘straightforward’ applications which currently incur a fee of £1,500 will be increased to £2,500, while application fees for ‘moderately complex’ applications will increase from £5,000 to £10,000.


For authorised firms applying for a variation of permission (“VoP”), the FCA currently charge 50% of the standard rate (i.e. the respective cost for new businesses applying for similar permissions under a new authorisation), or £250 if the VoP does not move the authorised firm into a new fee-block. Although the FCA is proposing to raise the minimum £250 fee to £500, the regulator is not otherwise proposing changes to its VoP application fee structure.


The FCA is, however, proposing introducing fees for Change in Control (“CiC”) and Senior Manager Function (“SMF”) applications; neither of which have previously incurred an application fee. Under the proposals CiC applications will incur a £500 fee, while SMF applications will result in a £250 fee.


Portman will provide a further update once the FCA has released its final Policy Statement.

SFDR: Delay to level 2 implementation

The EU has adopted a new global sustainable development framework, the Sustainable Finance Disclosures Regulation (“SFDR”), which has at its core sustainable development goals.


While, at this stage, there has been no confirmation that the FCA intends to implement the requirements of the SFDR in the UK, UK authorised firms may well still be impacted by the requirements of the SFRD if they offer products in the EU or provide services to EU authorised investment firms.


The SFDR introduces two ‘levels’ of requirements: the over-arching Level 1 requirements, which predominantly focus on Firms implementing policies and disclosing information about the integration of sustainability risks in their investment decision‐making process; and more granular Level 2 requirements, which provide technical standards details on the implementation of Level 1 requirements.


Level 1 requirements will come into effect on 10 March 2021. However, the EU has recently confirmed that the Level 2 requirements, have been delayed to an, as yet, undetermined date.


The EU advises that, as the technical standards details have been delayed, firms should take a principles-based approach to compliance with the Level 1 requirements and this should be done on an evidenced “best efforts” basis.


Portman will continue to monitor developments relating to the Level 2 requirements and will report on any future developments.

Investment Adviser applications with the SEC

Following the introduction of GDPR, the Securities & Exchange Commission (“SEC”) suspended its consideration of applications from UK and EU based investment managers wishing to register as Investment Advisers. The SEC had concerns over data protection rules stemming from GDPR and, in particular, that that these would hinder its attempts to access company data.


However, it has been announced that the Information Commissioner’s Office (“ICO”), the authority responsible for data protection in the UK, issued a letter to the SEC on the application of the GDPR as it relates to the sharing of personal data. This was to enable the SEC to re-commence consideration of investment adviser applications UK firms wishing to register as investment advisers.


Portman has since worked with clients to register with the SEC and has seen that the regulator is once again considering applications from UK investment managers.

SEC Proposes Exemption from Broker-Dealer Registration for Finders in Private Placements

On 7 October 2020, the SEC proposed a new limited, conditional exemption which would allow “finders” to assist issuers with raising capital from accredited investors, without first having to register as a Broker-Dealer. The aim being to assist small businesses to raise capital and to provide regulatory clarity to investors, issuers, and the finders who assist them.


The proposals are aimed at finders that are ‘natural persons’ and would create two ‘tiers’ of finders:


• Tier I Finders: limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer in a 12-month period, but could not have any contact with a potential investor about the issuer; and


• Tier II Finders: allowed to solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to: (i) identifying, screening, and contacting potential investors; (ii) distributing issuer offering materials to investors; (iii) discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and (iv) arranging or participating in meetings with the issuer and investor.


The proposals will only apply to finders that intend to act for issuers that are private companies (i.e. those not required to file reports under Section 13 or Section 15(d) of the Exchange Act) and who offer their securities in reliance on an applicable exemption from registration under the Securities Act.


Under the proposals, Tier II Finders, who would be able to conduct a wider range of activities, would be subject to additional requirements to be able to utilise the exemption, such as: satisfying certain disclosure requirements, including providing appropriate disclosures of the Tier II Finder’s role and compensation prior to or at the time of the solicitation; and obtaining from the investor, prior to or at the time of any investment, a dated written acknowledgment of receipt of the required disclosures.


The SEC’s proposals request comment on whether the exemption should apply only to finders that are a natural person resident in the United States. 


Portman will continue to monitor developments relating to the proposal and will provide an update if the SEC implements the exemption.