1. UK — FCA Updates

2. UK — Bonus Cap

3. UK — Asset Management

4. UK — Market Abuse

5. UK — Cryptoasset Regulation

6. UK — ESG

7. UK — Enforcement

8. UK/EU — Post-Brexit

9. EU — MiFID II

10. EU — Retail Investment Strategy

11. EU — Cryptoasset Regulation

12. International — Cayman Islands/Financial Action Task Force (FATF) grey list

1. UK — FCA Updates

FCA speech on new secondary objective to support international competitiveness and growth

On 16 October 2023, the FCA published a speech by Nikhil Rathi, FCA Chief Executive, on the FCA’s new secondary objective to support international competitiveness and growth over the medium to long term.

Among others, the following points were raised:

• Speed, clarity, and certainty. The FCA has invested in case teams over the last three years. Rathi noted that, today, 97% of cases are assessed within the FCA’s statutory deadlines. Senior Managers and Certification Regime applications also take a median 40 days (50 days ahead of deadlines).
• Increased scrutiny at the authorisation gateway. On the other hand, the FCA is exercising increased scrutiny in the authorisation process, with one in four firms not making it through (up from one in 14 two years ago).
• International collaboration. The FCA is actively involved in setting global standards in areas such as cryptoassets, sustainability, and non-bank finance. Rathi noted, as co-chair of the Financial Stability Engagement Group of the International Organization of Securities Commissions (IOSCO), that risks on their agenda include private markets, leverage, and the funds complex, as well as risks to traded markets.
• Artificial intelligence. Rathi noted that markets today see more synchronised, automated order placements spanning multiple markets timed precisely around liquidity conditions. Rathi emphasised the importance of market cleanliness and effective functioning in this context, and stated that this is an area of priority for the FCA.

2. UK — Bonus Cap

FCA and PRA Joint Policy Statement PS 23/15: Remuneration: Ratio between fixed and variable components of total remuneration

On 24 October 2023, the FCA and Prudential Regulation Authority (PRA) published joint rule changes to remove the existing limits on the ratio between fixed and variable components of total remuneration (i.e., the “bonus cap”).

The policy statement applies only to banks, building societies, and PRA-designated investment firms. However, the rule changes could have wider implications across the industry, for instance by stemming the flow of talent from banks to non-bank firms.

The change will also make UK banks more attractive to senior staff than EU banks which continue to have the bonus cap, perhaps drawing EU staff to stay in or move to the UK.

The changes came into effect on 31 October 2023 and apply to current and future performance years.

3. UK — Asset Management

FCA speech on priorities for improving UK regime for asset managers

On 12 October 2023, the FCA published a speech by Ashley Alder, FCA Chair, on its priorities for updating and improving the UK regime for asset managers. In light of the FCA’s new competitiveness and growth secondary objective, the speech sets out the FCA’s three main priorities for reform, which are:

• making the regime for alternative fund managers more proportionate;
• updating the regime for retail funds; and
• supporting technological innovation.

For alternatives, first, the FCA will work with HM Treasury to ensure the regime operates proportionately depending on the nature and scale of a firm’s business. Second, the FCA is considering modifications to the Alternative Investment Fund Managers Directive (AIFMD) rules that prevent full-scope alternative fund managers from carrying out other activities within the same legal entity. Third, the FCA is considering whether changes could be made to ease the requirements on regulatory reporting (on the basis that the cost of compliance may not be proportionate to the benefits of this type of reporting).

In relation to retail funds, the FCA is considering simplifying the retail rules for non-undertaking for collective investment in transferable securities (UCITS) funds and whether non-UCITS funds might be rebranded to help rationalise the regime.

On technology, the FCA has been working with the Technology Working Group (which sits under HM Treasury’s Asset Management Taskforce) on a blueprint for fund tokenisation, which will be published later in the year.

As its next steps, the FCA will be consulting on amending the AIFMD regime and re-evaluating the AIFMD rules for non-UCITS retail funds next year. The FCA will also be reviewing the regulatory reporting regime in 2025.

FCA provides update on implementation of OFR

On 19 October 2023, Mhairi Jackson (asset management policy lead at the FCA) made comments on the timing of the UK Overseas Funds Regime (OFR) at a conference with the Association of the Luxembourg Fund Industry in London (as reported on by Reuters).

Currently, European Economic Area UCITS funds marketing in the UK via the Temporary Marketing Permissions Regime (TMPR) must, upon expiry of the TMPR, obtain individual recognition under s. 272 FSMA. The OFR, however (as prescribed by s. 271A FSMA), allows for recognition of collective investment schemes authorised under the law of a country or territory outside the UK, where (among other things) an equivalence assessment has been made by HM Treasury in relation to that country or territory.

In her speech, Jackson noted the following:

• The FCA is working to operationalise the OFR from April 2024.
• HM Treasury is yet to determine any additional requirements that will be imposed on overseas funds (these may include a valuation assessment).
• There will soon be an FCA consultation on the information to be provided by overseas funds.

4. UK — Market Abuse

FCA Market Watch 75

On 31 October 2023, the FCA published Market Watch 75, the latest edition of its newsletter on market conduct and transaction reporting issues. In this edition, the FCA shares observations about the interactions between issuers and investors that help determine interest in a transaction before its announcement (i.e., market soundings).

The FCA has observed cases in which market sounding recipients (MSRs) have traded relevant financial instruments during the time period:

• after a disclosing market participant (DMP) has initially communicated with them or sought their consent to receive the sounding and inside information; but
• before the DMP has disclosed the inside information.

This is made possible where MSRs have been able to identify the identities of financial instruments or the nature of a proposed transaction and the likelihood of it taking place, notwithstanding that these have not been disclosed by the DMP. The FCA observed that this frequently occurs where there has been a delay between DMPs requesting the MSR’s consent and the MSR giving it.

In these circumstances, MSRs remain subject to the prohibitions in both the UK Market Abuse Regulation (UK MAR) and Part V of the Criminal Justice Act 1993. The market sounding regime does not provide protections against MSRs trading on any inside information from market soundings.

However, the FCA observed that, in these instances, MSRs have provided rationales that are not easily reconcilable with the circumstances of the trading. It gives the example of an MSR selling a financial instrument immediately after a DMP has sought its consent to receive inside information, then buying the same quantity of the financial instrument back in the subsequent placing. The FCA explained that this does not reconcile with the “Rebalancing a portfolio” rationale, nor does it reconcile easily with instructions to trade being phrased with urgency.

For MSRs, the FCA recommended:

• considering putting in place the “Gatekeeper” arrangements highlighted in Market Watch 51 and 58 (e.g., appointing specific teams or staff in Compliance as the first point of contact for DMPs);
• ensuring that staff who receive and process market soundings are properly trained in relevant internal procedures and UK MAR prohibitions on unlawful use of inside information; and
• considering minimising time intervals between the DMP’s initial communications and requests for consent, and the MSR’s consenting to such requests.

5. UK — Cryptoasset Regulation

FCA issues 146 alerts to businesses on first day of new cryptoasset rules

On 8 October 2023, new advertising rules for cryptoassets (set out in policy statement PS23/6) entered into force. Following this change, there are four routes firms can take to lawfully communicate cryptoasset promotions:

1. an authorised person communicates the promotion;
2. an authorised person approves the promotion;
3. a cryptoasset firm registered under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 communicates the promotion; or
4. the promotion otherwise complies with the conditions of an exemption in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005.

On 9 October 2023, the FCA announced that it had issued 146 alerts about cryptoasset promotions on the first day of the new rules. The nature of these alerts is to warn consumers (i) that a firm may be providing or promoting financial services or products without the FCA’s permission and (ii) to avoid dealing with such firm.

In a subsequent statement on 25 October 2023, the FCA confirmed that the number of alerts had risen to 221, showing that it is continuing to identify and act against firms that are illegally promoting cryptoassets to UK consumers. In that statement, it also identified three common issues with cryptoasset financial promotions:

• promotions that make claims about the “safety,” “security”, or ease of using cryptoasset services without highlighting the risk involved;
• risk warnings that are not visible enough due to small fonts, hard-to-read colouring, or non-prominent positioning; and
• firms that are failing to provide customers with adequate information on the risks associated to specific products being promoted.

HM Treasury response to consultation and call for evidence on future financial services regulatory regime for cryptoassets

On 30 October 2023, HM Treasury published a response to its February 2023 consultation and call for evidence on the future financial services regulatory regime for cryptoassets (on which, see our earlier Sidley Update).

Among other things, HM Treasury provided updates on the following matters:

• New regulated activities. HM Treasury confirmed that it intends to take forward proposals to create new regulated activities under the Financial Services and Markets Act 2000 (FSMA) framework including operating a cryptoasset trading venue, cryptoasset intermediation activities, cryptoasset custody, and operating a cryptoasset lending platform.
• FCA authorisation process. HM Treasury noted, as it did in the February 2023 consultation, that authorisation will not be automatically granted to cryptoasset firms which are currently registered under the Money Laundering Regulations, and that firms that have an existing authorisation under Part 4A of FSMA will need to seek new authorisations using the FCA variation of permissions form.
• Portfolio management and provision of investment advice. HM Treasury confirmed it does not agree that portfolio management and the provision of investment advice on cryptoassets should be brought within the regulatory perimeter at this stage.
• Prospectus regime. In line with the intended reform of the UK’s prospectus regime, HM Treasury confirmed its view that there should be disclosure documents in place for all cryptoassets that are made available for trading on a UK cryptoasset trading venue. It also agreed in principle with the idea that disclosure requirements would differ — and be less prescriptive — for venues that admit only institutional investors (as opposed to retail investors).
• Market abuse regime. The government intends to take forward most aspects of the proposed approach for market abuse set out in the February 2023 consultation, including the suggested scope of the regime, the regulatory trigger points, and the use of MAR as the basis for the regime including the prohibitions (covering insider dealing, market manipulation, and unlawful disclosure of inside information). The government will also take forward proposals to require regulated cryptoasset firms (such as operators of cryptoasset trading venues and cryptoasset intermediaries) to appropriately manage price sensitive information.
• Sustainability. The government will proceed with approach of sustainability issues primarily through disclosure in the first instance. The government intends to use existing international fora (such as IOSCO) to develop interoperable metrics to facilitate meaningful comparisons. The government will also undertake further exploratory work on whether existing sustainability frameworks and indicators could be applied.

The government’s aim is for secondary legislation to be laid in 2024, subject to Parliamentary time.

6. UK — ESG

Green Technical Advisory Group report on institutional home for UK green taxonomy

On 5 October 2023, the Green Technical Advisory Group (GTAG) published its final piece of advice to the UK government on the design and implementation of a UK Green Taxonomy, having been appointed to do so in June 2021.

For the short term, the GTAG report recommends that the government establish an advisory body to support implementation/development of the Taxonomy (whether a new body or an extension of the Financial Reporting Council’s or Audit, Reporting and Governance Authority’s existing responsibilities). For the medium term, GTAG further recommends that the government should initiate the process of legislating for long-term statutory decision-making powers.

The UK government is currently expected to consult on the UK Green Taxonomy in autumn 2023.

TPT Disclosure Framework

On 9 October 2023, the Transition Plan Taskforce (TPT) published its final climate transition plan disclosure framework.

The framework sets out five “elements” of a good practice transition plan: foundations, implementation strategy, engagement strategy, metrics and targets, and governance. Within these are a total of 19 “sub-elements” and corresponding “disclosure recommendations.”

The FCA has stated it will draw on the TPT Disclosure Framework as it develops its own disclosure expectations for listed companies, asset managers, and FCA-regulated asset owners.

Other TPT matters to be aware of include the sector summary consultation closing on 24 November 2023 and the launch of a consultation on sector “deep dives” in November 2023.

7. UK — Enforcement

FCA bans and fines James Staley £1.8 million for failure to correct misleading statements to the FCA

On 12 October 2023, the FCA published a Decision Notice against James Staley, the former CEO of Barclays Bank Plc (Barclays), imposing a fine of £1.8 million and prohibiting him from performing any senior management or significant influence function in the financial services industry.

The FCA found that Staley, as CEO of Barclays, had approved a letter sent by Barclays to the FCA that contained two misleading statements about the nature of his relationship with Jeffrey Epstein and the point of their last contact.

The FCA found that Staley had failed to comply with the following rules applicable to senior managers:

• Individual Conduct Rule 1 – You must act with integrity.
• Individual Conduct Rule 3 – You must be open and cooperative with the FCA, the PRA, and other regulators.
• Senior Manager Conduct Rule 4 – You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice.

The Decision Notice serves as a reminder that failure to correct misleading statements to the FCA can amount to recklessness and that this can lead to a lack of integrity finding. The FCA also reiterated its view that the role of CEO requires an individual to exercise sound judgement and set an example to staff at their firm.

It should be noted that Staley has referred his Decision Notice to the Upper Tribunal, meaning that the abovementioned findings are provisional and merely reflect the FCA’s belief as to what occurred and how it considers his behaviour should be characterised.

8. UK/EU — Post-Brexit

Joint EU-UK Financial Regulatory Forum: Joint Statement, October 2023

On 19 October 2023, the EU and the UK held the first meeting of the Joint EU-UK Financial Regulatory Forum.

The meeting was co-chaired by the Director General for Financial Services on behalf of HM Treasury and the European Commission Director General for Financial Stability, Financial Services, and Capital Markets Union. Participants attended from the Bank of England, the FCA, the UK Mission to the European Union, the European Central Bank, the EU Supervisory Authorities (European Banking Authority (EBA), European Securities and Markets Authority (ESMA), and European Insurance and Occupational Pensions Authority) and the EU Single Resolution Board.

Among other things, participants discussed addressing vulnerabilities in non-bank financial intermediation (NBFI). In particular:

• Participants agreed that to address vulnerabilities in NBFI and enhance the resilience of the sector, it is critical to finalise and implement international reforms.
• Participants shared their respective positions on the ongoing Financial Stability Board (FSB) work aiming to promote the implementation of the FSB money market funds policy proposals and addressing structural liquidity mismatches in open-ended funds.
• Both sides welcomed the FSB’s upcoming review of leverage in NBFI, which will be co-chaired by the FCA and the ECB.
• Both sides noted their support for the work being led by the FSB and the Basel Committee on Banking Supervision on lessons learned in response to the global banking stress and by the FSB and IOSCO on NBFIs.

Participants also discussed issues relating to sustainable finance, including:

• how best to progress multilateral efforts to support an orderly transition to net zero, including participation in the G20 Sustainable Finance Working Group, among other fora;
• progress on taxonomy implementation and updates regarding ESG ratings and standards for sustainability disclosure requirements; and
• the importance of ensuring the interoperability of standards, including on disclosure requirements and support for the work of the International Sustainability Standards Board.

The next meeting is expected to take place in spring 2024, and the UK and the EU agreed to follow up on topics discussed ahead of the next meeting.

9. EU — MiFID II

Final compromise texts on revisions to MiFID II and MiFIR

On 18 October 2023, the Council of the European Union published two notes confirming the final compromise texts for Regulations amending MiFID II and MiFIR respectively (2021/0384 (COD) and 2021/0385 (COD)).

The final compromise texts cover:

• the establishment of the EU consolidated tape;
• a general ban on “payment for order flow” (whereby brokers receive payments for forwarding client orders to certain trading platforms);
• amendments to MiFIR and MiFID II on commodity derivatives.

Once consolidated, the text of the Regulations will need to be formally adopted by both the Council and the Parliament, before publication in the Official Journal of the European Union and entry into force.

10. EU — Retail Investment Strategy

European Parliament publishes draft reports on Retail Investment Strategy

On 4 October 2023, the Economic and Monetary Affairs Committee of the European Parliament (ECON) published two draft reports on respective parts of the recent European Commission draft Retail Investment Strategy legislative package (discussed in our Sidley Update of June 2023).

Notably, the Commission’s initial proposal to reduce the thresholds at which a client can “opt up” from retail client to professional client status remains unaffected by ECON’s amendments.

ECON does, however, suggest deleting entirely the Commission proposal for ESMA to develop benchmarks against which a “value for money” assessment may be carried out for alternative investment funds (AIFs) marketed to retail investors. Its reasoning is that the value for money proposal would lead to reduced diversity of products and supressed innovation.

On MiFID II, ECON has proposed requiring investment firms that make use of so-called “finfluencers” to (among other things) establish a written agreement with the finfluencer and carry out regular compliance checks of the finfluencer’s activity.

Finally, ECON proposes certain adjustments to the packaged retail and insurance-based investment products key information document and will continue to further assess the alignment of the new sustainability section with the relevant existing legislation.

11. EU — Cryptoasset Regulation

ESMA publishes second consultation on Markets in Crypto Assets Regulation (MiCA)

On 5 October 2023, ESMA published its second consultation on MiCA. The first consultation paper was published in July 2023, and the third and final is expected to be published in Q1 2024.

This second consultation paper contains six draft regulatory technical standards (RTS), which cover:

• the content, methodologies, and presentation of sustainability indicators on adverse impacts on the climate and the environment;
• measures that cryptoasset service providers must take to ensure continuity and regularity in the performance of services;
• trade transparency;
• content and format of order book records;
• recordkeeping by cryptoasset service providers; and
• the data necessary for the classification of white papers.

The consultation paper also contains draft implementing technical standards (ITS) on (1) standard forms and templates for the cryptoasset white paper and (2) technical means for appropriate disclosure of inside information.

The consultation closes on 14 December 2023. ESMA will then submit the draft RTS and ITS to the European Commission by 30 June 2024 for adoption.

For further detail on the requirements to be introduced by MiCA, please see our Sidley Update How Will the EU Markets in Crypto Assets Regulation Affect Crypto and Other Financial Services Firms?

ESMA statement on implementation of MiCA

On 17 October 2023, ESMA published a statement clarifying the timeline for MiCA and encouraging market participants and Member State national competent authorities (NCAs) to start preparing for the transition.

ESMA emphasises the following points in particular:

• MiCA rules on the provision of cryptoasset services will not enter into application until December 2024.
• Due to the optional 18-month transition period afforded to individual Member States, holders of cryptoassets and clients of cryptoasset service providers may not benefit from full rights and protections afforded to them under MiCA until as late as 1 July 2026.
• The exemption enabling provision of cryptoasset services or activities by a third-country firm in cases of “reverse solicitation” should be understood as very narrowly framed.

NCAs are encouraged to dedicate resources and align their supervisory practices with those of their counterparts across the EU to begin effective supervision from day one.

EBA and ESMA consultation on suitability assessment guidelines under MiCA

On 20 October 2023, the EBA and ESMA published two sets of draft guidelines on suitability assessments under MiCA relating to:

1. members of the managing body of issuers of asset referenced tokens (ARTs) and cryptoasset service providers (CASPs); and
2. shareholders or members, whether direct or indirect, with qualifying holdings in issuers of ARTs or CASPs.

The former guidelines provide competent authorities with common criteria to assess the appropriate knowledge, skills, and experience of members of the management body as well as their good repute, honesty, and integrity and if they are able to commit sufficient time to perform their duties.

The latter guidelines provide competent authorities with a common methodology to assess suitability for the purposes of granting authorisation as issuers of ARTs or as CASPs and carrying out the prudential assessment of proposed acquisitions.

The consultation closes on 22 January 2024, and it is expected that the two final guidelines will be available when MiCA becomes applicable.

12. International — Cayman Islands/FATF grey list

Cayman Islands removed from FATF anti-money-laundering grey list

On 27 October 2023, the FATF published an update on jurisdictions that have been under increased monitoring by the FATF (commonly referred to as the “grey” list).

The Cayman Islands was added to the FATF grey list in February 2021 (as described in our previous Sidley Update). Following this, the Cayman Islands was also added to the list of “high-risk third countries” pursuant to the EU Anti-Money Laundering (AML) Directive (Directive (EU) 2015/849) (EU AML List) in March 2022.

Separately, the European Commission had proposed in its draft text for AIFMD II that a non-EU AIFM or non-EU AIF wishing to market into the EU must not be domiciled in a high-risk third country under the EU AML List. Should the Cayman Islands remain on the EU AML List as at the date of entry into force of AIFMD II, this would prevent Cayman AIFMs from marketing, or Cayman AIFs from being marketed, into the EU.

However, in its recent update, the FATF announced that the Cayman Islands is no longer subject to the FATF’s increased monitoring process. It is, as a result, now expected that the Cayman Islands will also be removed from the EU AML List, which will be welcome news for firms with Cayman AIFMs or Cayman AIFs marketing or being marketed into the EU in light of the expected rules in AIFMD II.