By Eva Keogan
By Luuk Jacobs
By Jonathan Max
By Luuk Jacobs
By Andy Milner
By Pierre-Yves Rahari
The FCA outlined earlier this week, through the voice of CEO Andrew Bailey, the blueprint of the regulator's approach post-Brexit. In short - the way I read it - the FCA will aim to regulate towards outcomes in line with the European standards ("no race to the bottom") while operating with a hands' off approach ("principles and outcome based"). This is a very tight rope to walk ... Indeed, as I see it, the future UK regulation will need to be aligned with the European one, to ensure continuation of fluid collaboration and cooperation (the Europeans were quite clear on that matter during the Brexit talks), which the FCA is keen to deliver on. At the same time, the FCA seems to be responding to clamours of "too-much-regulation," which emerges regularly from some ranks of the Investment Management industry. I take the view that the FCA post-crisis approach - in line with most European regulators - has been to influence the resolution of issues that our industry is struggling to cope with on its own: Investor protection, transparency on costs, adequate governance models, conduct standards, diversity models and so on. This, to me, amounts to influencing a change of culture in our industry (which does not mean questioning the raison-d'être of the industry, i.e. increase the value of capital entrusted to us). Anyway, ten years of post-crisis regulation has brought some constructive changes to the industry, and some challenges, too, but I am not sure all has been achieved; it takes time to undertake a culture change as ambitious as the one we are tackling. As such, I find it risky that the FCA should lift their foot from the pedal so soon. In my opinion, the odds are high that the industry reverts to pre-crisis behaviours, if the regulator is already signalling that they will relax their grip on execution. I really want to hope that a change in approach will get to the ambitious outcomes that the industry needs, but we have been there before and failed to deliver. What would be different this time?
Or am I seeing the glass half empty?
By Luuk Jacobs
The FCA published last week it's Research Agenda for 2019 (2019 fca-research-agenda.pdf). Their focus will be on
household finance and consumer behaviour
household finance and consumer behaviour securities markets: microstructure, integrity and stability competition, innovation, and firm behaviour and culture technology, big data, and artificial intelligence regulatory efficiency and effectiveness
The 3rd objective seems to bring the discussion previously focussed on pricing in general to the more sophisticated pricing which increasingly uses technology and big data to set prices, and often use predictive analytics to personalise prices.
The 4th objective aims to better understand how the developments in technology, big data, and artificial intelligence are shifting market economics, the resulting benefits and harms and implications for regulation.
All this with the aim to ensure that their regulatory interventions achieve their objectives of making efficient use of their and industry’s resources. From an external perspective, they want to achieve a regulatory regime that promotes and supports effective financial markets while minimising their costs to society.
I am looking forward to their research outcomes and the future regulations that is designed on the back of it
Understanding your state of readiness for SMCR extension - City HR
CITY-HR.CO.UK Assessing your readiness for the SMCR extension Aimed at firms embarking on SMCR, or those in scope who would like latest thinking, this programme will: Provide an SMCR overview with expert insight direct...
By Caroline Sheldon
For those of you who would love to read another Brexit related article... here is are some of the latest updates- including an interesting update with respect to the temporary permissions regime published in the Netherlands! With less than two months to go until the UK leaves the EU, there has been a lot of recent Brexit related developments in the financial services industry, some of which we look at below.
THE TEMPORARY PERMISSIONS REGIME
UK Financial Conduct Authority (“FCA”) has pushed ahead with its “no deal” planning and has opened its Temporary Permissions Regime (“TPR”) notification window to EEA asset management firms and to investment funds marketing in the UK. The TPR will allow firms currently passporting into the UK to continue new and existing regulated business within the scope of their current permissions in the UK for a limited period, while they seek full FCA authorisation, if the UK leaves the EU on “exit day” (11pm on 29 March 2019) without an implementation period in place. It will also allow certain funds to continue temporarily marketing in the UK on the basis of current European marketing passports and rights, with no need for a hiatus before they are able to comply with UK marketing regimes.
The FCA has said that firms should not wait for confirmation of whether there will be an implementation period before they submit their TPR notification, as firms and investment funds that have not submitted a notification within the notification window will not be able to use the regime.
All notifications must be made by the FCA’s Connect online system. The FCA has published a guide for the Connect online system available here.
The notification window remains open until 28 March 2019. There will not be a fee for making a notification under the TPR.
THE FINANCIAL SERVICES CONTRACTS REGIME REGULATIONS
On 8 January 2019, the FCA published a consultation paper, CP19/2, which sets out details of the financial services contracts regime (“FSCR”) and the rules the FCA proposes should apply to firms during the regime. The consultation closed on 29 January 2019.
The FSCR Regulations aim to further reduce the risk of harm associated with an abrupt loss of permission on exit day. This ensures that EEA passporting firms can still fulfil their existing contractual obligations in the UK for a limited period of time, even if they are outside the TPR following the UK’s withdrawal from the EU, provided that firms must satisfy the conditions of the FSCR. This legislation will be relevant for those EEA firms which passport into the UK to carry on a regulated activity who fail to notify the FCA that they wish to enter the TPR or are unsuccessful in securing authorisation at the end of it, but still have regulated business in the UK to run off.
Firms will fall into one of two categories under the FSCR: being supervised run-off (“SRO”)for EEA firms with UK branches or top-up permissions in the UK, and firms who entered the temporary permissions regime but did not secure a UK authorisation at the end, andcontractual run-off (“CRO”) for remaining incoming services firms.
The SRO will apply to the following firms:
- firms currently operating in the UK via a branch;
- firms who enter the TPR but exit without securing full UK authorisation; and
- firms that currently hold top-up permissions.
As it is the case for firms in the TPR, SRO firms will be deemed to have Part 4A permission for carrying out activities within the scope of their passport as at exit day, to the extent necessary to continue to service pre-existing contracts in the UK. Unlike the TPR, no notification is required for this deemed permission to arise; it will apply automatically. Details of SRO firms will be shown on the Financial Services Register.
The FCA's powers over SRO firms under FSMA will continue to apply; however, the FCA will also cover certain matters which were previously handled by the firms’ home state. In addition, SRO firms will be required to maintain their home-state authorisation in order to benefit from the regime.
The CRO will apply to firms operating in the UK solely on a services basis (i.e. without a UK branch) that do not enter the TPR and have pre-existing contracts in the UK which would otherwise require a permission in order to service.
CRO firms will be treated as exempt persons and will not be UK authorised. Similarly to the SRO, this exempt status will allow firms to perform regulated activities within the scope of their passport as at exit day to the extent necessary to continue to service pre-existing contracts in the UK after exit day.
The FSCR will apply for a maximum of 5 years for all contracts, except for insurance contracts which will have a maximum of 15 years. The Treasury may extend these periods, if necessary, based on a joint assessment by the FCA and the PRA.
THE FINANCIAL SERVICES AND MARKETS ACT 2000 (AMENDMENT EU EXIT) REGULATIONS
At the end of 2018, HM Treasury has published a draft version of the Financial Services and Markets Act 2000 (Amendment EU Exit) Regulations 2019 (the “SI”). The SI makes a number of amendments to the Financial Services and Markets Act 2000 (“FSMA”) to ensure that the financial services framework continues to operate effectively once the UK leaves the EU, in any scenario. However, the SI is not intended to make substantive policy changes. The amendments to FSMA are set out in part 2 of the Regulations; with regard to FMSA, HM Treasury has highlighted particularly that amendments are being made to:
- regulated and prohibited activities (Part 2);
- permission to carry on regulated activities (Part 4A);
- performance of regulated activities (Part 5);
- control of business transfers (Part 7);
- control over authorised persons (Part 12); and
- provision of financial services by members of the professions (Part 20).
Please click here to view the explanatory information and the draft instrument.
TEMPORARY PERMISSION REGIME PUBLISHED IN THE NETHERLANDS
An amendment to current Dutch legislation was published on 4 February 2019 which allows investment firms from the United Kingdom to continue to provide investment services to professional clients in the Netherlands in a no-deal Brexit scenario.
Under an existing third country exemption regime (following from article 10 Exemption Regulation FSA) investment firms based in Australia, the United States of America and Switzerland are exempted from the MiFID licence obligation if they (i) exclusively provide investment services to per se professional clients or deal on own account; and (ii) are subject to regulatory supervision in their home state.
This regime is amended to temporarily expand the exemption to investment firms based in the UK. The Dutch temporary permission regime (“Dutch TPR”) will enter into effect if and when the UK leaves the European Union without a deal and it is expected to last until 01 January 2021.
The Dutch TPR is relevant for investment firms with their registered office in the UK that wish to continue providing investment services to per se professional clients or dealing on their own account in the Netherlands post-Brexit. The Dutch TPR is also of interest to Dutch firms being serviced by UK investment firms as it avoids disruption of current servicing.
Firms wish to pursue this option, they should submit a notification form to the Netherlands Authority for the Financial Markets.
Preparing for Brexit is challenging- particularly as a result of the uncertainty over what type of deal the UK may be left with when the UK leaves the EU on the 29 March. However, the good news is that different European countries are now preparing for a "no deal" Brexit, with a wave of recent national legislation aiming to ensure both financial and regulatory stability. This should provide UK asset managers with additional time and flexibility to adapt to this new regulatory landscape.
For more information, and any guidance or advice on the impact on Brexit, Cleveland & Co, your external in-house counsel, are here to help- let us know what you think and if you have any queries!
No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Cleveland & Co Associates Limited accepts or assumes responsibility, or has any liability, to any person in respect of this document. Copyright in the materials is owned by Cleveland & Co Associates Limited and the materials should not be copied or disclosed to any other person without the express authorisation of Cleveland & Co Associates Limited. This document is not intended to give legal advice and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. Readers must take specific legal advice on any particular matter which concerns them. If you require any advice or information, please speak to your usual contact at Cleveland & Co Associates Limited.
By Rob Carter
The UK is a hotbed of fintech activity, and it has not escaped the attention of investors worldwide. so what can we expect in 2018?
Last year, almost £3bn of venture capital found its way in to the UK’s tech sector, a record high and nearly double the figure for 2016. British fintech firms attracted almost four times more funding in 2017 than Germany, and more than France, Ireland and Sweden put together. This year promises to be even bigger, but what are the exciting developments driving those investment flows?
Here’s what to expect in 2018 across five key areas we’ve identified:
One of the most exciting developments to land in the UK financial sector is Open Banking. Under these new rules, which came in to force in January this year, banks must share their customers’ financial data with other FCA-authorised institutions, if customers request them to. This includes bank and credit card transactions and information about spending habits, for example. The aim is to improve competition in the marketplace and ultimately help consumers get a better deal. It should also foster much greater innovation, as new alliances are forged between traditional financial services firms and fintech startups. This is already starting to happen – First Direct has partnered with fintech firm Bud, Barclays is working with Flux, and NatWest has teamed up with FreeAgent. Banks are working hard in-house too: HSBC, for example, has launched a beta app which will allow customers to see all their accounts on one screen, even those from rival providers. Expect more innovation and unlikely partnerships in the banking sector this year.
Wealthtech refers to the specific type of fintech which is used to solve problems and improve user experience in the wealth management and investing world. The definition includes robo-advisers like Nutmeg and Wealthify, as well as micro-investment services and digital brokers. They focus on the under-served mass market of people who would like to invest but only have small savings pots to play with, or who perhaps can’t afford financial advice or wouldn’t be economically viable clients for traditional financial advisers to take on. Robo-advice and micro-investing tools help to democratise investing and make it accessible to a much wider consumer base. Although some of these companies may take time to become profitable, the assets they manage are set to grow rapidly. Deloitte estimates the $2 billion in assets under automated management globally today may grow to as much as $7 trillion by the year 2025.
So strong has been the hype around cryptocurrencies that some listed companies in totally unrelated sectors have linked themselves to the space by changing their names or the focus of their businesses. Just adding the word ‘blockchain’ in somewhere has proven enough to send their share prices soaring (see Long Island Iced Tea Corp, now called Long Blockchain). But there may already be signs that the bubble could burst – highly volatile Bitcoin has fallen a long way from its lofty highs, and there is a regulatory threat from financial watchdogs globally following a crackdown by South Korea. There could be interesting developments to come in cryptocurrencies this year as companies navigate the new landscape.
Regtech refers to the use of technology to help financial services firms better comply with regulation. It’s been dubbed ‘the new fintech’ and it is a fast-growing area. Regtech businesses help other firms to meeting their reporting and compliance obligations, monitor transactions, and manage risk. Firms like Funds-Axis, DueDil, and Silverfinch are part of this growing movement. Deloitte says: “RegTech has a very bright future, with a huge amount of opportunity for those developing this type of technology to automate and enable the world of regulatory assessment and control management, bringing clarity and control to an area of the business that is so incredibly important, but so often cumbersome and time-consuming.” With the Financial Services industry under more regulatory pressure than ever and drowning in legislation, Regtech should be a fascinating area to watch.
When you think of AI, you might think of chatbots being used to replace customer service people, or voice command technology like Amazon Alexa. But the applications of AI in fintech go much further. It can be used to spot suspicious transactions and cybersecurity threats, or predict consumer behaviour and make more accurate predictions based on these insights – for example, whether someone will be a future credit risk. Machine learning can be used to create a customised investment portfolio based on someone’s personal interests and preferences, updating it as their preferences change over time. The possibilities are endless, and who knows how the FS industry could change when AI reaches its full potential?
As always, only time will tell when it comes to forecasting the future but one thing is sure, the UK fintech market is thriving now and will continue do so for a long time.