Corporate Advisory

Brexit – EU concessions for UK Asset Managers

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European governments have stepped up efforts to grant crucial concessions to UK asset managers to limit the worst effects of a no-deal Brexit. France, Germany, Italy and the Netherlands are among countries that have amended national laws to ensure UK investment companies can still serve foreign customers.

British groups manage at least £1.8tn for clients in the EU and such relationships could be in jeopardy should Britain crash out of the bloc without a deal. Equally the UK government has rolled out its temporary permissions regime, allowing EU managers to continue to sell investment products to UK consumers after Brexit. As the clock ticks, EU27 governments are introducing mirror policies.

This week the Netherlands said it would bring in a temporary permissions regime for Brexit. This will allow UK managers to continue to sell products to Dutch institutional investors when they lose passporting rights, which enable managers to provide services in the European Economic Area.

France recently published a Brexit law to let UK banking and finance companies to continue to operate if there is a no-deal Brexit. Italy has said it will adopt measures to ensure that UK financial institutions can continue to conduct business in Italy under the current rules. Germany, Finland and Luxembourg have each drafted laws to make it easier for British financial services companies to continue to work in the countries after March 29.

The FCA, signed memoranda of understanding with European watchdogs on February 1, meaning that delegation arrangements can continue.

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Corporate Advisory

Is UK Cryptocurrency Regulation on its way?

 Last week the FCA set out which aspects of the cryptocurrency industry it regulates, as volatile digital assets come under greater scrutiny. The regulator also said it would consult later this year on a proposed ban on selling derivatives linked to certain cryptocurrencies to retail customers. Such products are increasingly harmful globally, the FCA said.

Policymakers are now working out how, if at all, cryptocurrencies come under existing financial rules, and whether fresh regulation is needed.

Regulatory approaches have varied heavily, from China’s outright banning of cryptocurrency trading to Japan’s system of licensing crypto exchanges. The FCA is aiming to create suitable rules for Britain while following global trends.

The FCA’s guidance categorises different types of so-called crypto assets to whether they fall under its regulatory net. Firms must then obtain a license from the FCA if they engage in activities that fall within that net.

The watchdog’s guidance looked at assets including “security tokens,” which resemble shares or debt, and “utility tokens”, which allow access to products or services without giving holders any rights.

While the FCA says UK-headquartered exchanges account for around 1 percent of daily global trade, London’s status as a financial hub has attracted major crypto firms. Regulatory moves by Britain are therefore closely watched.

The FCA will hold a public consultation on the guidance. It also said the government would publish a consultation paper in early 2019 on whether to change the law to broaden the watchdog’s remit to include further types of cryptocurrencies.

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Corporate Advisory

Loan books – Still causing ‘new’ trouble in the sector.

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Metro Bank has disclosed that it failed to have enough capital backing some commercial loans because of an accounting error, sending shares in the upstart challenger to Britain’s big high street lenders to their worst one-day loss.

The bank, which has expanded rapidly to 66 branches since launching in 2010, also issued a profit warning, saying its full-year profits and capital levels would be weaker than expected after a “soft” end to the year.

Metro Bank’s shares fell almost 39 per cent in London. The lender’s risk-weighted assets jumped to £8.9bn, up from £7.4bn at the end of September and about £900m higher than analyst estimates , a change that revealed the bank was more exposed to riskier loans, including commercial mortgages.

The increase was driven partly by planned loan growth, but was also inflated by an adjustment in the weighting for riskiness given to some of its commercial property and other specialist loans.

Metro said it had not seen any deterioration in the performance of the loans, but discovered they had previously been included in the wrong risk band, meaning it did not have as much capital to fund them as it should have.

…So over ten years on, loan books are still causing new trouble in the sector.

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Corporate Advisory

Brexit – Banks in the City have already spent a fortune on Brexit planning, so lets see what today brings

London’s 10 biggest investment banks have spent more than £1bn preparing for the UK’s impending departure from the European Union, sparking anger among City executives about the vast expense Brexit is causing business.

According to research, the major investment banks have spent an average of £100m each trying to make their operations Brexit-ready.

Gina Miller, the fund manager and prominent anti-Brexit campaigner, said: “No sector can escape the spending preparations for a no-deal Brexit, but it is a ludicrous waste of money when there is no parliamentary majority or will for a catastrophic no-deal to happen.”

Smaller investment banks not among the City’s 10 biggest have also spent “tens of millions of pounds” preparing for the UK’s exit from the EU, lobbyists said. Costs have come from a combination of consultancy fees, changes to technology systems, legal costs, new or expanding office space, hiring or creating teams in London dedicated to Brexit planning, and moving employees to the continent.

Financial services companies have so far shifted 1,800 jobs to the continent as a result of Brexit, and 7,000 roles could eventually be relocated, according to a survey by EY, the accounting firm. Bankers from Deutsche Bank, BNP Paribas, Credit Agricole, Credit Suisse, Societe Generale, Morgan Stanley and UBS have been told they will have to quit the capital.

Vishal Vedi, financial services Brexit leader at Deloitte, the accountancy firm, said costs could spiral still further after the UK leaves the EU. “After April, we expect this to ramp up,” he said.

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Corporate Advisory

SFTR now set for 2020

The European Commission has set the go-live date for SFTR from Q2 2020.

The European regulation, which aims to increase transparency across Securities Financing Transactions (SFTs), requires market participants to report all SFTs to an approved Trade Repository (TR).

With over 150 data fields included, much of this data impacting trading desks and operations teams, it is crucial for firms impacted by SFTR to improve and gain control over the quality of their data ahead of the implementation date.

The staggered Reporting go-live timeline:

  • Q2 2020 – Credit Institutions and Investment Firms
  • Q3 2020 – Central Counterparties (CCPs) and Central Securities Depositories (CSDs)
  • Q4 2020 – Pension Funds and UCITS
  • Q1 2021 – Non-Financial Counterparties


Corporate Advisory

Regulators prepare the Guillotine on retail selling of ‘Complex’ Derivative products

On Friday the FCA proposed making temporary curbs on the sale of complex derivative products to retail customers permanent.

EU regulators agreed in June to a temporary ban on the sale of “binary options” and imposed restrictions on the sale of CFDs, aiming to protect retail investors from heavy losses.

The FCA, in a statement, also proposed applying the restrictions to similar products such as “turbo-certificates” in the UK, widening the scope of the current EU curbs to stop variations getting round the restrictions.

The FCA is acting to tackle widespread concerns about the inherent risks of these products, and the poor conduct of the firms selling them, that has led to harm to consumers in the UK and internationally through large and unexpected trading losses,” the watchdog said.

Germany’s financial watchdog said last month that it also plans to ban private investors from buying binary options.

A permanent ban on binary options could save retail consumers up to 17 million pounds a year, and may reduce the risk of fraud by unauthorised entities claiming to offer these products, it added.

The FCA will consult separately in early 2019 on a potential ban on the sale of derivative products referencing cryptocurrencies, including CFDs, to retail consumers.

EU regulators have said their ban on selling binary options would be extended in January for three months.

The FCA will publish final rules by March 2019, however its has also said that if there is no Brexit transition period and it was unable to finalise its proposed rules by March, it would likely adopt emergency measures to replicate the bloc’s curbs so that investors are still protected.

The FCA is also seeking feedback on whether its proposed curbs on CFDs should be extended to other complex retail derivative products, including futures contracts.

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Corporate Advisory

The Libor replacement headache – Use of the Benchmark is actually on the Rise

Regulators and banks always knew investors’ dependence on the Libor interest rate benchmark was going to be difficult. The UK’s Financial Conduct Authority would like banks and institutions to move to other benchmarks by the end of 2021.

While they have made a start, a new problem has emerged. The use of Libor is still rising and it is down to the transition itself. The notional value of long-dated derivatives contracts referencing sterling Libor that mature after 2021 is double that of July last year, according to the Bank of England’s latest Financial Stability Report. It was 18 months ago that the FCA told the market Libor was on borrowed time.

Libor has become so pervasive in the past 30 years that it is still central to thousands of derivatives, bonds, credit cards and loan contracts. The BoE stats are in part misleading because a notional number on a derivatives contract does not remotely reflect the actual exposure in the market. Even so, the interest rate benchmark is a vital component of a derivatives contract.

However as the BoE notes, the rise here is because investors are transacting swaps that exchange cash flows in Libor for cash flows in Sonia as its quoted at a lower rate than Libor. In effect it looks like more Libor swaps are being created as a hedge to the transition from Libor. This really begs two questions: who is acting as a counterparty on these swaps and what risks are they taking? It may need a forward-looking term benchmark based on Sonia and a fallback if Libor is discontinued to resolve the issue.

They are only in early-stage development, which will take years. The 2021 transition date looks ever more fragile.

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Corporate Advisory

Brexit and MiFID III – What does the future hold?

Not the most appealing thought to anyone within the financial Services sector, however the potential for changes to the ‘newish’ MiFID II could well be upon us in any future Brexit environment.

Brexit and other European political factors will be the main driver of any European regulatory change in the near future, including any changes to MiFID II or the introduction of MiFID III, according  MEP Kay Swinburne.

Delivering a keynote address at the Fixed Income Leaders Summit, MiFID II author Swinburne highlighted the UK’s upcoming departure from the European Union in March next year as key influencing factor on how regulatory change may play out.

While Swinburne maintained that the introduction of MiFID III is a “reality”, this is more likely to be formed through a series of reviews to existing MiFID II standards and other technical amendments, primarily driven by political motivations.

“Even though I am a politician, I take no pleasure in bringing politics into financial legislation and I firmly believe that any review of any highly technical dossier, anything like MiFID II, should be kept at a distance from serious political influence,” said Swinburne. “But, I’m afraid it is a reflection of the reality that I have observed in Brussels over the last few months that it would be foolish to consider future regulatory change without considering the political drivers that are there right now.”

Citing Brexit as the “single biggest driver right now for MiFID III-type changes”, Swinburne said that the UK was “fairly guilty about not looking beyond other political developments” but underlined the importance of other fundamental changes occurring across Europe that will also play a significant role in how regulation is reviewed.

“We need to consider the upcoming changes that will take place in the EU and the EU’s own institutions,” Swinburne said, pointing to the upcoming European Parliament elections in May 2019, which in turn will place a greater emphasis on fringe political parties that traditionally “vote against legislation, regardless of its content.”

Addressing the possible timeline for when the industry could expect to see a review of MiFID II occurring, Swinburne said she would “write off the first six months after the European Parliament mandate”, instead highlighting a number of changes currently underway in Europe that will impact on regulatory changes, such as the SME performance review and post-trade transparency rules for the fixed income space.

“My concern now is that MiFID III will be shaped not by data resources, but by purely political objectives, and above all, it is going to be shaped very differently by the relationship going forwards between the UK and the EU, and that will override all the fundamentals of market analysis,” she said. “So, MiFID III, as it is known in that nomenclature, may be a long time coming. But changes are happening now.”

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Corporate Advisory

Apple and Facebook call for EU-style privacy laws in US

Facebook and Apple have called on the US government to adopt tough EU-style data privacy laws, challenging White House objections that European regulation is imposing red tape on American technology businesses.

In separate addresses in Brussels on Wednesday, Apple’s chief executive Tim Cook and Erin Egan, Facebook’s privacy chief, threw their weight behind legislation that would give American citizens equivalent protections to those given to Europeans under the EU’s General Data Protection Regulation.

GDPR, which came into force in May, is one of the toughest personal privacy regimes in the world, giving EU citizens the right to demand companies disclose and delete information held about them. The regulation also gives Europe’s national regulators the power to impose fines of as much as €20m, or 4 per cent of annual revenues, on companies that break the law.

The Trump administration has complained GDPR risks creating barriers to international trade by imposing unnecessary burdens on companies struggling to comply with the rules. Writing in the Financial Times in May, US commerce secretary Wilbur Ross said the criteria for applying GDPR was “too vague” and would impose a “significant cost” on small businesses.

In a meeting with Vera Jourova, EU justice commissioner, in Brussels last week, Mr Ross expressed concerns GDPR was creating difficulties for US business and law enforcement, according to an EU official familiary with the matter. Mr Ross also invited Brussels to send comments on how GDPR operates to the White House for its consultations on drafting a US privacy law.

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Corporate Advisory

Brexit – FCA Discloses No-Deal plans

The FCA has stepped up its preparations for a no-deal Brexit by outlining detailed plans for the oversight of EU financial services firms with operations in Britain. The FCA published a blueprint for how it would issue temporary authorisations for EU firms doing business in the UK.

The regulator also revealed that 1,300 EU firms that have activities in Britain would be willing to sign up to its proposal that they have time-limited permits lasting three years.

This figure represents fewer than 20 per cent of the 8,000 EU entities that hold authorisations from the bloc, called passports, to do business in the UK.

However, the FCA does not know how many of these entities have multiple passports.

The FCA will roll out its three-year temporary authorisations regime for EU firms in the event of a no-deal Brexit to try to smooth the end of passporting arrangements.

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