Corporate Advisory

A wave of Regulation and Compliance challenges ahead

As summer begins to draw to a close we are fast approaching a particularly busy time for compliance professionals of financial services firms. The article from NRF provides an overview of some of the key financial services initiatives that are set to make in-trays even deeper when compliance staff return from their summer break. These include:

Senior managers’ regime: the countdown to March 2016

MiFID II and MiFIR: technical standards

MAR: FCA consultation

Benchmarks: oversight and controls

Consumer credit: rule changes on the horizon

Mortgages: 21 March 2016

Wholesale conduct risk



Read the full Norton Rose Fulbright article here

Corporate Advisory

Prime Minister calls for a tough stance to Regulation and Compliance

The financial services industry is facing more rules – and harsher consequences than ever before if they fail to observe them – notably in complying with anti-money laundering (AML) regulations for know your customer (KYC).

In Singapore late last month, the UK Prime Minister David Cameron warned there was “no place for dirty money” in Britain, that his government would address ways to make property ownership and bidding for government contracts by foreign companies more transparent. “We want {to be} the most open country in the world for investment,” he noted, but the UK must not become “a safe haven” for corrupt money from around the world.

Read the full news article here

Corporate Advisory

Time to really think about the future

By Jason Sumner

Ever since the financial crisis, global markets have being through a period of transformation, massive reform pressures and capital impacts. The markets are seeing a radical change and where once there was a clear view of the financial regulations and their impact across businesses and operations now the raft of new rules brings a multi dimensional impact. All of this of course also provides opportunity. The sell-side are making the best of this, dealing with the wave of regulation, legislation and directives, through complying, exiting or developing new businesses.

For the buy side, they too have been impacted, although not all have reacted at the same pace. Typically operating under a more self-assessment governance model this is changing and the spotlight is now firmly on this side of the sector. For those impacted, its time to really think about the future.

Recent legal cases have seen some financial service managers punished for not only financial matters, but also not having a robust and importantly transparent operating model. Regulatory fines have seen firms punished for weak or non-compliance within Custody.

Increased regulatory scrutiny continues to drive the need for rigor for the appropriate operating models. Historically, Asset Managers, Investment Managers and Hedge Funds have had a fairly standard model to operate under with a number of variable execution options available to them. Now Wealth Managers, Private Equity, Private Banks and Family Offices are also under the refocused spotlight of the regulators and lawmakers. They all need to adapt to ensure the business models, operating models, operations, systems, processes, documentation, transparency and governance within their firms evolves in line with regulatory reform and the evolving markets. This requires considerable expertise, access to technical and subject matter research, resource and time to execute and deliver.

So where is the change? The buy-side has at least three major areas of focus (if not more)

UCITS V, AIFMD and the big one MIFiD II

Directionally they all require the same thing of the buy-side community: Transparency, Reporting, Client Protection, Documentation and Risk data aggregation. The challenge is the requirements and impact are all slightly different and in some cases overlapping especially once cross-jurisdictional legislation is brought into the equation. The further challenges are ensuring initial compliance, implementation into internal structures, on-going demonstration and evidencing of compliance and finally implications to business strategy and operating models.

UCITS V for example seeks to focus on depositary functions, remuneration policies and sanctions. The directive introduces new rules on UCITS depositaries, such as the entities eligible to assume this role, their tasks, delegation arrangements and the depositaries’ liability as well as general remuneration principles that apply to fund managers.

  • Single depositary for each UCITS, disallowing the appointment of multiple depositaries
  • Harmonisation of the duties of a depositary to keep the assets of the UCITS safe, monitor cash movements to and from the fund and oversee the fund manager’s performance of its key functions
  • Specific safe-keeping requirements that a depositary needs to comply with in respect of financial instruments that may be held in custody as well as for other assets, including segregation requirements for assets that are held in custody
  • Member state requirements to ensure that assets held in custody by a depositary or its delegate are protected in the event of the depositary or its delegate becoming insolvent
  • Liability regime making the depositary liable for the avoidable loss of a financial instrument held in custody
  • UCITS management companies to have remuneration policies, complying with certain remuneration principles

AIFMD for example has required a comprehensive framework for regulation of alternative investment fund managers, including a more robust reporting regime, duties of the depositary, passporting and remuneration rules as well as marketing requirements for non-EEA managers with some challenges across member states.

  • Reporting regime requiring firms to provide a comprehensive set of reporting to the appropriate member state authority
  • Passporting designed to encourage fund managers to bring their fund structures within the EEA to benefit from a harmonised distribution market, however discrepancies between Member States in their implementation have resulted in confusion and challenges for managers expecting to benefit from a single entry point into the EEA.
  • Marketing for non-EEA managers when marketing non-EEA alternative investment funds to professional EEA investors will require firms to navigate a number of hurdles across the Member States

…and lets not forget MIFID II, quite possibly the biggest set of requirements to ever be slapped on the buy-side. Given its an extension of the original MIFID directive which pretty much bypassed the sector, it starts at a disadvantage.

For MiFID II, thematically five key areas need to be addressed by each buy-side firm, although this list is by no means exhaustive.

  • Best Execution and order flows, impacting pricing, trading flows, order systems and execution venue publication
  • Transparency regime brings big data implications for pre and post-trade management and flows, highlighting a need for centralised data management. Request for Quote transparency also needs to be managed
  • Transaction Reporting, requiring an increase in trade flow information, more than EMIR
  • Client Categorisation with focus on service provision and a rather extensive and onerous re-papering programme. Retail vs Professional Client treatment and surveillance
  • Product Governance and Manufacturing, focusing of fees, client information, un-bundling and research

In addition to these is the vast potential scope of products/ instruments likely to be covered, subject to a classification and impact. Vast simply does not do it justice, however, like the sell-side, the buy-side sector will need to seriously think about the products they wish to offer their clients and also the instruments they trade underlying those products. Restrictions, definitions, offering memorandums, prospectuses, trading obligations, transparency, processes, reporting, client safeguards, conduct rules, documentation, governance, organisational requirements / models and costs are all considerations for the buy-side to address.

This month the MiFID II RTS will finally be published and the sector will have better clarity to react and although they will still need to be adopted, surprises are unlikely. With this big thought provoking impact and with the window to implementation and compliance being relatively small, unlike previous compliance programmes this one will make firms really think about their future, its businesses, models and cost base. Smaller boutiques could even exit completely.

It doesn’t end there either. The buy-side can look to expect the unprecedented reform focus the sell-side have experienced going forward, certainly with an outlook over the next five years. Systemic and operational risk concerns continue to highlight the ‘scrutiny approach and governance’ of the third-party outsourcing relationships of the custodians, TA’s, Fund Accountants and pure outsourcing, leading to model reviews, process and control challenges. The sector can also look to expect more regulatory on-site visits, inspections and requirements to provide data swiftly to demonstrate compliance. All of these things require not just the immediate need to initiate a compliance programme, but more strategic thinking and planning programmes.

Print version here Time to really think about the future

Corporate Advisory

Changes recommended to EMIR legislation framework

By Jason Sumner

ESMA has published four reports focused on how the EMIR framework has been functioning and providing recommendations to the European Commission’s (EC) EMIR Review.

Three of the reports are required under Article 85 of EMIR, and cover non-financial counterparties (NFCs), pro-cyclicality and the segregation and portability for CCPs. The fourth report responds to the EC’s Review including recommendations on amending EMIR in relation to the clearing obligation, the recognition of third country CCPs and the supervision and enforcement procedures for trade repositories.

The documents contain several controversial recommendations including

  • Re-classification of “quasi-financials”;
  • Assess systemic relevance of NFCs on basis of gross notional value per class regardless of hedge/non-hedge distinction;
  • Amend the Article 39 EMIR regime on segregation and portability for client assets;
  • Simplify the Clearing Obligation procedure and remove frontloading requirements;
  • Abandon the requirement to backload reports for transactions terminated before 12 February 2014; and
  • Overhaul the third country CCP equivalence procedure

See the full EMSA announcement and reports here and / or for comment and details see the ‘Regulation Today‘ publications at Norton Rose Fulbright

Corporate Advisory

MiFID II could have the impact of forcing some smaller Asset Managers out

By Jason Sumner

In a recent article Small asset managers may be forced out of the market by MiFID II, according to think tanks New City Initiative (NCI) and Open Europe.

The NCI has said that EU regulations will introduce significant costs for UK asset managers and has called for the new rules to be reformed to preserve boutique firms.

Dominic Johnson, chairman of NCI, said: ‘The key trade-off for any business is that of costs versus income. The issues surrounding regulation are very similar – businesses need to operate in a regulated market, but the benefits of regulation need to outweigh the costs.

‘The investment management community and especially the ‘boutique’ community find that the regulatory burden imposed upon us by the EU is so expensive and onerous that in themselves these regulations are an issue in terms of our business sector prospering.’

See the full article here


Corporate Advisory

Regulation costs and tax uncertainty remain top concerns across the FS sector

By Jason Sumner

The CBI survey reveals that banks cannot keep up with regulation costs. Director of economics at business organisation, Confederation of British Industry (CBI), Rain Newton-Smith, has commented on recent research that the organisation conducted and believes that the UK government should concentrate more on retaining their position as financial centre of the world.

The cost of regulation and tax uncertainty are a top concern for firms across the sector”

See full article here


Corporate Advisory

RRD takes hold for IFPRU 730k firms

The EU [Bank] Recovery and Resolution Directive (RRD) establishes a comprehensive recovery and resolution regime. The FCA were required to transpose the Directive in respect of certain investment firms that they prudentially regulate (IFPRU 730k firms), and group entities in a group that contains a 730k investment firm or credit institution.

The transposition of the RRD in respect of IFPRU 730k investment firms required the FCA, as the prudential regulator of such firms, to make new rules. In August 2014, the FCA published a Consultation Paper in which they proposed the changes to the FCA Handbook that are required to transpose the elements of the RRD for which they are responsible.

Publication of the final rules and an accompanying Policy Statement came in January 2015. The vast majority of these rules came into force on 19 January 2015. The rules on the contractual recognition of bail-in enter into force on 1 January 2016

See full article here

Corporate Advisory

Not yet to clearing of OTC Derivatives say the Buy-side

Buy-siders at this year’s Euroclear Collateral Conference have said they are not clearing OTC derivatives in Europe until regulators make it mandatory.

With the rollout of new central clearing rules for OTC derivatives now penciled in for early 2016, the general consensus among panelists and the audience was that they would not be clearing the bilateral products prior to implementation.

Read full article here Buy -Side OTC

Corporate Advisory

ESA’s publication – The main risks to market stability have intensified

The Joint Committee of the European Supervisory Authorities (ESAs) published its fifth Report on Risks and Vulnerabilities in the EU Financial System. Overall, the report found that in the past six months, risks affecting the EU financial system have not changed in substance, but have further intensified.

The main risks affecting the financial system remain broadly unchanged from those identified in the report’s previous edition, but have become more entrenched. The major risks include:

  • Low growth, low inflation, volatile asset prices and their consequences for financial entities;
  • Search for yield behaviour exacerbated by potential rebounds;
  • Deterioration in the conduct of business; and
  • Increased concern about IT risks and cyber-attacks.

Read the full article here ESA