Regulatory Insights No. 11 - State Street Corporation...2017/01/17 · the regulatory side of things has been pretty active too. Agreements were reached on important files such as

Regulatory Insights

State Street’s quarterly overview of important legislative and regulatory developments

in the European Union

Issue No. 11

ForewordWelcome to 2017’s first edition of the State Street Regulatory Insights* newsletter, our quarterly overview of important legislative and regulatory developments in the European Union (EU).

When looking at both the period since our last update as well as what to expect this year, one of the remarkable things is that political uncertainty has become an even more important factor when considering the environment that our industry operates in, especially in the EU and the US.

United StatesAt the time of writing, the new US administration under President Trump is still in the process of fully settling in. It is not clear yet what direction this administration will take with its political programme and, specifically, its regulatory agenda for the financial services industry.

The recent Executive Orders directing a review of Dodd-Frank and halting the implementation of the new US fiduciary rule along with the market reaction to this have created an expectation that there will be deregulation, as well as at least a modification of the Dodd-Frank Act.

At the least, it seems there will be some regulatory relief for small banks and possibly the asset management and insurance sectors. However, the details and the potential beneficiaries of it remain to be seen. It is also unclear, at this stage, what the new administration will mean for international regulatory co-operation and for international fora such as the Financial Stability Board, International Organisation of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision (BCBS).

European UnionIn Europe, as well as the United States, politics will continue to dominate the headlines over the next couple of months. The upcoming elections in the Netherlands, France and Germany will be of vital importance. The French elections are particularly important, given the strong polling results for Marine Le Pen, her plans for holding an EU referendum and calling France’s membership of the North Atlantic Treaty Organisation (NATO) into question. Concerns around Greece are also back on the agenda.

*State Street Regulatory Insights No. 11 was published in March 2017.

ii REGULATORY iNSiGHTS NO. 11

BrexitThen there’s Brexit! The situation has continued to evolve since our last update. On 17 January 2017, the UK Prime Minister gave a speech outlining the UK negotiating position. She identified twelve key objectives for the negotiations. These include controlling immigration and agreeing a free trade agreement with the EU. In February, the UK Government published its White Paper on the UK’s exit and its new partnership with the EU. Both the Prime Minister’s speech and the White Paper are short on detail of the government’s negotiation planning.

The White Paper confirmed the twelve key objectives outlined by the Prime Minister and announced a further White Paper on the forthcoming Great Repeal Bill, the legislative act that will incorporate the current applicable EU legislative and regulatory framework in the UK.

The next milestone is the triggering of Article 50 by the UK Government. This is expected to happen at some point in the next few weeks which should align with the approval of the Brexit Bill in the UK Parliament. The approval of the Bill in Parliament is required following the UK Supreme Court’s ruling last year.

As the date for triggering Article 50 approaches, the financial services industry, led by various industry bodies, continues to provide the UK government with analysis and input on the effect of Brexit on different aspects and areas of the industry, while continuing to focus on implementation arrangements, access to talent and a bespoke deal delivering mutual access. In parallel, firms are continuing to work on their post-Brexit plans.

Regulatory LandscapeLeaving the political dimension aside, the regulatory side of things has been pretty active too. Agreements were reached on important files such as the EU Money Market Funds Regulation (MMF) and the revised Shareholder Rights Directive. Importantly, the delay of the Packaged Retail and Insurance-based Investment Products (PRIIPs) application date was finalised even though the drama around finalising the related Level 2 measures continues.

iii REGULATORY iNSiGHTS NO. 11

Furthermore, a large number of important Level 2 and Level 3 measures were issued by the European Supervisory Authorities (ESAs), including in the context of Markets in Financial Instruments Directive II and Markets in Financial Instruments Regulation (MiFID II/MiFIR), the Central Securities Depository Regulation (CSDR), and most notably, Undertakings for Collective Investment in Transferable Securities (UCITS) share classes, where the recent European Securities and Markets Authority (ESMA) Opinion envisages derivative overlays for currency hedging purposes only.

The European Commission has published its so-called risk reduction package, which finalises the Basel III implementation in the EU by introducing elements such as the Leverage Ratio (LR) and the Net Stable Funding Ratio (NSFR). Also, considerations are ongoing regarding the reviews of European Markets Infrastructure Regulation (EMIR) and of the Alternative Investment Fund Managers Directive (AIFMD), both of which are due in 2017.

The European Commission has also launched various initiatives in the context of a more forward-looking agenda by issuing a consultation on Big Data as well as a Capital Markets Union (CMU) mid-term review. As the UK – Europe’s single most important capital market – prepares to leave the EU this has become even more relevant.

At a time when both the political and the regulatory environment remain very eventful, we hope, as always that this publication gives you a useful overview of regulatory changes and helps you to navigate the relevant developments of recent months.

SVEN KASPER

Senior Vice President EMEA Head, Regulatory, Industry & Government Affairs State Street

iV REGULATORY iNSiGHTS NO. 11

ContentsFeature Article 1Navigating the New Market Rules 1

Europe 4Internal Governance 4Money Market Funds 5Shareholders’ Rights 6PRIIPs 6Risk Reduction Package 7EMIR Review 8Call for Evidence 9CSDR 10EBA Stress Test 10Big Data 11EBA Reports on a Harmonised Covered Bond Framework 11MiFID II 12Capital Markets Union 13Maltese Presidency Work Programme 14ESMA Opinion on UCITS Share Classes 15

France 16The Sapin II Law 16Treatment of Claims Update 18

Germany 20Limits on Exposures to Shadow Banking Entities 20General Decree on Capital Requirements for Interest Rate Risk 21Minimum Requirements for Risk Management of Capital Management Companies 22

ireland 23Loan Originating Qualifying Investor Alternative Investment Funds 23Fund Management Company Effectiveness 24Feedback Statement on Consultation on Central Bank Investment Firm

Regulations 2015 26Cross-industry Guidance in respect of Information Technology and

Cybersecurity Risks 28

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italy 30Provision of the Bank of Italy to update the Main Regulation on UCITS 30MiFID II Implementation 32Italy Introduces Tax Exempt Individual Investment Plans 33

Luxembourg 34Ex-ante Contributions 34Scope of the Deposit Guarantee and the Investor Compensation 35Provisions Applicable to Credit Institutions 35Out-of-Court Complaints Resolution 36

United Kingdom 37Transparency on Costs and Charges 37FCA Asset Manager Study Interim Report 39Regulatory Reporting: Retirement Income Data 41

Abbreviations 42

European Regulatory Timeline 47

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49%expect the role of

non-bank institutions, as providers of market

liquidity, to grow

42%predicted that

hedge funds would increasingly become providers of market

liquidity

Navigating the New Market RulesFeature Article

Changes to the liquidity landscape are being driven, in part, by new regulation including tougher capital requirements. These changes are having an impact on traditional buy-side and sell-side relationships.

With weaker balance sheets and shareholder pressure to improve profitability, global investment banks are looking to rationalise business models, and many may no longer be able to perform their traditional roles as liquidity providers. Activities such as fixed income, currency and commodities trading have come under particular pressure. This creates opportunities for new providers of liquidity to enter the market-place, including non-bank financial institutions such as hedge funds.

Equally, new technologies such as peer-to-peer (P2P) networks and electronic trading venues will have a role to play in the current market environment.

In a new State Street survey of 300 institutional asset owners, asset managers and hedge funds1, 49 percent of respondents said they expect the role of non-bank institutions, as providers of market liquidity, to grow. Forty-two percent predicted that hedge funds would increasingly become providers of market liquidity.

1. State Street 2016 Liquidity Survey. Longitude Research surveyed 150 asset managers, including 50 hedge funds, and 150 asset owners in June and July 2016. This global survey extended to 14 countries 300 institutional asset owners and managers in June and July 2016. Of those surveyed, 150 were asset owners, including pension funds, insurance companies, and endowments and foundations, and 150 were asset managers. These included 40 hedge funds. The global survey extended to 14 countries worldwide. Approximately 35 percent of respondents were based in the Americas, 40 percent in Europe, and 25 percent in Asia Pacific.

1 REGULATORY iNSiGHTS NO. 11

43%of hedge funds said they would evaluate becoming market-

makers

Liquidity Roles are EvolvingThe emerging liquidity providers of tomorrow are likely to include those operating with a lower cost of capital. As investors look for new ways to drive returns, some may decide that it makes better economic sense to transition from being a consumer to a provider of liquidity. Longer-term investors such as pension funds would be a prime example.

With the shift from the principal, over-the-counter (OTC) bond market to a hybrid principal-agency model, the characteristics of this new model may include explicit commissions and longer trading horizons. There may be greater uncertainty over the execution price of some security types. This change will create new opportunities. More than half of all institutional asset owners said that continued market volatility will demonstrate the value of hedge funds in price discovery. For their part, 43 percent of hedge funds said they would evaluate becoming market-makers in certain securities.

Citadel Securities, the electronic market-making arm of hedge fund Citadel, has become an active participant in the interest-rate swap and cash treasuries markets. Smaller cash-rich entities including insurers or mortgage providers are in the early stages of providing repo services. New entrants have the opportunity to reshape market liquidity, creating a healthy market ecosystem that accommodates a variety of players.

As more buy-side firms become price-makers, they will need to invest heavily in their fixed income trading capabilities, new skillsets and enhanced analytics. Potential market-makers have also found their capabilities tested by a lack of access to finance. The ability of non-bank institutions to replicate the traditional broker-dealer approach might also be limited by their balance sheet size as well as regulatory costs. Where there are limitations, the expanding role of electronic platforms may open up new sources of liquidity.


48% of asset managers

increasingly look towards electronic trading platforms

60%believe electronification

of the OTC market will grow

Electronic Trading increases Connections

Indeed, developments in technology are having a profound impact, particularly the electronification of the OTC market. Nearly 60 percent of our survey respondents believe electronification of the OTC market will grow, and a similar number expect that electronic trading will help mitigate liquidity constraints in stressed markets. Forty-eight percent of asset managers said market liquidity was encouraging them to increasingly look towards electronic trading platforms.

An absence of pre-trade data from electronic trading venues had traditionally impeded buy-side firms from price-making, but this is gradually changing through regulatory initiatives. Asset owners must report transactional data to the US Securities and Exchange Commission (SEC) under the Trade Reporting and Compliance Engine (TRACE) framework, whereas the incoming MiFID II Directive in Europe introduces enhanced pre and post-trade transparency obligations for financial institutions.

This increased data transparency will help improve market quality for liquid assets by increasing competition, broadening market access and reducing dependence on traditional market makers. However, questions remain as to whether electronic trading is viable for more illiquid securities, which could suffer from information leakage. Here, there is still a role for bilateral dealer-client relationships.

Managing the ChangeThe new liquidity environment is driving major changes across the industry. New solutions are emerging to help provide new sources of liquidity, and new players are stepping forward to perform a market-making role. Institutional asset owners and managers will need to understand where they want to compete and what role they want to play in this rapidly evolving environment.

RAJEN SHAH

Executive Vice President EMEA Head, Global Markets State Street


Internal GovernanceEurope

On 28 October 2016, the European Banking Authority (EBA) issued a consultation on guidelines on internal governance.

The purpose of the consultation is to revise the 2011 guidelines, in order to update the current design of corporate governance arrangements on the sound management of risk and to take account of changes under the Capital Requirements Directive (CRD IV). Specifically, the consultation focuses on the duties and responsibilities of the management body in its supervisory role in risk oversight. The rules on business conduct are also updated with an enhanced focus on risk culture and conflicts of interest.

The EBA and ESMA have also released a joint consultation on guidelines for assessing the suitability of banks and investment firm members of the management body and key function holders. These draft guidelines, foreseen under CRD IV and MiFID II, will apply to competent authorities, credit institutions and investment firms. They establish common criteria for assessing the individual and collective competencies and knowledge of the management body. They specify how the number of directorships held by members of the management body should be counted for significant institutions. In addition, the guidelines detail the rules on diversity which should be followed in recruiting members of the management body.

The consultation period for the two papers ended on 28 January 2017.


Europe

Money Market FundsIn December 2016, agreement was reached in trialogue on the Money Market Fund (MMF) regulation.

The European Council adopted the agreement on 7 December. The following day, the European Parliament’s Economic and Monetary Affairs (ECON) Committee also voted in favour of the trialogue agreement.

Although it was adopted by the Committee of Permanent Representatives (COREPER II), three Member States (Luxembourg, Hungary and Greece) made written comments that their concerns were not taken on board and Luxembourg stated it did not support the agreement at all.

Three types of MMFs will be introduced under the Regulation: a variable net asset value MMF (VNAV MMF); a constant net asset value MMF (Public Debt CNAV MMF) that invests 99.55 percent of assets in qualifying government debt; and a low volatility net asset value MMF (LVNAV MMF). For Low Volatility Net Asset Value (LVNAVs) and Constant Net Asset Value (CNAVs) the following was agreed on liquidity requirements: a minimum 10 percent portfolio investment in daily maturing assets and a minimum 30 percent portfolio investment in weekly maturing assets.

Up to 17.5 percent of the minimum liquidity required in weekly maturing assets may be held in public debt instruments. The agreement also includes a review clause requiring the European Commission to report after five years on the functioning of the Regulation. For public debt CNAVs, the European Commission will report after five years on the feasibility of establishing an 80 percent European Union (EU) public debt quota. The report will take account of the availability of short term EU public debt instruments and assess whether the LVNAV MMF might be an appropriate alternative for the non-EU government debt CNAV MMF.

Current expectations are that the text will not go to a plenary vote until late in Q1 or Q2 of 2017. It will then need to receive final endorsement in the European Council.


Europe

Shareholders’ RightsOn 7 December 2016, the European Parliament and the European Council reached a compromise agreement on the re-cast of the Shareholders Rights’ Directive.

The revised legislation will apply to all EU listed companies to enable their shareholders to hold management accountable for their decisions and to ensure they take into account the long-term interests of their businesses as well as including rules relating to the ability of listed companies to identify their shareholders.

The revised Directive provides enhanced transparency requirements for institutional investors and asset managers and introduces ‘say on pay’ rules. This is to ensure a strengthened link between management pay and performance. The agreement has to be formally adopted by the European Parliament plenary and the European Council. Member States will then have 24 months to transpose the directive after it enters into force.

PRIIPsOn 27 October 2016, the European Commission announced a 12-month delay on the entry into force of the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. It will come into force on 31 December 2017.

The European Commission’s proposal has since been approved by the European Parliament and the European Council and was published in the Official Journal (OJ) in December 2016.

The European Commission also sent a letter to the ESAs seeking to re-draft the Regulatory Technical Standards (RTS). However, despite a consensus between EBA and ESMA, the board of supervisors of the European Insurance and Occupational Pensions Authority (EIOPA) failed to reach a qualified majority vote on the opinion. The European Commission has subsequently published the revised RTS which are aimed at addressing the EU Parliament’s concerns. It is now expected that the revised RTS will be finalised in H1 2017.


Europe

Risk Reduction PackageOn 23 November 2016, the European Commission released a package of reforms on capital and liquidity standards and revised bail-in requirements for banks. This is designed to implement certain international regulatory commitments into EU law.

The package covers a wide range of important policy areas, including risk-based and leverage capital, large exposure limits, liquidity mandates, loss-absorbency requirements and the operational structure of non-EU financial entities.

The draft legislation will need to go through the full EU legislative process. This is expected to take at least 18 months and may involve substantive changes.

The European Commission’s proposals amend existing EU legislation and include revisions to the Capital Requirements Regulation (CRR), the Capital Requirements Directive (CRD), the Single Resolution Mechanism Regulation (SRMR) and the Bank Recovery and Resolution Directive (BRRD). The BRRD is composed of two separate amendments – one focusing on revisions to the EU’s minimum requirements for own funds and eligible liabilities (MREL) rules and the other focusing on the subordination of bail-in debt.

Once the legislation is finalised, it is expected that the proposed amendments will start entering into force in 2019 at the earliest. Most of the proposed CRR amendments should become applicable two years after the CRR II enters into force with a number of the provisions being phased in after this date. In relation to CRD V, Member States will be required to transpose the proposed amendments into national legislation within one year of the Directive coming into force.


Europe

EMIR ReviewOn 23 November 2016, the European Commission issued a report on the functioning of the European Markets Infrastructure Regulation (EMIR), ahead of the formal review of the legislation which is anticipated in 2017.

The review was originally due to be delivered in August 2015 but has been delayed to incorporate responses received following the European Commission’s call for evidence.

In the report, the European Commission provides a summary of the areas where, it believes, steps could be taken to make the EMIR regulatory framework more proportionate and efficient. While the European Commission states that it does not believe fundamental changes to the EMIR regime are necessary, it believes there is scope for simplification in order to reduce the regulatory burden on firms.

The forthcoming review is anticipated to cover:

• Streamlining the reporting requirements in EMIR

• Application of the clearing obligation, particularly for small financial counterparties, pension funds and non-financial counterparties (NFCs)

• Recognition of the need for greater certainty on the risk mitigation requirements for non-cleared over-the-counter (OTC) trades.

The European Commission will also look at the scope of transactions covered by the clearing and risk mitigation requirements in EMIR.


w

Europe

Call for EvidenceOn 23 November 2016, the European Commission released a follow-up communication on the call for evidence exercise.

The document highlights the areas where the European Commission intends to take action following its initial consultation exercise in 2015. The European Commission plans to make a number of legislative changes to existing regulation, along with non-legislative proposals, in order to adjust regulatory rules which have unintended or overly burdensome impacts on industry participants.

Examples of where the European Commission plans to take action are in the recently published risk reduction package, which aims to amend the existing macro-prudential framework, as well as the review of EMIR. In addition, some proposals require new legislation such as the recently published draft legislation on the recovery and resolution of central clearing counterparties (CCPs) and the action plan on retail financial services which is expected in early 2017.

Further amendments are anticipated for the Alternative Investment Fund Managers Directive (AIFMD) and the Solvency II Directive. The European Commission will monitor progress in the implementation of the communication and will publish possible next steps by the end of 2017.


Europe

CSDROn 11 November 2016, the European Commission published a number of Level 2 standards under the Central Securities Depositories Regulation (CSDR).

These consist of:

• A Delegated Act (DA) on the calculation of cash penalties for settlement fails and the operations of Central Securities Depositories (CSDs) in host Member States

• An RTS on the content of the reporting on internalised settlements and the relevant Implementing Technical Standards (ITS)

• An RTS on authorisation, supervisory and operational requirements for CSDs and the relevant ITS

• An RTS on prudential requirements for CSDs and designated credit institutions offering banking-type ancillary services.

These measures were delayed for over a year and have now been adopted by the European Commission without significant amendments. However, the RTS on settlement discipline has yet to be published and is anticipated early in 2017.

EBA Stress TestIn December 2016, the EBA announced that it intends to carry out its next EU-wide stress test in 2018.

The EBA plans to start work on the associated methodology immediately and has indicated that alongside the stress test there will be a review of the impact of International Financial Reporting Standards (IFRS), which are due to be implemented in January 2018.


Europe

Big DataIn December 2016, a discussion paper was published by the European Supervisory Authorities (ESAs) focusing on the opportunities and the potential risks of Big Data.

Big Data is considered to be the collection, processing and use of high volumes of different types of data from various sources, using IT tools, in order to generate ideas or solutions or to predict certain events or behaviours.

This paper presents a high level overview of the potential benefits and risks associated with the use of Big Data and seeks to establish if there are any gaps in the current regulatory framework that need to be addressed.

Comments on the discussion paper are due by 17 March 2017.

EBA Reports on a Harmonised Covered Bond FrameworkIn December 2016, the EBA published a report on proposals to harmonise the covered bond framework in the EU.

The report recommends a multi-faceted approach to help strengthen covered bonds across the EU, with the aim of ensuring that only those financial instruments that comply with harmonised structural, credit risk and prudential standards can be branded as ‘covered bonds’.

Key EBA recommendations are that:

• A new covered bond directive should be proposed in order to provide a covered bond and to specify structural quality requirements for all regulated covered bonds in the EU

• In addition, the CRR should be amended to strengthen the regulatory framework for those covered bonds that benefit from preferential capital treatment and consider the convergence of national frameworks on a voluntary basis, where appropriate.


Europe

MiFID IIThe European Commission and ESMA are continuing to publish a significant volume of consultations and Level 3 publications.

These include:

• An updated questions and answers (Q&A) document on the application of MiFID II and MiFIR, which clarifies when ESMA will publish the first set of data needed to implement the systematic internaliser (SI) regime and the date by which firms must comply with the SI regime for the first time

• A consultation on draft RTS on the treatment of package orders under MiFID II and MiFIR

• An updated Q&A document on transparency topics and market structures topics and a new Q&A document on commodity derivatives topics under MiFID II and MiFIR

• A Q&A document on market structure topics under MiFID II and MiFIR.

In addition, the European Commission has adopted a number of the remaining RTS under MiFID II/MiFIR.


Europe

Capital Markets UnionIn January 2017, the European Commission published a consultation on the Capital Markets Union (CMU) mid-term review 2017.

The consultation covers what has been done so far, outlines next steps and seeks feedback on how the CMU Action Plan of September 2015 can be updated and completed in order to provide a strong policy framework for the development of capital markets.

The objectives of the mid-term review are to: take stock of the progress made to date; update the actions envisaged in light of work undertaken so far, and evolving market circumstances; and complement the action plan with new measures.

The European Commission also highlights a number of upcoming priorities. These include:

• Finalising the action plan on retail financial services as expected (Q1 2017)

• Adopting the report on barriers to the free movement of capital prepared by the relevant European Commission expert group (Q1 2017)

• Presenting a proposal for a simple, efficient and competitive EU personal pension product in Q2 2017

• Formulating policy-oriented FinTech recommendations and proposing measures through its internal task force and further engagement with outside experts and stakeholders in 2017

• Developing and completing the work of the high level expert group set up in the European Commission in 2016 and implementing policy recommendations that will set the EU on the path towards an effective EU sustainable finance agenda by the end of 2017.

The consultation will be open until 17 March 2017 and the European Commission will present a mid-term review of the CMU action plan in June 2017.


Europe

Maltese Presidency Work ProgrammeThe Maltese Presidency of the EU Council has published its work programme for its six-month term.

The presidency has identified a number of priorities relating to financial services. These include:

• Continuing the development of the CMU project

• Finalising European Council discussions on securitisation

• Reaching political agreement on European Venture Capital Funds (EuVECA)

• Starting negotiations on the CRR, the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR)

• Progressing work on the European Deposit Insurance Scheme (EDIS)

• Continuing work on the legislative proposal on CCP recovery and resolution.


Europe

ESMA Opinion on UCITS Share ClassesOn 30 January 2017, ESMA published an Opinion on UCITS Share Classes.

The ESMA Opinion aims to introduce a principles-based framework for UCITS share classes across the EU. This is to address the diverging national practices which have resulted from the lack of prescriptive detail on share classes in the UCITS Directive. The ESMA Opinion builds on the feedback it received from stakeholders on its second discussion paper, published in April 2016. ESMA’s Opinion, which is addressed to National Regulators, sets out four high-level principles which should be followed by UCITS when setting up different share classes:

• Common investment objective: Share classes of the same fund should have a common investment objective, reflected by a common pool of assets. ESMA believes that hedging arrangements (with the exception of currency risk hedging) are not compatible with this principle, as it could lead to a share class having a different risk profile, and subsequently a different investment objective, to the wider fund.

• Non-contagion: Appropriate procedures should be implemented to minimise the risks specific to one share class that could have a potentially adverse impact on other share classes of the same fund. The ESMA Opinion introduces a set of

operating principles (which should be observed as minimum standards) to mitigate the potential spill-over risks from the use of a derivative overlay in a hedged share class. These include operational and accounting segregation and stress-testing at the share class level.

• Pre-determination: All features of the share class should be pre-determined before it is set up, with a view to providing investors with a full overview of the rights/features attributed to their investment.

• Transparency: Differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes. ESMA again proposes a set of operational principles. This includes providing investors with a list of share classes with contagion risk and the stress test results to NCAs (on request).

To facilitate an orderly transition and to mitigate the potential negative effects for investors in already existing share classes (established prior to the issuance of ESMA’s Opinion), these should be allowed to continue to operate. However, in order to level the playing field across the EU, such share classes should be closed for investment by new investors within six months of publication of this Opinion, and for additional investment by existing investors within 18 months of publication of this Opinion.


The Sapin II LawFrance

Law no. 2016-1691 of 9 December 2016 on transparency, the fight against corruption and the modernisation of economic life (the Sapin II Law) was promulgated in the OJ of 10 December 2016.

This law includes provisions covering a wide range of areas and will bring France into line with the highest international standards in the area of transparency and the fight against corruption. The Sapin II Law imposes an obligation to prevent and detect corruption. It provides whistle-blower protection, introduces the possibility of avoiding prosecution and establishes a national anti-corruption agency with the authority to review these provisions. The Sapin II Law also operates extra-territorially against violations outside France. Companies that fall under this obligation are expected to comply with the provisions which come into force in May 2017.

Obligation on French CompaniesCompanies subject to this obligation to prevent and detect corruption must establish the following:

• A code of conduct which must be integrated into the company’s internal regulations

• A whistleblowing line

• Ongoing risk assessments

• Procedures for conducting due diligence on third parties, such as clients, suppliers, and intermediaries

• Internal and external controls

• Training for executives or employees

• Disciplinary procedures for employees

• An internal audit of the programme.


France

Whistle-blower ProtectionThe Sapin II Law introduces protected status for whistle-blowers. This means that a whistle-blower will not be criminally liable for disclosing any secret protected by law, when such a violation is ‘necessary and proportionate to protecting the interests involved’. The Sapin II Law offers the opportunity for financial assistance to whistle-blowers who are punished as a result of a disclosure they made in good faith. It also imposes financial penalties on those who seek to penalise the whistle-blower.

French Anti-corruption AgencySapin II establishes the Agence Française Anticorruption (AFA). This replaces the central service of corruption repression (Service Central de Repression de la Corruption).

The agency will operate under the authority of the French Minister of Justice and Minister of Budget. The AFA will have both investigative and supervisory or monitoring powers, as well as the power to impose administrative sanctions in relation to compliance programmes.

Creation of a French Equivalent of the US Deferred Prosecution Agreement

Sapin II introduces deferred prosecution agreements (DPAs) referred to under the law as public interest judicial agreements (convention judiciaire d’intérêt public). The aim of these agreements is to empower companies to enter into an agreement with the prosecutor (procureur de la République) to avoid prosecution or criminal sanctions.

This agreement may impose:

• A fine to the French Treasury – proportionate to the benefits gained from the violations found and limited to 30 percent of the annual average turnover. The fine will be calculated on the last three turnovers known at the date of the finding of the breach.

• Implementation of an adequate corruption prevention programme, monitored by the French anti-corruption agency AFA for up to three years.

• Indemnification of any known victim and payment within one year.

DPAs are only open to legal persons and do not exempt individuals from being investigated separately.


France

Treatment of Claims UpdateOn 18 October and 14 November 2016, the Financial Market Authority (AMF) and the Prudential Supervisory and Resolution Authority (ACPR) colleges approved updates of their respective doctrines on the handling of customer complaints.

In its official communication, the ACPR noted shortcomings regarding the protection of customers in the handling of claims despite the abundance of legislation and regulation in this area. This opinion is based on:

• Controls (carried out by the ACPR) within credit institutions, insurance companies and intermediaries

• Controls outlined in the internal control report section regarding customer protection

• Information received by the ACPR from clients.

The updates are:

• Modification of instruction 2012-07 on the handling of complaints for the AMF

• Recommendation 2016-R-02 on the handling of claims replacing Recommendation 2015-R-03 of 26 February 2015, for the ACPR.

Both texts will take effect from 1 May 2017. Until then, the ACPR Recommendation 2015-R-03 of 26 February 2015 applies.

The aim of these updates is to guarantee customers:

• Clear and transparent information on how complaints are handled, as well as facilitated access to the complaints monitoring system

• Efficient, equal and harmonised claims processing

• Potential corrective actions to be taken once issues are identified though claims processing.


France

The recommendations of the ACPR and the AMF are:

• Inform clients of the complaints process

• Clearly define appropriate procedures governing the management of claims processing

• In cases where a client complaint is not been upheld, either in full or in part, the client will be provided information as to the reason for this and access to mediation

• Monitoring of complaints handling to address any deficiencies or bad practices.

The harmonisation of the rules of the ACPR with those of the AMF must: ‘contribute to the simplification of relations with customers and to the improvement of confidence in the markets for the benefit of consumers and companies’, according to the two authorities.


Limits on Exposures to Shadow Banking Entities

Germany

On 2 December 2016, the German Federal Financial Supervisory Authority (BaFin) published Circular 8/2016 (BA) on limits for exposures to shadow banking entities.

The circular deals with the implementation of the EBA Guidelines on limits for exposures to shadow banking entities, which carry out banking activities outside a regulated framework, under the Capital Requirements Regulation into German supervisory practice.

The circular applies to institutions to which Part 4 of Capital Requirement Regulation (Large Exposures) applies. However, significant entities and significant groups, supervised by the European Central Bank (ECB), are exempt.

The circular defines the term ‘shadow bank’ and outlines how institutions must define their individual, overall and single large exposure limits to shadow banks. Furthermore, institutions are obliged to implement effective procedures and control mechanisms to deal with the risks of such exposures. The circular came into force on 1 January 2017.


Germany

General Decree on Capital Requirements for Interest Rate RiskOn 23 December 2016, BaFin published a General Decree on additional capital requirements for interest rate risks in the banking book.

This decree is relevant for institutions which have not yet been subject to capital requirements in the context of a supervisory review and evaluation process (SREP) by either the ECB or BaFin.

While Union branches governed by Section 53 of the German Banking Act (KWG) will be affected, EU branches (Section 53b KWG) and branches governed by Section 53c KWG will not be affected. Section 53 refers to branches of undertakings domiciled outside Germany which usually require an authorisation from BaFin in Germany, as opposed to Section 53b KWG which does not require authorisation from BaFin if the undertaking has been granted approval by the competent authorities of the home state.

The institutions affected by this decree will have to calculate the individual capital requirements for interest rate risk for the first reporting date of the prudential interest rate shock as at 31 December 2016. Subsequently, the calculation of the capital requirements must be made on a quarterly basis, it must be analogous to the determination of the interest rate shock and must be taken into account in the regulatory equity reporting in the future.


Germany

Minimum Requirements for Risk Management of Capital Management CompaniesOn 10 January 2017, the BaFin published Circular 1/2017 (WA) on Minimum Requirements for Risk Management of Capital Management Companies (KAMaRisk).

The circular is a revision of the BaFin Circular 5/2010 (WA) on Minimum Requirements for Risk Management of Investment Companies (InvMaRisk). Numerous passages have been deleted, as there are now statutory regulations in the German Investment Code (KAGB) and in the European Commission Delegated Regulation (EU) No 231/213 of 19 December 2012 (AIFM-Level 2 Regulation), supplementing Directive 2011/61/EU of the European Parliament and the Council (Alternative investment fund managers Directive – AIFMD). The regulations apply to exemptions, general operating conditions, depositaries, leverage, transparency and supervision.

In addition, minimum requirements for the risk management of AIF investment firms which loan money or invest in non-securitised loans have been newly added under Section 5 of the KaMaRisk.


Ireland

Loan Originating Qualifying Investor Alternative Investment FundsOn 28 November 2016, the CBI announced that it would be amending the AIF Rulebook to change the requirements applying to loan originating Qualifying Investor Alternative Investment Funds (L-QIAIFs). The CBI issued the amended AIF Rulebook on 3 January 2017.

L-QIAIFs had been prohibited from engaging in activities other than lending and directly related operations. The CBI reviewed this restriction and concluded that it was appropriate to allow other investments linked to the loan origination strategy, a policy which reflects European regulation and the European Long-Term Investment Fund Regulation (ELTIF), in particular.

The CBI updated the AIF Rulebook to additionally permit L-QIAIFs to invest in ‘debt and equity securities of entities or groups to which the loan originating qualifying investor AIF lends or which are held for treasury, cash management or hedging purposes’. This means that L-QIAIFs are now permitted to deal in investments connected to the loan origination strategy.


Fund Management Company Effectiveness

Ireland

On 19 December 2016, the Central Bank of Ireland (CBI) published its feedback statement on the third consultation paper on fund management company effectiveness (CP 86), as well as its final complete guidance on fund management company effectiveness.

The third consultation had sought feedback on draft guidance on managerial functions, operational issues and procedural matters, as well as proposed rules on record keeping and the location of directors and designated persons (DPs).

The final guidance addresses the following governance areas:

• Delegate oversight

• Organisational effectiveness

• Directors’ time commitments

• Managerial functions

• Operational issues

• Procedural matters.

It collates previously published guidance on delegate oversight, organisational effectiveness and directors’ time commitments and publishes the finalised CBI guidance on managerial functions, operational issues and procedural matters following the CBI’s third consultation.

There are four new rules introduced under the finalised guidance:

• New streamlined management functions

• An organisational effectiveness rule

• A retrievability of records rule

• The location rule.

Each of these will be set down in legislation. Six chapters of guidance are also introduced.

The location rules for DPs and directors was the matter on which the CBI’s final position was most keenly anticipated. In its response to CP 86, the industry expressed concerns about the effect the proposals would have on the accessibility of expertise outside the European Economic Area (EEA). The CBI acknowledged that these arguments were persuasive.


Ireland

The final requirements which will be incorporated into regulation are less onerous than those originally proposed. Under the new regime, a fund management company with a low Probability Risk and Impact System (PRISM) rating must have:

• Two directors resident in the state

• Half of its directors resident in the EEA

• Half of its managerial functions performed by at least two DPs resident in the EEA.

The CBI has not included the previously proposed requirement that DPs located in multiple locations must be employees of the same group. There is no requirement to have an Irish DP and there are no prescribed managerial functions that must be carried out within the EEA. This means that fund management companies may determine for themselves which managerial functions they wish to perform outside the EEA.

The final location rules will allow managers to use in-house resources outside the EEA to carry out managerial functions for key areas such as fund management, fund risk management and operational risk management. They can leverage the expertise in these areas within their own organisations, even where that expertise is located outside the EEA.

While fund management companies will need to reassess board and DP composition and potentially make some changes, the revised rules will allow fund management companies to construct their governance structure in a manner that leverages their company expertise and the promoter’s organisation, while at the same time satisfying the CBI’s requirements for effective supervision.

The requirement that the organisational effectiveness role must be carried out by an independent director, who cannot undertake any other managerial functions, is also relevant when assessing the impact of these rules on board composition and the allocation of managerial functions to DPs.

The rules do not address the post-Brexit situation. However, there is a non-exhaustive list of factors to be taken into account with respect to key personnel located in jurisdictions other than Ireland (for example physical proximity, cultural ties, similar legal or regulatory systems, etc.). The CBI will consider these factors and has stated it would seem many of them will still apply to the United Kingdom.

For existing fund management companies the rules will not be effective until 1 July 2018. This should allow adequate time to assess the implications of the new requirements and to implement any changes that may be necessary.


Ireland

Feedback Statement on Consultation on Central Bank Investment Firm Regulations 2015On 4 November 2015, the CBI published a consultation paper (CP 97: Consultation on Central Bank Investment Firm Regulations) and released its feedback statement on 28 November 2016.

CP 97 relates to the publication of an Investment Firm Rulebook (the Rulebook) which consolidates all of the conditions and requirements which the CBI imposes on investment firms in one document. The CBI is issuing the Rulebook on a statutory basis. The CBI is in the process of finalising the regulation and it can be expected to be issued in Q1 2017.

The following are the key elements addressed in the feedback statement:

• In order to assist firms implementing the CBI Investment Firm Regulations, it is the CBI’s intention to publish guidance to accompany the published regulations. The CBI also intends to prepare and publish an investment firm Q&A document, to assist firms with technical queries that may arise from time to time.

• The CBI acknowledges that certain requirements may be more suited to guidance. Accordingly, the feedback statement also indicates those matters which will be included in guidance, rather than in regulations, and also those areas where additional guidance will be provided.

• It is not the CBI’s intention to inadvertently prevent organisations from structuring their operations in a particular manner. However, in some cases an operational change may be required to meet the new requirements. Clarifications, where appropriate, are included below.

• The CBI will retain the prohibition on outsourcing the check and release of the final Net Asset Value (NAV) except in circumstances determined by the CBI. Those exceptional circumstances will be set out in guidance, which will accompany the CBI Investment Firm Regulations.


Ireland

• Firms that have existing, previously approved, outsourcing arrangements that do not comply with the guidance will not be required to change those arrangements.

• The CBI has decided to retain a definition of the final NAV, in order to provide clarity on this important issue: ‘Final NAV means a net asset value calculated for the purposes of dealing in an investment fund provided to investors, published or otherwise released to the market by the Fund Administrator or its outsourcing service provider’. The definition as set out in CP 97 applies irrespective of the dealing frequency of the fund.

• The final check and release of each investment fund NAV is a core administration activity which must be performed by the fund administrator. This review must be completed prior to the release of the final NAV and should be completed, signed and dated by a senior staff member within the fund administrator.


Ireland

Cross-industry Guidance in respect of Information Technology and Cybersecurity RisksIn September 2016, the CBI issued a paper setting out its guidance in relation to Information Technology (IT) and cybersecurity governance and risk management by regulated firms in Ireland.

These are key areas of concern for the CBI, given their potential impact on firms and their customers, and the risks for financial stability. This paper sets out observations that incorporate examples from supervisory work carried out by the CBI, over the course of 2015 and 2016, to assess IT and cybersecurity-related operational, governance and strategic risks in regulated firms.

The guidance outlined in the paper sets out the CBI’s current thinking on good practices that regulated firms should use to inform the development of effective IT and cybersecurity governance and risk management frameworks. This guidance will inform the views of supervisors on the quality of IT related governance and risk management in regulated firms. Failings in respect of this guidance will inform CBI supervisory decisions, including those in respect of risk mitigation programmes. This guidance sets out the CBI’s expectations of firms in this area. The CBI’s supervisory engagement will reflect this guidance with firms assessed accordingly.

The CBI expects the boards and senior management of regulated firms to fully recognise their responsibilities for these issues and to put them among their top priorities. The CBI has stated that firms must robustly address key issues such as alignment of IT and business strategy, outsourcing risk, change management, cybersecurity, incident response, disaster recovery and business continuity. The CBI expects firms to make sure that they understand these risks and manage them effectively.


Ireland

The CBI has made the following points in relation to the paper:

• It is management’s responsibility to understand the specific IT related risks that the firm faces and to ensure that these are sufficiently mitigated in line with the firm’s risk appetite

• No guidance from the CBI can cover all risks and necessary actions for all regulated firms

• The paper does not address all aspects of the management of IT and cybersecurity risk, but rather focuses on those areas that the CBI deems most pertinent at this time, based on its supervisory work to date

• The relevance and importance of the issues raised in the paper will vary according to the business model, the size and technological complexity of the institution and the sensitivity and value of its information and data assets.

The paper is not a replacement for and does not supersede the legislation, regulations, guidelines and standards that firms must comply with as part of their regulatory obligations, particularly in the areas of risk management, internal controls or corporate governance.


Provision of the Bank of Italy to update the Main Regulation on UCITS

Italy

On 23 December 2016, the Bank of Italy issued a provision to update the regulation on asset management, dated 19 January 2015. The provision was published in the Italian Official Gazette on 4 January 2017 and entered in force the following day.

The most important changes relate to remuneration of the asset management company, costs admissible to be charged to the funds, duties of the depositaries and schemes of the annual reporting of the funds.

Remuneration of the Asset Management Company

The Bank of Italy has indicated that going forward, one method is admissible to calculate the performance fees of fund managers, instead of the number of methodologies previously accepted as standard market practice.

Admissible Costs to be Charged to the UCiTS Funds

The NAV calculation is only allowed to be performed on behalf of the asset management company where an outsourcing agreement has been arranged (the ‘outsourcing regime’). Therefore the Bank of Italy considers the costs liable to the administrative management of the UCITS fund.

Duties of the DepositariesIn accordance with the Joint Regulation between the Italian Securities and Exchange Commission (CONSOB) and the Bank of Italy, the depositary can calculate the NAV only where there is an outsourcing agreement in place (the outsourcing regime). If the depositary were the NAV calculator under the former affidamento regime (depositary’s responsibility) it is not necessary to request a new authorisation from the CONSOB and Bank of Italy.


Italy

Undertakings for Collective Investment in Transferable Securities (UCITS) funds can now deposit their liquidity with a third bank. In this case, the depositary has the duty of the cash monitoring. This means that the third bank and the management company are obliged to provide adequate information flows.

The depositary also has duties regarding ownership verification and record keeping, including the keeping of an inventory of the ‘other assets’ that can’t be held in custody by the depositary. It’s important to note that the inventory of the other assets of a UCITS fund has to be provided by the depositary to the fund manager bi-annually. This sharing provision was not considered for AIFs.

The re-use of the assets of the UCITS funds by the depositary is admissible only under five strict provisions:

• The fund manager’s written agreement

• Re-use on behalf of the fund

• Execution of instructions provided by the fund manager

• Re-use in profit of the fund or its underwriters

• The provision of collateral by quick liquid securities with the surcharge of a haircut.

Schemes of the Annual Reporting of the Funds

The reporting schemes regulations’ annexes have been updated regarding the costs of the NAV calculation, the underwriting fees and the remuneration policy of the fund managers.

Other changes in the final draft of the regulation, not arising from the UCITS V Directive include the following:

• A new limit for the shareholdings held by the asset management company

• A designation of the commitment method as the only method that can be used to calculate the leverage

• Specific provisions regarding the investment limits for credit funds and provisions for EU AIFs that will operate in Italy.

As mentioned, the provisions of the regulation entered in force on 5 January 2017. However, specific transitional provisions require that the fund prospectus is modified by 28 February 2017 and that this is communicated to the Bank of Italy by 31 March 2017. The annual reporting schemes have to be updated for the first issue after 30 June. The new method to calculate performance fees must be adopted by 1 January 2018.


Italy

MiFID II ImplementationOn 22 December 2016, the CONSOB published a consultation paper on the implementation of MiFID II in Italy.

The consultation covers the implementation of the ESMA guidelines on assessing the knowledge of individuals who, on behalf of the intermediary, provide clients with investment advice or information about the financial instruments and services offered. The consultation expired on 20 January 2017. The Italian Banking Association (ABI) has provided its feedback.

A previous consultation paper on the draft guidelines on product governance requirements was issued by ESMA in October 2016. The consultation expired on 5 January 2017 and answers have been provided by the ABI and the Italian Investment Management Association (Assogestioni). While the two associations generally appreciate the approach and the proposals made by ESMA in its consultation paper, they have also asked ESMA to better clarify the respective roles and the interactions between distributors and manufacturers.

Some of the main comments and requests highlighted by the two associations are:

• The need for a better clarification of the concept of ‘distributor’ and of the relationship between the target market assessment made by the distributor and the suitability/appropriateness test

• Disagreement with ESMA’s interpretation that individual portfolio management is a form of product distribution and also with ESMA’s suggested approach on hedging and portfolio diversification aspects

• A request for further guidance on how the target market assessment for collective investment schemes (UCITS and AIFs) would look, in order to have a standardised approach across Europe as far as possible.


Italy

Italy Introduces Tax Exempt Individual Investment PlansWith the publication in the Italian Official Gazette of Law No. 232 of 11 December 2016, the Italian Government launched the tax exempt investment plans for individual retail investors (PIR or Piani individuali di Risparmio). These are similar to the French ‘plans d’épargne’ and the individual UK saving plans.

The Italian individual savings plans are designed for Italian residents. An investor can subscribe to only one long-term savings plan and a PIR can have only a single subscriber (one PIR, one investor).

These PIR Plans benefit from the exemption of withholding tax on capital gains and financial income (26 percent) if:

• Investment in such plans is held by individuals for more than five years

• At least 70 percent of the investment portfolio consists of equity or debt securities issued by Italian companies (or EU companies having an Italian branch) or units or shares of UCITS complying with such requirements

• 30 percent of the issuers of such securities are small and medium sized enterprises

• Each investor can’t invest more than €30,000 per year and a total amount of €150,000

• A maximum of 10 percent of the PIR amount is invested in financial instruments by the same issuer (to limit concentration risk in one single investment).

PIRs aim to support the local economy by providing financial resources to small cap Italian companies and ensuring tax exemptions on financial earnings to investors.


Ex-ante ContributionsLuxembourg

The Supervisory Authority of the Luxembourg Financial Sector (Commission de Surveillance du Secteur Financier, CSSF) published Regulation No. 16-06 on September 28, 2016. Ex-ante contributions must be paid to the Fonds de Résolution Luxembourg.

Part I of the Law of 18 December 2015 (the Law) regarding the failure of credit institutions and certain investment firms which entered into force on 28 December 2015, implements two major pieces of the Banking Union into Luxembourg law:

• Directive 2014/59/EU which establishes a framework for the recovery and resolution of credit institutions and investment firms

• Directive 2014/49/EU on deposit guarantee schemes.

The Gone Concern Resolution part of the Law applies to Luxembourg credit institutions, investment firms and Luxembourg branches of institutions established in non-EU countries.

In this context, the CSSF is appointed as the ‘resolution authority’ in Luxembourg. It is tasked with applying the resolution tools and exercising the resolution powers through a ‘resolution council’.

In order to finance the implementation of the resolution tools, the Law creates the Luxembourg Resolution Fund (FRL), funded at least annually on an ex-ante basis, by the credit institutions and investment firms authorised in Luxembourg. These include Luxembourg branches of institutions authorised in a third country, in proportion to their liabilities and risk profile (Please refer to Article 3 of Regulation No. 16-06).

The CSSF Regulation No. 16-06 refers to the above mentioned contribution. The resolution council within the CSSF will communicate the annual contribution amount to each institution by 1 July of each year. This communication will be done via electronic form and/or by post with an acknowledgement of receipt.

Payment must be made within 10 working days of the request being brought to the attention of the FRL by the resolution council. Sanctions can be imposed by the resolution council in case of infractions.


Luxembourg

Scope of the Deposit Guarantee and the Investor CompensationCSSF Circular – CPDI 16/02 aims to clarify certain eligibility criteria for the deposit guarantee and the investor compensation, in accordance with Titles II and III of the amended Law of 18 December 2015 on the failure of credit institutions and certain investment firms (the Law of 2015).

This circular provides additional clarification on the implementation of the UCITS V Directive into Luxembourg law. The circular reiterates the exclusions defined in CSSF Circular 15/630 and extends them to the ‘Système d’indemnisation des investisseurs Luxembourg’ (SIIL). Entry into force is planned for 18 October 2017.

Provisions Applicable to Credit InstitutionsOn October 11 2016, CSSF Circular 16/644 was published concerning provisions applicable to credit institutions acting as UCITS depositary, subject to Part I of the Law of 17 December 2010 on Undertakings for Collective Investment and to all UCITS, where appropriate, represented by their management company.

This circular replaces CSSF Circular 14/587 (as amended by CSSF Circular 15/608). Chapter E of IML Circular 91/75 is no longer applicable to UCITS. The circular entered into force on 13 October 2016.

On a similar topic, ESMA has issued Q&A on the application of UCITS V.


Luxembourg

Out-of-Court Complaints ResolutionCSSF Regulation No. 13-02 relating to the out-of-court resolution of complaints is abrogated and replaced by Regulation No. 16-07.

This regulation deals with client complaint handling by financial institutions. The main changes relate to the process of out-of-court resolution by the CSSF. There is no change to the complaints handling process for financial institutions.

Charges for Late FilingUnder the terms of RCS Circular 16/03 additional charges for late filing will apply in the following cases:

• Filing of annual accounts

• Filing of consolidated accounts.

These new requirements will apply only to legal persons. Additional charges will apply if annual accounts are filed later than seven months after the end of the company’s financial year. The circular entered into force on 1 January 2017.


Transparency on Costs and Charges

United Kingdom

On 5 October 2016, the FCA (Financial Conduct Authority) published a Consultation Paper (CP16/30) setting out proposed rules and guidance to standardise the disclosure of transaction costs in workplace pensions, (Defined Contribution (DC) and part DC schemes).

Independent Governance Committees (IGCs) of pension schemes currently have a duty to request and report on transaction costs as part of their governance duties. However, the FCA highlights that at present there is no standardised disclosure protocol for reporting information about some types of transaction costs by asset managers. As a result, the information received by the IGCs is not consistent in either its content or format. The end result is that governance bodies may not be able to perform their function of assessing if scheme members are receiving value for money.

The FCA proposes placing a new obligation on asset managers to provide full disclosure of these costs in a standardised form. The CP presents the data requirements, proposes standardised calculation of transaction costs and makes proposals for cost amalgamation. Developed with the MiFID II and PRIIPs legislation in mind, the FCA proposes the use of the ‘slippage cost approach’. The general principle of this approach is that the transaction cost is the difference between the price at which an asset is valued immediately before an order is placed into the market and the price at which it is actually traded.

In addition, the FCA recognises that the arrangement may have information which flows through multiple parties. Therefore, all parties will need to be engaged, in order to ensure that full disclosure of the costs involved in the investment is made to the Governance Committee.


United Kingdom

For example, if an insurer uses a third party fund or funds manager, who then buys the funds of another investment manager, it is essential that information flows between the various parties in a comprehensible manner and reaches the relevant governance body.

The FCA also sets out the proposed treatment for other costs incurred by pension schemes. Such costs can be incurred through members contributing to or leaving the scheme, members switching, trustees or providers switching or investment decisions being taken by investment managers.

The FCA proposes that the calculation of costs should be at an arrangement level and that there is look-through across all funds, to ensure consistency when amalgamating and presenting information.

Consultation closed on 4 January 2017 and the policy statement is expected in Q2 2017. The new disclosure requirement is expected to come into force in 2018.


United Kingdom

FCA Asset Manager Study Interim ReportOn 18 November 2016, the FCA published the interim results from its study into the asset manager sector (MS15/2.2).

In summary, the FCA findings suggest there is weak price competition in a number of areas of the asset management industry. This has had a material impact on the investment returns of investors paying for asset management services.

The FCA has a range of evidence underpinning this finding relating to: how asset managers compete, investor behaviour and the role of intermediaries in helping investors to choose products. The FCA highlighted the following:

• There is limited price competition for actively managed funds, meaning investors often pay high charges but the FCA does not believe these costs are justified by higher returns.

• There is stronger competition on pricing for passively managed funds, though there were some examples of poor value for money in this sector.

• Fund objectives are not always clear and performance is not always reported against an appropriate benchmark.

• Despite a large number of firms operating in the market, the asset management sector, as a whole, has enjoyed sustained, high profits over a number of years with significant price clustering.

• Investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny.

In the paper, the FCA sets out interim proposals as remedies to the findings:

• A strengthened duty on asset managers to act in the best interests of investors, including reforms that will hold asset managers accountable for how they deliver value for money and introduce independence on fund oversight committees. The FCA explores options – one of which is to place greater duties on trustees and depositaries in assessing whether the fund manager is delivering value for money, rather than altering asset fund management (AFM) governance structures.

• Introducing an all-in fee approach to quoting charges, so that investors in funds can easily see what is being taken from the fund.

• Helping retail investors identify the best fund for them by:

– Requiring asset managers to be clear about the objectives of the fund and report against these on an ongoing basis

– Clarifying and strengthening the appropriate use of benchmarks

– Providing tools for investors to identify persistent underperformance.


United Kingdom

• Making it easier for retail investors to move into better value share classes.

• Requiring clearer communication of fund charges and their impact at the point of sale and in communications to retail investors.

• Requiring increased transparency and standardisation of the information on costs and charges for institutional investors.

• Exploring, with government, the potential benefits of greater pooling of pension scheme assets.

• Requiring greater and clearer disclosure of fiduciary management fees and performance.

• Consulting on whether to make a market investigation reference to the Competition and Markets Authority (CMA) on the institutional investment advice market.

• Recommending that Her Majesty’s Treasury (HM Treasury) also considers bringing the provision of institutional investment advice within the FCA’s regulatory perimeter.

The FCA is seeking views on its interim findings. The consultation closed on 20 February 2017.


United Kingdom

Regulatory Reporting: Retirement Income DataIn November 2016, the FCA issued a consultation paper CP16/36 on the regulatory reporting of retirement income.

Following the advent of pension freedoms within the UK in April 2015, the FCA has been monitoring market developments, as pension providers evolve their product offerings, in light of the abolition of the previously mandatory requirement for an annuity upon retirement. The FCA stated they have been collecting retirement income data from a representative sample of pension providers, on a quarterly basis.

The FCA sets forward proposals to expand analysis and is creating two new regulatory returns (REP015 – Retirement income flow data and REP016 – Retirement income stock data and withdrawals flow data return) to collect retirement income data which will replace the current ad hoc returns process.

This is designed to advance FCA’s operational objectives, particularly the protection of consumers, and to promote effective competition in the interest of consumers. The data will enable the FCA to:

• Monitor market trends and track consumer behaviour

• Provide supervision with information about individual firms, including: their market share of pensions and retirement income back book; and how many retirement products they are selling, to what types of consumer and through what channels

• Target regulatory interventions by identifying and monitoring risks to consumers in the retirement income market

• Identify what products are growing quickly and may require greater attention

• Track indicators, such as switching by consumers, to understand how competition is working in the market

• Inform business plan priorities around pensions.

The consultation was open until 24 February 2017. The policy statement and final rules are expected in spring 2017. The new regulatory reporting is expected to cover six months of data from 1 April 2018 to 30 September 2018 and a 12-month return to cover 1 April 2018 to 31 March 2019.


AbbreviationsABi Italian Banking Association (Associazione Bancaria Italiana)ACPR Prudential Supervisory and Resolution Authority

(Autorité de contrôle prudentiel et de résolution)AFA French Anti-Corruption Agency (Agence Française Anticorruption)AFM Asset Fund ManagementAiF Alternative Investment FundAiFM Alternative Investment Fund ManagerAiFMD Alternative Investment Fund Managers DirectiveAMF Financial Market Authority (Autorité des Marchés Financiers)AML Anti-Money LaunderingAMLD iV Fourth Anti-Money Laundering DirectiveAPMs Alternative Performance MeasuresASiC Australian Securities and Investment CommitteeAssogestioni Italian Investment Management Association

(Associazione Italiana del Risparmio Gestito)BaFin German Federal Financial Supervisory Authority

(Bundesanstalt für Finanzdienstleistungsaufsicht)BCBS Basel Committee on Banking Supervision BRRD Bank Recovery and Resolution DirectiveCASS Client Assets SourcebookCBi Central Bank of IrelandCCP Central CounterpartyCFL Consolidated Financial Law (also known in Italy as

Testo Unico della Finanza TUF)CFT Combating the Financing of TerrorismCFTC US Commodity Futures Trading CommissionCMA Competition and Markets AuthorityCMU Capital Markets UnionCNAV Constant Net Asset ValueCOLL Collective Investment Scheme SourcebookCONSOB Italian Securities and Exchange Commission

(Commissione Nazionale per le Società e la Borsa)COREPER ii Committee of Permanent RepresentativesCP Consultation PaperCP 86 Consultation Paper on Fund Management Company EffectivenessCP 97 Consultation Paper on Investment Firms Regulations 2015CRD iV Fourth Capital Requirements DirectiveCRR Capital Requirements RegulationCSD Central Securities DepositoryCSDR Central Securities Depository RegulationCSMAD Directive on Criminal Sanctions for Market Abuse


CSSF Supervisory Authority of the Luxembourg Financial Sector (Commission de Surveillance du Secteur Financier)

DAs Delegated ActsDG JUST Directorate General for Justice and Consumer ProtectionDLgs Italian Legislative Decree (Decreto Legislativo)DM Italian Ministerial Decree (Decreto Ministeriale)DP Discussion PaperDPAs Deferred Prosecution AgreementsDPs Designated PersonsEBA European Banking AuthorityECB European Central BankECOFiN Economic and Financial Affairs CouncilECON European Committee on Economic and Monetary AffairsEDiS European Deposit Insurance SchemeEEA European Economic AreaEiOPA European Insurance and Occupational Pensions AuthorityELTiF European Long-term Investment Fund RegulationEMiR European Market Infrastructure RegulationEP European ParliamentESAs European Supervisory Authorities

(comprised of EBA, ESMA and EIOPA)ESMA European Securities and Markets AuthorityESRB European Systematic Risk BoardEU European UnionEuVECA European Venture Capital FundsEV Economic ValueFAQs Frequently Asked QuestionsFATCA Foreign Account Tax Compliance ActFCA Financial Conduct AuthorityFCP Common Fund (Fond Commun de Placement)FMi Financial Market InfrastructuresFRL The Luxembourg Resolution Fund (Fonds de résolution Luxembourg)FRTB Fundamental Review of the Trading BookFSP Fund Service ProviderFTT Financial Transaction TaxFX Foreign ExchangeGDPR General Data Protection RegulationGFSC Guernsey Financial Services CommissionHFT High Frequency TradingHMT Her Majesty’s TreasuryiCAAP Internal Capital Adequacy Assessment ProcessiFRS International Financial Reporting StandardsiGC Independent Governance Committees


iMR Investor Money RegulationsinvMaRisk BaFin Circular 5/2010 (WA) on Minimum Requirements

for Risk Management of Investment CompaniesiORP Institutions for Occupational Retirement ProvisioniOSCO International Organization of Securities CommissionsiRRBB Interest Rate in the Banking BookiTS Implementing Technical StandardsKAGB German Investment CodeKaMaRisk BaFin Circular 1/2017 (WA): Minimum Requirements for

Risk Management of Capital Management CompaniesKiD Key Information DocumentKiiD Key Investor Information DocumentKWG German Banking Act (Kreditwesengesetz)L-QiAiFs Loan Originating Qualifying Investor Alternative Investment FundsLiBOR London Interbank Offered RateLR Leverage RatioLVNAV Low-Volatility Net Asset ValueMAD Market Abuse DirectiveMAR Market Abuse RegulationMEP Member of the European ParliamentMiFiD Markets in Financial Instruments DirectiveMiFiR Markets in Financial Instruments RegulationMLP Manager-Led ProductMMF Money Market FundMMFR Money Market Fund RegulationMMFs Money Market FundsMOPS Multi-Option ProductsMoU Memorandum of UnderstandingMREL Minimum Requirements for own Funds and Eligible LiabilitiesMTF Multilateral Trading FacilityNAV Net Asset ValueNCA National Competent AuthorityNFC Non-Financial CounterpartiesNii Net Interest IncomeNiS Network and Information SecurityNPL Non-Performing LoansNPPR National Private Placement RegimesNSFR Net Stable Funding RatioO&Ds Options and DiscretionsOECD Organisation for Economic Co-operation and DevelopmentOiCR Undertakings for Collective Investment in Transferable Securities

(Organismo di Investimento Collettivo in Valori Mobiliari)OJ Official Journal


OPCVM Mutual Funds (Organisme de Placements Collectif en Valeurs Mobilières)

OTC Over-the-CounterOTF Organised Trading FacilityPD Prospectus DirectivePiE Public Interest EntitiesPiR Tax Exempt Investment Plans for Individual Retail Investors

(Piani individuali di Risparmio)PMS Participating Member StatesPOi Protection of InvestorsPRiiPs Packaged Retail and Insurance-Based Investment ProductsPRiSM Probability Risk and Impact SystemRAiF Reserved Alternative Investment FundRCS Register of Commerce and Companies

(Registre de Commerce et des Sociétés)RESA Electronic platform of central publication on companies and

associations (Recueil Electronique des Sociétés et Associations)RM Regulated MarketRTGS Real-Time Gross SettlementRTS Regulatory Technical StandardSA Public Limited Company (Société Anonyme)SAPiN ii A French Law on transparency, the fight against

corruption and the modernisation of the economySARL Private Limited Company (Société à Responsabilité Limitée)SCA Partnership Limited by Shares (Société en Commandite par Actions)SCS Luxembourg Limited Partnerships (Société en Commandite Simple)SCSp Luxembourg Special Limited Partnerships

(Société en Commandite Simple Spéciale)SFT Securities Financing TransactionsSFTR Securities Financing Transactions RegulationSi System InternaliserSiiL Système d’indemnisation des investisseurs LuxembourgSiCAF Fixed Capital Investment Company

(Société d’Investissement à Capital Fixe)SiCAV Variable Capital Investment Company

(Société d’Investissement à Capital Variable, SICAV or SICAF)SiF Specialised Investment FundSiPS Systematically Important Payment SystemSPVs Special Purpose VehiclesSREP Supervisory Review and Evaluation ProcessSRF Single Resolution FundSRi Summary Risk IndicatorsSRMR Single Resolution Mechanism Regulation


SSM Single Supervisory MechanismSTS Simple, Transparent and StandardisedSYSC Senior management arrangements, Systems and ControlsT2S TARGET2-SecuritiesTLAC Total Loss Absorbing CapacityTUF Testo Unico della Finanza (Consolidated Financial Law)UCiTS Undertakings for Collective Investment in Transferable Securities


European Regulatory Timeline

2015/Q1 2016/Q1 2017/Q1 2018/Q1Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q4 Q2 Q3 Q42019/Q1

Publication in Official Journal

Text published in Official Journal

Political agreement on Level 1 text reached

Application date

Level 2 rules on settlement internalisation and CSD requirementsLevel 2 rules on prudential requirements for CSDs

Level 2 rules on settlement discipline Estimated application date forsettlement discipline rules

Application date extended to Jan 2019

Level 2 technical standardspublished

Level 2 technical advicepublished

Application date

Application date

Political agreement onLevel 1 text reached

Political agreement on Level 1 text

Application date

Target date for agreement for Participating Member States

Estimated earliest application date if agreement is possible

Estimated application dateQ1 2019

Application date

Level 2 technical standards published

Application date

Delegated Acts and RTS publishedMember Statetransposition date

Compromise Level 1agreement reached

Application date TBC

Consultation on draft rules on Key Information Document

Final Level 2 rules on the Key Information Document


Political agreement on Level 1text reached

Estimated application date for reporting requirements

Application date for rules on reuse

Application date for transparency requirements

Discussion paper on draft Level 2 rules

Estimated application date

Political agreement onLevel 1 text

Level 2 rules on depository tasks and duties

Application date for Level 2 requirements

Application date for Level 1 requirements


AMLD IV

IORP II

MiFID II/MIFIR

MMFs

PRIIPs

SFTR

Shareholders Rights Directive

UCITS V

FTT

ELTIFs

Data Protection

CSMAD/MAR

CSD

Benchmarks

Completed milestones

Future milestones

Application date


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This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that State Street believes or anticipates will or may occur in the future are forward-looking statements. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street’s express written consent.

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EuropeSven Kasper +44 20 3395 3723 [email protected]

Francis Wood +44 20 3395 3437 [email protected]

Channel IslandsRussell Turner +44 1534 609508 [email protected]

FranceTanneguy Cazin +44 203 395 2434 [email protected]

Angdy Ma +33 44 45 43 37 [email protected]

GermanyInes Cieslok +49 69 667745 104 [email protected]

IrelandMary McCarthy +353 1 776 8411 [email protected]

Simon Firbank +353 1 776 8726 [email protected]

ItalyAlberta Castoldi +39 02 3211 7135 [email protected]

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Angdy Ma +352 464 010 213 [email protected]

United KingdomJeanette Harper +44 131 315 5186 [email protected]

Tom Pool +44 20 3395 3587 [email protected]

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Regulatory Insights No. 11 - State Street Corporation...2017/01/17 · the regulatory side of things has been pretty active too. Agreements were reached on important files such as