10 June 2022
In this issue
- RegData: Investment Firm Groups and Group Capital Test Exemption and MIF006
- ICARA
- Authorised funds with respect to the Russian invasion of Ukraine
- Crypto assets and the FCA
- Money Market Fund Resilience
- FCA Fees and Levies
- Research rules for Collective Portfolio Managers
RegData
Firms will now have undergone their first reporting under IFPR and MIFIDPRU. We have seen a number of queries with respect to group reporting, which firms have struggled with in the first quarter.
Investment Firm Groups
Firstly as a recap, as a result of IFPR a lot more firms are now in the scope of both solo and consolidated investment firm group reporting. This means they have to do two sets of returns each quarter on RegData: one for the individual firm and another for the investment firm group.
If the group is sufficiently simple, then it may qualify for the Group Capital Test (GCT) exemption. Firms with the GCT exemption don’t have to report on the group, and instead complete a MIF006 form confirming they still meet the GCT criteria each quarter. This is much simpler.
The FCA have said that firms which made the application prior to 31 January 2022 can automatically apply the GCT, however we have noted that the FCA has not updated RegData for some of these firms.
If this is the case firms should contact the FCA and explain that they made the GCT application before the deadline and that the group reports should be removed from RegData and replaced with a MIF006.
Group Capital Test Exemption and MIF006
On the topic of the MIF006 form, one of the fields it asks for is the firm reference number (or LEI) of the parent company. As a lot of firms have a non-trading holding company as the parent, by definition it won’t have a FRN. Most companies won’t have applied for a LEI number either as won’t have been required to.
If there’s no LEI or FRN, the MIF006 form can’t be completed. This issue also applies to other firms in the investment firm group which are unregulated.
The FCA have been pretty silent on this, but we understand that they will be contacting firms to tell them how to register the parent and obtain an FRN (even in circumstances where the parent is not undertaking any regulated activity).
We also understand that the parent firm will receive its own RegData login to complete the MIF006, although there appears to be some uncertainty even within the FCA about this point.
Firms which have not been contacted by the FCA about obtaining a FRN for the parent should contact them to ensure it is in hand.
ICARA
As a reminder, firms which are in scope for the new ICARA document will need to have this underway. It was up to firms to choose their deadline date for completion of the ICARA and most went for a date towards the end of 2022.
There is no requirement to send it to the FCA, but it forms an important part of the capital adequacy calculation as it derives any additional Pillar 2 capital which the firm (or group) needs to hold.
Authorised funds with respect to the Russian invasion of Ukraine
The Russo-Ukraine conflict is first and foremost a humanitarian tragedy and our thoughts are with all those affected.
Financial markets have been impacted in a number of ways as a result of the invasion. International sanctions, increased commodity prices and an increase in global systemic risk have all contributed to market turbulence. There are however specific assets which may be held by UK authorised investment funds where the normal mechanisms for determining price have stopped operating.
These include:
- Equities and fixed income securities issued by governments and corporates in Russia, Ukraine and Belarus.
- Assets traded on stock exchanges which are backed by the such securities.
- Securities issued by companies whose operations are particularly affected by the current situation.
- Units in other collective investment schemes that have suspended dealings due to exposure to such assets.
The FCA has proposed in consultation paper CP22/08: Protecting investors in authorised funds following the Russian invasion of Ukraine that funds which are affected create a ‘side pocket’ class of unit/share.
All affected assets would be moved into this separate class and holders at the time of the side pocket creation would receive shares in the new side pocket class. This has the effect of segregating the harder to price assets with the rest of the fund.
Crypto assets and the FCA
The FCA has already dipped its toe in the water with crypto assets with certain firms requiring to register with the FCA for AML oversight.
The FCA has defined two types of token which fall in scope of regulation (and therefore would require a firm to be authorised).
- Security tokens: These are tokens that amount to a ‘Specified Investment’ under the Regulated Activities Order (RAO), excluding e-money. Thet may provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. They may also be transferable securities or other financial instrument under the EU’s Markets in Financial Instruments Directive II (MiFID II). These tokens are likely to be inside the FCA’s regulatory perimeter.
- E-money tokens: These are tokens that meet the definition of e-money under the Electronic Money Regulations (EMRs). These tokens fall within regulation.
Unregulated tokens are any tokens not falling within scope of the above. This includes ‘payment’ tokens such as Bitcoin, and Litecoin. For now then the majority of crypto assets are outside the scope of the FCA’s remit, but we would expect long term for these to be more closely monitored/regulated.
Money Market Fund Resilience
Money Market Funds (MMFs) are a type of open-ended investment fund, which offer investors a short-term solution for cash management. They often provide same day liquidity, however the underlying investments of the fund may be less liquid. This creates a mismatch between the required liquidity of the fund and its ability to liquidate underlying investments.
MMFs have certain liquidity requirements to minimise this risk, however under stressed market conditions (such as in March 2020) MMFs were put under pressure. Some MMFs struggled to maintain the required liquidity levels, which increased the perceived (and actual) risk of funds being suspended. This in turn may have increased investor outflows from some MMFs
The FCA has released a discussion paper DP22/1: Resilience of Money Market Funds with some potential changes to make MMFs more resilient.
Fees and Levies 2022/23
The FCA has release CP22/7: FCA regulated fees and levies: rates proposals for 2022/23 outlining their proposals for the 2022/23 fees. The FCA froze the minimum and flat rate periodic fees for the last two years to help firms through the pandemic. They also introduced extended payment terms for firms struggling to pay fees.
The proposal is that both of these will no longer apply. Fees are anticipated to rise by around 4.9% overall.
Research rules for Collective Portfolio Managers
Proposals have been made in CP22/4: Quarterly Consultation Paper No. 35 with respect to research rules for Collective Portfolio Managers (CPMs). This includes UCITS Management companies, full scope and small UK AIFMS and income EEA AIFM branches.
Previous inducement rules aimed to improve accountability over costs passed to customers for research and execution services. The proposal is to introduce an exemption from the inducement rules for SME research below a market capitalisation of £200m. More detail can be found in the consultation paper.
CAN WE HELP?
If you would like to discuss any of these developments or have questions for our specialist Finance Services team, please do get in touch.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
Copyright © Shipleys LLP 2022
Related Resources
Financial Services Update – February 2022
Financial Services Update September 2021
Financial Services Update May 2021
