Our Global Head of Compliance Solutions, Hari Bhambra, highlights some of the key regulatory developments around the world during the first quarter of the year.
In our recent webinar, Hari identified:
There were several regulatory developments around the world during the first quarter, as financial markets started recovering from the COVID-19 pandemic. While the impact of the coronavirus has begun to abate in many geographies, there have been several new initiatives implemented to tackle the challenges raised by the events of last year.
Below, we highlight some of the most relevant regulatory and compliance issues for the investment industry.
Starting in the US, there were several initiatives including the amendment of investment adviser marketing rules by the Securities and Exchange Commission (SEC) covering indirect and direct communications of securities in a private fund.
Broker-dealers were reminded to enhance anti-money laundering (AML) policies and procedures, including the reporting of suspicious activity reports, identifying flags and undertaking appropriate due diligence on suspicions.
The Financial Crimes Enforcement Network (FinCEN) highlighted the implementation of a framework for ultimate beneficial owner (UBO) data collection and the use of FinCEN identifiers for ongoing reporting of UBOs under the Corporate Transparency Act, seen as bringing the US into line with other jurisdictions.
The Cayman Islands were added to the Financial Action Task Force greylist, warranting increased monitoring and a plan of action that includes applying dissuasive sanctions including imposition of sanction for persons not filing accurate or adequate UBO information. Cayman Islands authorities will also have to demonstrate that all types of money laundering are prosecuted.
The Dubai International Finance Centre launched an incentivised venture capital regime, similar to those seen in other jurisdictions, including no regulatory capital requirements and minimum personnel.
The Dubai Financial Services Authority also updated firms on suitability expectations in the provision of financial advice and discretionary investment management services, supported by adequate record-keeping and evidence of alignment with a client’s preference and profile. This is seen as a reflection of similar changes across Europe (such as MiFID appropriateness considerations) and the implications of suitability assessments via the use of digital platforms.
In the Abu Dhabi Global Markets (ADGM), new data protection regulations modelled on the EU’s GDPR have been launched, overseen by an independent office of data protection and a data protection commissioner. Separately, the authority introduced requirements for Corporate Service providers (CSPs) including ‘fit and proper’ standards for company service providers (CSPs), including requirements for adequate UBO practices and look-through of any entities they oversee. ADGM also now requires non-exempt entities to appoint a registered CSP.
In Asia, the Monetary Authority of Singapore (MAS) issued several consultations, including Basel III reforms on credit risk capital and the ‘output floor’ – which seek to reduce inconsistency in risk-weighted assets (RWAs) not justified by risk fundamentals – and improve comparability of bank capital ratios. The regulator is also consulting on revisions to enterprise risk management, investment risk management, and public disclosure practices for insurers to align them with international standards and prevent vulnerabilities from developing into systemic risk.
MAS has also issued enhancements to combat cybersecurity risks due to the prolonged remote working environment, focusing on issues such as IT security, regulatory compliance and staff oversight.
Hong Kong and Thai regulatory authorities have entered into a memorandum of understanding for public funds to be distributed into each other’s markets, facilitating capital market flows. Meanwhile, the Securities & Futures Commission of Hong Kong launched a consultation on a proposed code of conduct for book building and placement in equity and debt capital markets in response to IOSCO feedback on increased conflict of interest in intermediaries’ conduct.
Finally, in Australia, authorities are making enhancements to AML and counter-terrorism financing rules that will take effect from June, relating to customer identification and verification undertaken by third parties.
UK & Europe
The European Securities & Markets Authority’s (ESMA) 2021 work plan included, among other matters, a proposed review of ESG and sustainable finance, alignment across supervisory bodies to facilitate convergence in approaches. It also plans to look at financial innovation through the EU FinTech Action Plan and a single rulebook programme, including legislative reviews of MiFID II and AIFMD. Furthermore, ESMA will be looking at the Covid-19 recovery in markets and post-UK transition to maintain investor protection and ensure the orderly functioning of markets and financial stability.
The regulator has also published a common supervisory plan for UCITs liquidity risk management, including enhancements such as pre-investment liquidity analysis. Additionally, it has published a review to simplify reporting regimes and enhanced transparency, particularly for non-equity instruments.
Consultations launched during the first quarter included into MiFID II appropriateness and execution-only requirements including to what extent, sustainability risks should be included in such appropriateness assessments. Authorities are also looking into marketing communications guidelines for cross-border distribution of funds also with consideration of sustainability-related disclosures.
Meanwhile, the Irish authorities amended the Investment Limited Partnership, a vehicle that can accommodate open- and closed-ended structures, umbrella structures, and segregated sub-funds, whilst benefiting from tax incentives particularly aligned to private equity Additionally, with the appointment of an AIFM, the structure can enable access into Europe through passporting rights, which is particularly important post-Brexit.
In the UK, the Financial Conduct Authority (FCA) reviewed technological change across the financial services industry in light of working from home since the onset of the pandemic and the opportunities or difficulties posed by the move towards greater technological development and alignment. The regulator is also currently consulting on a new prudential regime for UK investment firms to replace the multiple categories with two broad categories – ‘small, non-interconnected’ or not – taking into account capital and liquidity requirements. Finally, the FCA will also look into the strengthening of investor protection in SPACs (special purpose acquisition companies) given their growing popularity over the past year and will be consulting on this in Q2.
There were several ESG developments, particularly following the change of administration in the US. Both the Federal Reserve and SEC announced they would be examining climate change-related risks (both physical and transition), ESG disclosure and investor protection through several new committees and task forces.
The EU implemented the long-awaited Sustainable Finance Disclosure Regulation (SFDR) on March 10, which has resulted in enhanced disclosure in key contracts, offer documents and prospectuses. A final draft regulatory technical standard on SFDR template disclosures will give investors enhanced and harmonised information.
In Singapore, environmental risk guidelines for asset managers have been issued, including recommendations for governance and senior management to develop their knowledge in this area, as well as stewardship obligations.
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