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Private Bank Briefing March 2021 PRIVATE BANK PRIVATE Issues Impacting the Private Bank Sector BRIEFING Welcome to our quarterly roundup of legal and compliance issues impacting private banks and their clients. In This Edition p2 | MiFID II: Latest Developments p14 | LIBOR: FCA Confirms Dates for Cessation of LIBOR Benchmarks p4 | Brexit: Update p15 | Diversity: Why the FCA Cares About Diversity p4 | PRA Policy Statement on CRD V (PS26/20) and Inclusion p5 | PRA Letter to iNEDs on Issues and Risks for FCA Guidance for Firms on the Fair Treatment of Boards p16 | Vulnerable Customers p5 | PRA Fees and Levies: Holding Company Kalifa Review Regulatory Transaction Fees p17 | p17 | BMR: Regulation Amending BMR to Address p6 | SSR: Notification Thresholds Benchmark Cessation Risks and Exempt Certain p6 | ESMA Guidelines on Outsourcing to Cloud Service Third-Country FX Benchmarks Providers p18 | Lessons from Enforcement: Breaching Principle p7 | Asset Protection: Government Response to 11 — The implications of the FCA’s Final Notice to Consultation on Expanding the Dormant Assets Charles Schwab UK Scheme p19 | TechTrends: The Woolard Review — A Review of p7 | SMCR: PRA Report on the Evaluation of the Change and Innovation in the Unsecured Credit SMCR Market p8 | COVID-19: PRA and FCA Update Statement for p20 | Global Insights: Hong Kong Dual-Regulated Firms on SMCR p22 | What to Look Out for in Q2 2021 p9 | COVID-19: FCA Newsletter Market Watch 66 p10 | Sustainable Finance Update p13 | PRIIPS: Agreement on Changes to the PRIIPs KID firms to “carefully consider” the requirements, and that the framework The FCA’s review serves as a helpful framework against which MiFID II: Latest Developments they provide is “important in ensuring that firms act in the best interests asset managers can review their product governance policies and of the investors in their funds”. procedures, particularly given the FCA’s comments that it expects firms ESMA reminds firms on rules of reverse solicitation will be made of the relevant parameters based on the characteristics of for whom the product governance requirements are optional to ensure In a statement published on 13 January 2021, ESMA reminded firms the shares to apply from their first day of trading. These estimates will The FCA believes there is “significant scope” that they take them into consideration in any event. then be updated after six weeks based on data from the first four weeks not established or situated in the EU of the MiFID II requirements on the Notably, the FCA’s review was limited to asset managers offering of trading in the UK. for asset managers to improve their product provision of investment services to retail or professional clients. UK-authorised collective investment schemes that were available to ESMA is concerned that since the end of the Brexit transition period, The same logic will apply for tick sizes, with an initial estimate governance arrangements. retail investors (i.e., not professional clients or eligible counterparties) some “questionable practices” by firms around reverse solicitation updated after six weeks by a calculation based on data from the first through platforms on both an advised and execution-only basis. have emerged. ESMA highlighted that some firms appear to be trying four weeks of trading in the UK. These figures may result in different Key findings This means that the population of firms reviewed were less able to to avoid the MiFID II requirements by inserting general clauses in their tick sizes than currently apply for trading of these instruments on The FCA’s observations include: rely on the principle of proportionality that is built into the product terms of business or by using online pop-up “I agree” boxes where exchanges in Switzerland. UK trading venues will be allowed to use the governance rules. This is because, broadly, the proportionality principle Negative target market: One aspect of the target market assessment minimum tick size that applies in Switzerland if that tick size is smaller requires firms to implement the product governance rules in a way clients state that any transaction is executed at the client’s by asset managers is to consider whether, in addition to setting a than the minimum tick size based on the average daily number of that is proportionate to the complexity and risk of the product and the own initiative. positive target market for the product (i.e., who the product is designed transactions that the FCA publishes through its Financial Instruments sophistication of the client (which tracks their client categorisation under for and why), firms are able (but not required) to also set a negative Transparency System. UK MiFID II). It remains to be seen what the FCA’s views will be in ESMA is concerned that since the end of the target market (i.e., anyone for whom the product is not suitable). The relation to compliance with the product governance rules in a context in ESMA working paper on MiFID II research unbundling FCA observed that only one manager had set a negative target market, Brexit transition period, some “questionable which proportionality can be relied on to a greater extent — such as, for ESMA has published a working paper analysing the impact of the and that it conflicted with other aspects of the positive target market example, the sale of vanilla shares to professional clients in a wholesale practices” by firms around reverse solicitation MiFID II research unbundling provisions on EU sell-side research, assessment. Firms are encouraged to ensure that they consider markets context. Firms should monitor for any updates to the product following their application on 3 January 2018. Concerns had been whether the risk/reward profile is consistent with the target market and have emerged. governance rules (including whether any such changes apply only to raised that the rules could have had detrimental effects, particularly on that any negative target market they do set properly interacts with the certain products/manufacturers, such as collective investment schemes SMEs, on the availability and quality of research on EU companies, and positive target market assessment. ESMA reminds firms that where a third-country firm (i.e. UK firm) and managers, or apply more broadly). on company financing conditions. Conflicts of interest: The review found that whilst all firms had a solicits clients or potential clients in the EU or promotes investment Suspension of the RTS 27 best execution reporting obligations services, it would not be considered as a service provided at the In summary, ESMA did not find material evidence of these detrimental conflicts management framework, not all were effective. The FCA Investment firms are temporarily no longer required to publish quarterly client’s own initiative. ESMA confirms that this is the case regardless effects and concluded that the MiFID II research unbundling provisions reiterated that, as product governance rules are outcomes-focused, best execution reports. The European Commission has confirmed that of any contractual clause or disclaimer purporting to state otherwise have neither improved nor worsened the situation. having a framework in place without ultimately ensuring that the legislative aim of the MiFID II Quick Fix Directive is to suspend the and regardless of the person through whom the solicitation or conflicts either do not arise or are properly managed does not meet ESMA confirmed that the research unbundling rules may further evolve quarterly RTS 27 best execution reporting obligations for two years promotion is issued. ESMA also reminds firms that clients or potential its expectations. in the future. as of the day following the entry into force of the MiFID II Quick Fix clients can be solicited by all types of communication, including press Scenario and stress testing: Product governance rules require firms Directive. Therefore, the suspension of the quarterly best execution releases, advertising on the internet, brochures, phone calls, or ESMA concluded that the MiFID II research to perform scenario analysis to assess the risk of poor outcomes to reports commenced on 27 February 2021 and will apply for two years. face-to-face meetings. clients and the circumstances in which they may occur. Managers may unbundling provisions have neither improved Unlike a normal directive, the MiFID II Quick Fix Directive, and more ESMA highlights that: already be required to perform stress testing under, for example, UCITS specifically the provision suspending the best execution reporting or Packaged Retail and Insurance-based Investment Products (PRIIPs), • The provision of investment services in the EU without proper nor worsened the situation. obligations, was designed to have direct effect and therefore suspends and the FCA’s sample found that all managers were performing some authorisation exposes service providers to the risk of administrative RTS 27 reports immediately. scenario analysis and/or stress testing. However, the FCA noted a or criminal proceedings FCA MiFID II product governance review varied approach and reiterated that a key aspect of product governance On 26 February 2021, the FCA published a webpage setting out a • When using the services of investment service providers which are scenario analysis is to assess the product in volatile market conditions Unlike a normal directive, the MiFID II Quick Fix review of eight asset management firms’ implementation of the UK not properly authorised in accordance with EU and Member States’ and scenarios that may affect how
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