Financial Services Regulation and Compliance – Investment Firms Jul 2021


CBI issues three market related Dear CEO letters

The CBI has published its findings and expectations following an industry review of compliance with the Market Abuse Regulation (MAR). It found that improvements are required in the following areas:

  • Regulated firms must enhance trade surveillance and suspicious transaction and order reporting frameworks in order to ensure they are effective. This includes additional resourcing where needed to support the operation of those frameworks and where businesses increase in scale and complexity.
  • Issuers must implement better frameworks to ensure their public disclosures of inside information are made in a timely manner.
  • Issuers and their professional advisors must improve the quality both of insider lists and how the operation of those lists is governed. This includes writing to insiders to inform them of their MAR obligations and the consequences of committing market abuse offences.
  • Market participants must improve staff awareness of and training in MAR. In particular, training needs to be more comprehensive and specific to the risk the entity faces in the context of its business activities.​

The CBI is issuing RMPs to market participants where concerns were identified.

​The Wholesale Market Conduct Team issued three Dear CEO letters providing an overview of key findings from the CBI’s 2020 market abuse supervisory work and the CBI expectations in relation to MAR compliance standards, addressed to:​

  1. persons who transmit or execute orders
  2. issuers
  3. advisors who act on behalf of or on account of issuers


EBA issues opinion on the implementation of the IFD/IFR

On 1 July 2021 the EBA published an opinion on the implementation of the Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD), which entered into force on 26 June 2021. For most firms classification will be clear. For others the opinion provides guidance on the actions to be taken in case of uncertainty on whether investment firms should apply for an authorisation as a credit institution. This is in the absence of the delegated act establishing the methodology for the calculation of the highest threshold (the €30bn threshold), on which the EBA has currently opened a second public consultation.

In general, the EBA advises competent authorities to apply a pragmatic approach for those investment firms, where the relevant €30bn threshold for the identification​​​ of the prudential regime to be applied to the investment firm cannot be determined without the guidance provided in the EBA’s Regulatory Technical Standards (currently being consulted on). More specifically, the EBA advises supervisors not to prioritise any supervisory or enforcement action in relation to the identification of investments firms, until six months after the final methodology is in place.​​​​

ESMA launches consultation on reporting under EMIR

ESMA launched a public consultation on its draft guidelines for derivatives reporting under Regulation 648/2012 (EMIR Regulation). The consultation paper includes draft guidelines on a wide range of topics related to reporting, data quality and data access under EMIR Refit. ESMA has also published validation rules that clarify dependencies between data fields, as well as their applicability in the different use cases. This consultation runs until 30 September 2021.

ESMA publishes disclosure and investor protection guidance on SPACs

ESMA has issued a public statement on the prospectus disclosure and investor protection issues raised by special purpose acquisition companies (SPACs).

Prospectus disclosure

In view of both the complexity and the diversity of SPAC transactions, the statement sets out ESMA’s expectations as to how issuers should satisfy the specific disclosure requirements of the Prospectus Regulation to enhance the comprehensibility and comparability of SPAC prospectuses.

Investor protection

The statement highlights ESMA’s view that SPAC transactions may not be appropriate investments for all investors due to risks relating to dilution, conflicts of interests in relation to sponsors’ incentives and uncertainty as to the identification and evaluation of the target company. In addition, ESMA emphasises the importance of proper application of the MiFID II product governance rules and their role in ensuring investor protection.

ESMA and the national competent authorities will continue to monitor SPAC activity to determine if additional action is necessary to promote coordinated supervisory action aimed at preserving investor protection.

EBA publishes final draft technical standards to improve supervisory cooperation for investment firms

On 5 July 2021 the EBA published final draft RTS and ITS on cooperation and information exchange between competent authorities involved in prudential supervision of investment firms. These draft standards are part of the phase two mandates of the EBA roadmap on investment firms and aim to improve cooperation and information exchanges between supervisors and investment firms.

ESMA launches consultation on review of MAR guidelines

ESMA have launched a consultation paper on the review of its guidelines on delayed disclosure of inside information under the Market Abuse Regulation (MAR) in relation to its interaction with prudential supervision.

Issuers, under MAR, can delay the disclosure of inside information where immediate disclosure is likely to prejudice an issuer’s legitimate interest, the delay of disclosure is not likely to mislead the public, and confidentiality is ensured.

The ESMA MAR guidelines include a list of legitimate interests of issuers that are likely to be prejudiced by immediate disclosure of inside information. The purpose of this consultation is to build upon and expand these guidelines, in the context of the interaction between MAR transparency obligations vis-à-vis inside information and the prudential supervisory framework.

The consultation paper proposes to amend the current MAR guidelines by:

  • clarifying that in case of redemptions, reductions and repurchases of own funds, pending the prudential supervisor’s authorisation, the institution has a legitimate interest to delay disclosure of inside information until authorisation is granted
  • clarifying that in case of draft supervisory review and evaluation process (SREP) decisions and related preliminary information, the institution has a legitimate interest in delaying disclosure of inside information until that information becomes public
  • adding a separate section to clarify that Pillar 2 capital requirements and Pillar 2 capital guidance contained in the SREP under the Capital Requirements Regulation and Directive package, are likely to meet the definition of inside information under MAR and would therefore need to be disclosed as soon as possible, once final

ESMA invites all stakeholders in the banking sector as well as other market participants including trade associations and industry bodies, institutional and retail investors, consultants and academics to send their input by 27 August 2021. ESMA will consider the responses and expects to publish a final report including its amended MAR guidelines by the end of 2021.

ESMA launches consultation on MiFID remuneration requirements

ESMA have launched a consultation on guidelines on certain aspects of the MiFID II remuneration requirements. The guidelines will apply to MiFID investment firms and credit institutions providing investment services and activities, structured deposits, UCITS ManCos and external ​AIFMs when providing investment services and activities under UCITS and AIFMD. Feedback is welcome until 19 October 2021. The final report and guidelines are promised for the end of the first quarter of 2022. ​

ESMA warns firms and investors about risks arising from payment for order flow

On 13 July 2021 ESMA issued a public statement which reminds firms that the receipt payment for order flow (PFOF) raises significant investor concerns as it is unlikely that the receipt of PFOF by firms from third parties would be compatible with MiFID II. ESMA has emphasised that firms must assess whether by reviewing PFOF, they are complying with relevant MiFID II requirements such as the requirements in relation to best execution, conflicts of interest, inducements and costs transparency.

ESMA highlights areas for improvement in compliance with MiFID II suitability requirements

ESMA has published the results of the 2020 Common Supervisory Action (CSA) on MiFID II suitability requirements. The CSA was launched in February 2020 and consisted of coordinated supervisory activities across NCAs to assess the application of MiFID II suitability rules. The results highlight that firms overall comply with many of the suitability requirements that were already regulated under MiFID I. However, improvement is required in respect of some of the requirements introduced by MiFID II. Particular improvement is required in respect of the requirement to consider the cost and complexity of equivalent products, the costs and benefits of switching investments and suitability reports. Going forward, ESMA will update its guidelines on suitability in 2021/2022 and competent authorities will take follow-up actions on an individual basis where necessary.

ESMA publishes MiFID II/MiFIR annual report on RTS 2

On 28 July 2021 ESMA published the MiFID II/MiFIR Annual Review Report under the Commission Delegated Regulation 2017/583 (RTS 2). ESMA has proposed to the European Commission to move to stage three of the phase-in for the transparency requirements. This move would be for both the average daily number of trades threshold used for the quarterly liquidity assessment of bonds and for the pre-trade size specific to the instrument threshold for bonds. The objective of these proposals is to enhance and improve the currently limited pre- and post-trade transparency available to market participants in the bond market.

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