2020 Vision: 10 Concerns for European firms over the coming months

Author

Martin Lovick, Ruth Avenell, Matthew Chapman

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Article

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  • Compliance

At our recent event, Regulatory Horizon 2020 | The Challenges Ahead, professionals from across the global investment management community came together to examine a wide range of regulatory compliance, technology, and cyber challenges set to impact firms in 2020 and beyond. We capture below the top ten concerns for European firms identified during the conference.


At the time, no-one was aware that we were on the brink of a global pandemic that would bring a completely new set of threats and challenges. So our summary of concerns did not include the risks resulting from the Covid-19 pandemic (please visit our resource page on this topic ). This checklist remains relevant for firms prepared to look through the crisis to the eventual recovery ahead.  

1.    “Dear CEO” letters 

The FCA issued several letters  – of most relevance to the audience were the ones directed at asset management and alternatives communities. The FCA has distinct but related concerns for those sectors and it is useful to be aware of both letters as they are illustrative of the regulator’s areas of focus. The letters are a sure sign that the regulator intends to engage more closely with the industry. It would be a good idea to discuss the letters at the board level, and document that this was done. Items raised in the asset management and alternatives letters include:

  • Market abuse – The FCA is potentially planning to follow up its 2018 market abuse survey with another such exercise. Firms should make sure their risk assessments and controls are up-to-date, controls are monitored, and that compliance teams are taking a more holistic approach to market abuse.
  • Market integrity and disruption – The FCA says that it might undertake in-depth work into firms’ investment strategies, and particularly those it perceives as “high risk.”
  • Financial crime – The FCA wants to be sure that policies and controls are properly embedded for compliance with the EU’s 5th Anti-Money Laundering Directive  as well as anti-bribery and anti-corruption requirements.
  • LIBOR – The FCA is already speaking to firms about what their plans are around the transition to a new risk-free rate – it’s important for firms to have a strategy in place to manage this transition.
  • Governance – The FCA makes clear the importance it places on effective and robust governance at regulated firms, Senior Managers & Certification Regime (SM&CR) is clearly a large part of their expectations in this area but it extends beyond the requirements of that particular regime.

2.    SM&CR

The December 2019 deadline was not the end, but rather the beginning. Thus, firms need to include testing into their annual review processes this year, and then ensure that it is completed each year after that. Firms also need to be sure that processes around individuals joining and leaving the firm align with the new obligations of SM&CR.

3.    Brexit

The UK has entered the 11-month Brexit implementation period, and it’s not yet known what kind of agreement, if any, will be in place with the EU at the end of 2020. The regulator is asking firms to contemplate a range of outcomes and prepare contingency plans based on those scenarios. Firms should keep an eye on the Temporary Permissions Regime (TPR) -like schemes now being put in place by individual national regulators.

4.    Efficiency within compliance teams

Even before remote working became a reality, CCOs and their teams were already thinking about the use of technology to automate certain compliance tasks – thus lowering costs, increasing efficiency, and freeing up compliance personnel for strategic, value-added work.

5.    Operational resilience

As part of operational resilience  preparation, firms must think holistically about their organisational structure, including related entities. When firms grow quickly, complexity multiplies, often leading to unanticipated problems. Firms should always be looking for ways to simplify and streamline.

6.    European Markets Infrastructure Regulation (EMIR)  

In March ESMA published a consultation paper relating to transaction reporting under EMIR. The proposals add some welcome structure around how the reporting exemption for certain market counterparties (NFC-s) might work in practice. The consultation also highlights a range of concerns, not least in respect of firms who delegate reporting without appropriate oversight. The completeness and accuracy of reporting is likely to come under renewed scrutiny in the back half of this year and into 2021, and so firms should consider revisiting their reporting and monitoring arrangements to ensure that any problems are identified sooner rather than later.     

7.    SFTR

In early February, ESMA confirmed that non-EU alternative investment funds are not in scope for STFR. Firms in scope should reach out to any third parties they are relying on to meet their upcoming SFTR requirements, to be sure this reporting will be completed to the standard required. Firms should not assume that their third parties will report on their behalf.

On 26 March 2020, as a response to Covid-19, ESMA announced that it would be postponing commencement of the SFTR reporting obligations for credit institutions and investment firms to 13 July 2020 (from 13 April 2020). 

8.    Investment Firms Directive

June 2021 is the implementation deadline for this EU rule, which focuses on prudential regulatory capital and remuneration. The biggest impact will be felt by advisory (exempt-CAD) firms, which will most likely see an increase in their regulatory capital and subject to (for the first time) obligations with regard to the qualitative assessment of prudential risk . Firms should begin to look now at how this directive, and its FCA transposition, will impact their prudential capital and business strategy. An FCA consultation paper that is due shortly will tell us more.

9.    GABRIEL reporting 

The importance of accurate and timely returns should not be underestimated and has been the subject of “Dear CEO” letters from the FCA in the recent past. When things go wrong with GABRIEL returns, the regulator will pick up the phone to the firm, so errors can bring unwanted regulatory attention.

10.    ESG and Sustainable Finance

A revised Stewardship Code and the EU’s Shareholder Rights Directive II have brought fresh challenges for asset management firms. Now coming up fast are the new obligations of the EU Disclosure Regulation, in force from March 2021. More significant though, even than these new standards, are the demands of investors and allocators, thus forcing many managers to engage with ESG issues for the first time.

In short, buy-side firms were already facing many new and complex challenges in 2020 even before the dire consequences of the Covid-19 pandemic. Compliance teams are being forced to think more strategically about their approach going forward – how they can bring together the right talent, technology, and resources to meet requirements and support their organisation’s overall business goals. Business as usual will never be the same again.

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