This will require relatively minor updates to firms’ CDD and EDD procedures, and UK investment firms should review areas such as the actions to be taken when it has not been possible to identify the beneficial owner, the use of electronic identity verification and the risk classification of persons based in high-risk third-countries.

New processes may also be required to notify Companies House where discrepancies in beneficial ownership exist compared to public records, and to ensure training is provided to agents, as well as employees. Please see the Greyline UK Regulatory Update for January 2020 for a more detailed analysis of the required actions, or contact us.

(transitionals end 31 Dec.)

Where fund managers and advisers have not already done so, they should consider the following questions in their Brexit contingency planning:

1. Has the firm or any of its funds or group entities registered under the UK Temporary Permissions Regime (TPR)?
2. Has the firm or any of its funds or group entities registered under the temporary permissions regime of any EU27 country? (For example, Luxembourg.)
3. Does the firm manage any EU27 funds? If so, can this continue in the event of a hard Brexit?
4. Does the firm have any EU27 managed accounts or advisory clients?
5. Does any marketing of funds take place in other EU27 countries? Will NPPR notifications need to be (re)submitted? Will this trigger any additional Annex IV reporting obligations?
6. Are marketing activities taking place on the ground in any EU27 countries? If so, will chaperoning or regulatory umbrella services be required to permit this to continue?
7. Does the group have any EU27 regulated entities? Does it require them?
8. Will the firm have to report under UK EMIR, EU27 EMIR or both? Has this been discussed with the firm’s trade repository?
9. Will the firm be subject to the UK or EU27 versions of the share and derivative trading obligations, or both? How will this impact the firm’s trading?
10. Will an EU27 GDPR representative be required to transfer personal data to or from the EU27?

Developments with respect to Brexit are being closely monitored by our Brexit Task Force.

11 October 2020 (AIFMs)

This will be similar to EMIR and MiFIR reporting and will apply to securities financing transactions. In the context of a hedge fund, this usually captures the temporary changes of ownership that take place when borrowing securities ahead of a short sale and the rehypothecation of assets that have been purchased on margin through a prime broker. A minority of such firms also engage in repos or securities lending which are also within scope of SFTR.

Firms should review their trading and activities to determine whether they are in-scope of these requirements and if so, to ensure they can identify any SFTs that are currently traded. Depending on the outcome of this exercise, they should then liaise with service providers to ensure that these trades can be reported once the reporting requirement comes into force later this year.

Member states are expected to implement 6MLD and apply it to firms by 3 December 2020. Given Brexit, it is unclear at this stage whether this will be implemented fully or partially in the UK.

It is not thought that this Directive will have a significant impact on UK investment firms, with the focus being to harmonise definitions, penalties and sanctions across the EU, and with new provisions in relation to gold, anonymous pre-paid cards and unaccompanied cash sent by cargo or post.

Greyline will keep this under review and provide additional updates as clarity emerges.

In the event that the mandatory training for senior managers and certified persons has not yet been completed, please contact us to discuss as this can be arranged on short notice.

The following actions should be completed prior to 9 December 2020, after which point the transitional relief will lapse:

Senior Managers

1. Senior managers who were grandfathered must have undergone their first annual fit and proper/competency assessment prior to 9 December 2020.

Certified Persons

1. Certified persons who were grandfathered must have undergone their first annual certification process and been issued their first certificate by 9 December 2020.
2. The details of all certified persons must also then be submitted to the FCA via Connect. These can be submitted all at once via a ‘bulk update’ at any time prior to 9 December 2020. After this date, the normal “7 business days” rule will apply. This requirement to submit still applies even where an individual has already left the firm, provided that they were certified.

The FCA have published a guide and FAQ that may assist with this process.

Other individuals subject to the Conduct Rules (i.e. non-ancillary staff)

1. Training should be provided for all such individuals on the application of the FCA Code of Conduct to their role, on or before 9 December 2020.
2. From 9 December 2020, breaches of the Conduct Rules relating to all such staff will become subject to the Conduct Rules. This means that disciplinary issues must be assessed against the Conduct Rules and breaches must be reported to the FCA in an annual filing. Breaches prior to 9 December 2020 are not reportable unless they constitute a Principle 11 issue, or they relate to a senior manager or certified person.

Other considerations

1. Firms should ensure that their compliance monitoring programme is adapted to include testing of the firm’s compliance with SMCR during 2020 and subsequent periods.
2. For example, the onboarding process of any new joiners in 2020 should be reviewed to ensure that SMCR onboarding requirements were met. Senior managers and certified persons joining during this period will not benefit from any transitional provisions that may have applied to pre-existing staff and must comply in full with SMCR from the date of joining.

For this reason, ESMA has put in place regulatory forbearance until 13 April 2021. This means in-scope firms can submit SFTR transaction reports without the LEIs for such entities without triggering validation errors or facing enforcement action. The expectation is that in-scope entities will put pressure on third-country issuers and intermediaries during this period, so that when the forbearance revoked all necessary LEIs are in place to allow reporting to take place.

It is not clear what will happen if LEIs are still not in place by that date, but this may have the effect of prohibiting in-scope EU entities from dealing with any such third-country intermediary or trading in the securities of any such third-country issuer from 13 April 2021 where no LEI has been put in place.

These changes are likely to impact any clients structured as MiFID investment firms, including Exempt CAD firms. AIFMs are less likely to be affected although the FCA may choose to gold-plate some or all of these requirements.

The new prudential regime will broadly categorised firms into three categories for prudential purposes:

• Class 1 firms are large, systemic investment firms taking principal risk (e.g. investment banks) and will continue to be treated in a similar manner as under existing banking capital regulations.
• Class 3 firms are defined as “small and non-interconnected investment firms” and are subject to simplified requirements. For discretionary managers, the most important criteria here is that AUM must be below €1.2 billion to fall into this category. Class 3 firms will in general only be subject to a Permanent Minimum Capital Requirement (PMCR) of €75,000 and a Fixed Overheads Requirement (FOR) of a quarter of their fixed overheads for the preceding year.
• Class 2 firms include any firm that does not meet the definition of a Class 1 or a Class 3, which would include any investment manager with AUM exceeding €1.2 billion. These firms will be subject to an additional set of K-Facto” requirements. For discretionary managers, the most important of these will be the K-AUM test, which will in summary apply a capital requirement of 0.02% of AUM. This will bring MiFID hedge funds in line with the existing requirements for AIFMs in this respect who are also subject to a 0.02% AUM requirement under AIFMD.

These rules may also be subject to amendments as a result of Brexit. This will become clearer once the FCA publishes their consultations on how they intend to implement these rules, which will also shed light on any potential gold-plating with respect to UK AIFMs.

• The Directive will introduce rules regarding:
• • A harmonised definition and process for the ‘pre-marketing’ of AIFs;
  • The provision of facilities to provide information to retail investors in each member state where such marketing takes place. It is clarified however that these facilities can be provided electronically and do not require a physical presence; and
  • A harmonised process and criteria for the de-notification of a fund for marketing in a member state.
• The Regulation will introduce rules regarding:
• • Harmonised requirements in relation to fund marketing communications;
  • Ex-ante regulatory approval of fund marketing communications, in the case of UCITS and retail marketing only. This requirement can be applied at the discretion of the local regulator and therefore may not apply in some member states; and
  • The creation of central databases for the publication of, in relation to each member state:

1. 1. 1. • The national marketing requirements;
         • All fees and charges that apply; and
         • A list of AIFs, UCITS and their managers approved for marketing.

It should be noted that the requirements above will only directly apply to EU AIFMs and UCITS management companies, along with in some cases EU EuSEF and EuVECA managers. They will not apply in the case were the AIFM is located outside of the EU, including (post-Brexit) where the AIFM is in the UK. However, the requirements above are likely to become a de facto standard and may be applied when interpreting similar situations in relation to marketing by third country AIFMs.

(expected Q4 2021 or later)

These requirements will apply to banks, enhanced scope SMCR firms, recognised investment exchanges and designated investment firms (i.e. dual regulated investment banks amongst other categories), but it is noted that most fund managers and advisers will be classified as MiFID investment firms or AIFMs and should not within the scope of these requirements.

The full text of these new requirements can be found in SYSC 15, which can be found in Annex B (page 84) of CP19/32. These proposals are open for consultation until 3 April 2020 and it is expected that a Policy Statement will be published with final rules in approximately one year. These rules are therefore unlikely to apply before late 2021.