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Regulatory Update: July 2019


By Nels Ylitalo  |  July 9, 2019

Each month, FactSet's Regulatory team offers a rundown of the most important developments in compliance and regulatory news. Read on to see which stories dominated the conversation in June.


Raising Fragmentation Flags, IOSCO, and the FSB Recommend Enhanced Supervisory Cooperation

In contemporaneous reports, two international bodies—the Financial Stability Board (FSB) and the International Organization of Security Commissions (IOSCO) —have raised concerns over international fragmentation within financial markets despite historic levels of international cooperation between financial regulators since the Financial Crisis. As a particularly acute example, both reports point to trading and clearing of OTC derivatives as an arena of market fragmentation.

The reports express further concern over emerging developments such as Brexit, the treatment of specified benchmarks, and the EU’s stance on recognition of third-country oversight of CCPs; it views these as potential drivers of further fragmentation.

The reports identify differential national regulations and divergent practices of regulators in relation to matters that are international as the principle cause of the identified fragmentation. The key message is that international markets cannot be regulated nationally, or at least not without some degree of regulatory homogeneity or harmonization. As such, both bodies recommend that international regulatory and supervisory cooperation should be increased. Information sharing should be enhanced and recognition of foreign regulators considered wherever possible to emphasize that this can be achieved without substantive changes to domestic regulation.

Both bodies have significant persuasive influence and as the key policy driver of the G20, the FSB recommendations carry weight. While these proposals may mitigate some issues with domestically regulating global markets, they are unlikely to provide a lasting solution to a problem that can only be solved through global standards.

Dispute Between EU and Swiss Authorities Leads to Restricted Trading in Swiss Shares 

On July 1, 2019, exchanges throughout the EU announced that they had suspended trading in Swiss shares due to the lapsed regulatory “equivalence” status of Switzerland coupled with the Swiss countermeasure banning the trading of Swiss-registered companies in the EU. The Swiss countermeasure effectively reroutes all trading in Swiss shares to Switzerland. The lapsed equivalence status and Swiss response are related to a larger political treaty that has been in the works for years but has not yet been finalized.


SEC Approves Suite of New Investor Protection Rules; Cast in Doubt by House Appropriations Bill


On June 5, 2019, the SEC approved the following comprehensive package of measures:


  1. Regulation Best Interest sets out rules governing the interaction between broker-dealers and their retail clients. As the name of the regulation implies, Regulation Best Interest draws on fiduciary principles, requiring broker-dealers to act in retail customers’ best interests, while forbidding broker-dealers to place their own interest ahead of their clients’ interests.


In broad terms, Regulation Best Interest entails obligations in four areas: disclosure, care, conflicts of interest and compliance. Regulation Best Interest will become effective 60 days after publication in the Federal Register, with a transition period until June 30, 2020.


  1. “Form CRS Relationship Summary” requires investment advisors and brokers to provide Form CRS to retail investors, describing the terms of services offered and accounts available to clients. The form must disclose whether the firm has any legal or disciplinary history and sets out a series of “conversation starters” which are meant to encourage clients to put questions to their brokers or investment advisors. As with Regulation Best Interest, Form CRS will become effective 60 days after publication in the Federal Register, with a transition period until June 30, 2020.


  1. The SEC issued two sets of Interpretive Guidance: (i) clarifying and reaffirming the SEC’s views regarding the scope and nature of fiduciary duties owed by investment advisers to clients, and (ii) clarifying the boundary between “solely incidental” broker-dealer advisory activities and activities that would cause it to become an investment advisor under the Investment Advisers Act.


The package has been the subject of heated political debate and the SEC vote approving the measures was split along partisan lines with the three republicans on the panel voting in favour and the sole Democrat dissenting on the basis that the rules failed to adequately protect investors.

The rules were the subject of extensive stakeholder consultation throughout 2018, which saw considerable opposition to the measures from investor protection groups, some of which pledged at the time to sue the SEC if the rule exempting brokers from registering as advisors for “incidental advice” was approved in the proposed format that has since been adopted. 

No sooner did the SEC adopt the foregoing package of measures than it was cast into doubt by a June 26th House vote in Congress on an appropriations bill that effectively prohibits implementation of the measures by blocking funding for it. The fate of Reg BI and related measures will now pass to the Senate and the budget reconciliation process.


Expert Group Publishes Landmark Sustainable Finance Taxonomy Technical Report

On  June 24, 2019, after several delays—the EU’s Technical Expert Group on Sustainable Finance (TEG) published its “Taxonomy Technical Report.” The 414-page policy document provides a ”Taxonomy” of substantive definitions and screening criteria that determine what should constitute environmentally sustainable economic activity.

The object of the report is to inform a proposed EU Taxonomy Regulation that will be referenced by other legislation such as amendments to AIFMD, UCITS, and MIFID II that seek to embed such factors into risk analysis, investment advice, marketing, and disclosures. Equally, the Taxonomy is also intended to be used for the purposes of establishing whether a financial product or service can be labelled as “green” within the EU; a label which is intended to be used in determining whether preferential capital treatment will apply—a measure designed to channel capital flows in a way that transforms the EU economy into calibration to achieve sustainability goals.

While other jurisdictions such as Hong Kong have implemented ”green” finance initiatives, this is the most comprehensive international effort to embed a formal sustainability taxonomy into law and will inevitably serve as a benchmark for other jurisdictions that seek to emulate the initiative. In this regard, the UK has indicated that post Brexit, it will seek to implement rules equivalent to EU standards on ESG factors explicitly acknowledging the important effect they will have on attracting capital flows.

European Commission Published Guidelines on Corporate Climate-Related Reporting

On June 18, 2019, the European Commission published guidelines on corporate climate-related reporting in connection with the Sustainable Finance Action Plan. The new guidelines include recommendations of the Task Force on Climate-Related Financial Disclosures and are accompanied by a raft of new expert reports from the Technical Expert Group (TEG) on sustainable finance as announced in this press release.

ESMA Announces Planned Intervention in Periodic Auction Models

On June 11, 2019, the European Securities and Markets Authority (ESMA) published its Final Report on frequent batch periodic auctions (FBAs). ESMA highlighted (in its call for evidence)] three practices that might undermine price formation and/or require a reference price waiver: the use of pegged orders, the use of price band limitations to ensure that the uncross price is always within the EBBO/PBBO, and the practice of locking in prices at the beginning of the auction. ESMA remains concerned that these practices may weaken the price determination process and serve as a vehicle to circumvent the MIFID II Dark Pool Double Volume Cap. ESMA intends to issue supervisory guidance in the coming months clarifying that FBAs should be genuinely price-forming in order to operate with a waiver from pre-trade transparency.

ESMA confirmed that it is does not intend to take further action at this point on auction durations and self-matching features within FBAs, which were also principal concerns raised in the November 2018 “Call for Evidence into Period Auctions” that preceded the recent report.

ESMA will clarify through upcoming guidance that the use of self-matching [ (for any trading system) should in no circumstances be used to formalize pre-arranged trades.  ESMA also confirmed that it will look at the broader effects of the MiFID II transparency regime including the general development of market structure in the upcoming MiFID II review reports.

EU Banking Reform Package Published in Official Journal

The EU Banking Reform Package, comprising CRR II, CRD V , BRRD II, and SRM II , has been published in the EU’s Official Journal. Rather than wholesale reforms like their predecessors, these new texts simply calibrate and enhance existing requirements while introducing new capital requirements and enhanced measures governing the resolution of banks and large financial institutions. The bulk of the rules enter into force from Q2 2021.

ESMA Launches Common Supervisory Action on MIFID II Appropriateness Rules

On June 3, 2019, ESMA published a press release [here] announcing the commencement of Common Supervisory Action (CSA) with local EU regulators on MIFID II appropriateness requirements. This follows concerns that appropriateness rules, which govern execution of transactions without accompanying investment advice, have not been applied consistently across Member States. As a consequence of the CSA, the industry can expect enhanced oversight and scrutiny of their conduct and practices in this area.

Shareholder Rights Directive II Applies

On June 10, 2019, the SRD II and its accompanying Implementing Regulation entered into force. The purpose of the legislation is to elevate the importance of shareholder engagement for promoting the long term financial and non-financial interests of companies and their broader stakeholders including sustainability and ESG considerations in accordance with the UN endorsed Principles for Responsible Investment. In this context, the “inadequate engagement” and monitoring of companies by institutional investors and asset managers—and their over-emphasis on short-term returns—is identified within the SRD II as requiring legislative intervention.

From an administrative perspective, investment firms will now be required to disclose shareholder identification information, distribute voting information between parties, facilitate shareholder voting, and deploy non-discriminatory, proportionate cost disclosures in relation to voting services —amongst other measures.

On a more substantive level, enhanced “comply or explain” transparency measures are introduced for asset managers and institutional investors including the implementation of a comprehensive, detailed engagement policy which describes how a firm integrates shareholder engagement in its investment strategy. Specifically, the policy must describe how a firm monitors investee companies across a range of considerations that include capital structure, corporate strategy, corporate governance, and non-financial performance such as social and environmental impact. The engagement policy is subject to a detailed annual disclosure in relation to its implementation and rules on the publication of key voting decisions throughout the year.

Institutional investors are also required to publicly disclose how their equity investment strategy is consistent with the profile and duration of their liabilities and its contribution to the medium to long-term performance of the assets. Where asset managers invest on behalf of an institutional investor generally or through a fund, the institutional investor must publicly disclose how the arrangements between them meet these objectives. In turn, asset managers are required to make annual disclosures to institutional investors with whom they have entered into such arrangements on how their investment strategy and its implementation complies with these requirements.


FCA Publishes AML Thematic Review

In June, the FCA published results of a Thematic Review into anti-money laundering (AML) compliance within the financial sector, concluding that poor systems and controls were still common in the market despite a broadly compliant landscape overall. The Review comes just a month after Standard Chartered was fined $1.1 billion by the FCA and multiple U.S. agencies for breaching anti-money laundering rules, and two months after Mark Steward, FCA Director of Enforcement, confirmed that the FCA was in the process of investigating a large number of anti-money laundering cases using the dual track criminal and civil process it had recently adopted for such cases.

The Review should serve as a wake-up call for they in the industry yet to attain full compliance with requirements, not least since EU AML laws are due to undergo further enhancement in January 2020 with the application of the fifth EU Anti-Money Laundering Directive, which is swiftly followed by the sixth EU Anti-Money Laundering Directive at the end of 2020, which further increases penalties for they found to have breached AML laws.

FCA Imposes £45.5 Million Fine for Failure to Report Fraud Suspicions

On June 21, 2019, the FCA announced it had fined the Bank of Scotland £45.5 million for failing to disclose suspicions of fraud within the “Impaired Assets” team of one of its branches. Specifically, the FCA found that the bank had failed to conduct itself in an open and cooperative manner with the regulator by not promptly disclosing the suspicions.

The fine was particularly large given the extent and gravity of the criminal offences in question and the risk, delay, and withholding of evidence posed to the interests of justice and the recompense of affected customers. Moreover, the FCA found that a prompt, compliant disclosure could have diminished the extent of the criminal conduct that occurred.

The fine was predicated not only on the failure to notify the authorities but also on the lack of diligence demonstrated in handling the matter and inadequacy of systems and controls, which include escalation protocols that effectively manage such incidents.

The FCA confirmed in its press release that the fine would have been £65 million had the bank not cooperated in the latter stages of the investigation process. The fine was accompanied by Prohibition Orders levied against four individuals, which prevent them from working in the financial services sector again. The case follows the highly publicized convictions of six individuals for their part in the matter.

What is interesting about this case is that commercial lending remains largely unregulated in the UK. However, as seen in prior cases such as the FX spot rigging scandal, the FCA will apply an expansive interpretation of its principles to punish unlawful and/or non-compliant conduct even if the conduct in question falls outside of regulated activity.

UK & Dutch Regulators Formalize Partnership Agreement

Following a meeting on June 3, 2019, the FCA and the Dutch Authority for Financial Markets (AFM) announced the signing of an agreement to formalize a cooperation partnership, which covers information sharing, secondments, expert training, and collaboration in FinTech developments that include “a pro-active and data-led approach to supervision.” Chair of the AFM, Merel van Vroonhoven said, “We see UK financial institutions moving to the Netherlands, especially international regulated markets, other trading platforms, and traders. Their choice for the Netherlands will impact our capital markets and trading infrastructure. The closer cooperation with the FCA will put us in a better position to protect investors and capital markets through the sharing of information and expertise to minimize risks.”

It is too early to tell whether this partnership will serve as a broader model of regulatory partnerships following Brexit or a one-off instance of collaboration. It is tempting to see this occurrence as more of the latter given the EU’s proclivity for developing concerted approaches to such matters, particularly in highly regulated sectors.

FCA Publishes New P2P and Crowdfunding Rules

On June 4, 2019, the FCA published Policy Statement 19/14, which introduces enhanced rules governing peer-to peer lending (P2P) and investment based crowdfunding platforms. The rules clarify the governance arrangements and systems and controls that such platforms must deploy with particular emphasis on risk management, credit risk assessment, and fair valuation practices— especially for firms which operate complex business models. The rules also enhance marketing restriction details in relation to P2P agreements and platform wind-down measures. Moreover, borrowing from MIFID II, the rules introduce an appropriateness assessment of investor knowledge and experience where no advice is given to investors. Finally, the rules apply the FCA Mortgage Conduct of Business Sourcebook “MCOB” and other Handbook requirements to P2P platforms that offer home finance products where regular investors are concerned. The rules enter into force on December 9, 2019, save for those relating to home finance that take immediate effect.

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Nels Ylitalo

Vice President, Director Product Strategy, Regulatory Solutions

Mr. Nels Ylitalo is Director of Product Strategy for Regulatory Solutions at FactSet. Previously, he worked in signals intelligence in the United States Navy prior to attending law school at Yale where he earned a JD in 2007. Following law school, he was a corporate/M&A attorney representing VC and PE funds as well as corporate clients in M&A transactions. Mr. Ylitalo’s portfolio covers a broad range of financial services regulations with a current focus on buy-side regulatory requirements and challenges, globally.


The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.