HOT TOPICSThe financial services industry is in the midst of unprecedentedregulatory upheaval. The Baringa Guide to Regulatory Developmentsprovides a consolidated timeline to track critical regulatory initiativesand provides commentary on the latest hot topics and trends.

AbbreviationsAIFM/AIFMD: Alternative Investment Fund Managers DirectiveCDS: Credit Default SwapCMU: Capital Markets UnionCRD: Capital Requirements DirectiveCRS: Common Reporting StandardCSDR: Central Securities Depositories RegulationEBA: European Banking AuthorityEU: European UnionESAs: European Supervisory AuthoritiesESMA: European Securities and Markets AuthorityEuSEF: European Social Entrepreneurship FundEuVECA: European Venture Capital FundFATCA: Foreign Account Tax Compliance ActFCA: Financial Conduct AuthorityFDAP: Fixed, Determinable, Annual, Periodical FICC: Fixed Income, Currencies and CommoditiesFFI: Foreign Financial InstitutionsFSB: Financial Stability BoardFX: Foreign ExchangeIMF: International Monetary FundITS: Implementing Technical StandardsIR: Interest rateMAD/R: Market Abuse Directive/RegulationMiFID: Market in Financial Instruments DirectiveMLD: Money Laundering DirectivePRA: Prudential Regulation AuthorityRTS: Regulatory Technical StandardsSFTR: Securities Financing Transaction RegulationSM&CR: Senior Managers and Certification RegimeSMEs: Small and medium-sized enterprises UCITS: Undertaking for Collective Investments in Transferable

Securities

Reputation built on results

Regulatory Guide for Asset and Wealth Management Q4 2015

Quarterly update on key timings and trendsYour guide to critical regulatorymilestones, analysis of hot topics and emerging regulatory trends

MegatrendsThe pace of regulatory reform remains unabated, seven years onfrom Lehman Brothers’ collapse. We are now starting to enter theimplementation phase of big ticket reforms, as regulators finalisethe remaining aspects of the post-crisis reform agenda. Thepublication of final draft RTS on MIFID II by ESMA will come as awelcome relief to industry participants, but key aspects of theMiFID II puzzle remain outstanding and fundamental questionspersist. It is clear that while we are drawing near the end of theofficial rule-making phase of MiFID II’s lifecycle, theimplementation phase is likely to bring further changes andpotential delays as regulators get a better picture of the trueimpact of their grand plans.

As a forerunner to this revisionist phase, the European Commissionissued a call for evidence on the cumulative impacts andunintended consequences of post-crisis regulation on 30thSeptember 2015. It observed that the scale of the regulatoryresponse to the financial crisis could mean that the regulatoryframework is building up redundancies, gaps and unjustifiablecosts.

Closer to home, the PRA is also assessing some aspects of its post-crisis reform agenda. In a major policy shift, it has proposed thatring-fenced retail banks will be permitted to transfer capital toother parts of their business (such as Wealth or AssetManagement). This is a major win for banks and the asset/wealthmanagers part of these groups, which means that ring-fencedbanks will be allowed to transfer profits to other companies in theform of dividends after giving ‘reasonable notice’ to the PRA.

Financial regulation will also evolve in the coming years as newrisks emerge in the financial system. Regulators are particularlyconcerned about the rapid rise of corporate debt, particularly inemerging markets. Increases in corporate debt levels since thefinancial crisis have highlighted the sensitivity of corporates tomacroeconomic and financial shocks which could have importantknock-on effects for banks and asset managers.

Extending the Senior Managers RegimeThousands of asset managers, hedge funds and FICC dealers will besubjected to the SM&CR under plans announced by the UKGovernment. The extended SM&CR framework will seek to embed aclearer system of accountability and responsibility for all individualsworking in financial service firms. New governance requirements willalso be introduced that require senior managers to submitdocumentation to the regulator to evidence their skills, experienceand areas of responsibility.

As signposted by Mark Carney in June, the extension of the punitiveregime to buy-side firms is part of a wider push by authorities tohalt market scandals – most recently the riggings of FX– which havedamaged the reputation of the City of London and threatenedfinancial stability. It also brings to an end the incumbent ApprovedPersons Regime which was criticised by the ParliamentaryCommission on Banking Standards as being a ‘mess’ and ‘failing toperform any of its varied roles to the necessary standard’.

While the extended regime is not due to go live until 2018, assetmanagers and hedge funds need to start thinking now about whatprocesses and systems they need to put in place to deal with thesenew requirements. The best in class are already working ondeveloping the right ‘tone from the top’, and not waiting for directregulatory intervention, by launching conduct training and revampingcontrol structures.

As part of initial compliance, firms will need to create sufficientlyclear Statements of Responsibilities and Responsibilities Maps foremployees, working across human resources, legal and compliancefunctions to tackle questions of scope, or interaction withobligations. They also need to introduce common standards ofconduct and culture, cast in clear language and introduce bettertraining and qualifications for their staff.

Extending the SM&CR will help embed a culture of personalresponsibility throughout the financial services industry. This willresult in better run firms which is not just good for shareholders andcustomers but also good for senior managers themselves.

Integrating EU capital marketsThe European Commission announced the first set of measures tointegrate capital markets across the EU, as part of the much laudedCMU. As part of measures announced in September, the Commissionintends to kick-start high-quality securitisation and promote long-term investment in infrastructural projects across the EU, amongstmany other initiatives.

The Commission has decided to take a conservative and slow-burnapproach to CMU initially by addressing the following areas:securitisation, Solvency II, venture capital, covered bonds and theimpact of cumulative regulations. In addition, the Commission willannounce proposed changes to the Prospectus Directive before theend of the year, with a view to making it easier and less expensivefor SMEs to raise capital on financial markets.

In terms of stimulating venture capital, European policymakers arelooking to reform current EU regulations (EuVECA and EuSEF) tomake it easier and more attractive for private savers to invest inunlisted SMEs. The Commission has launched a consultation whichwill ask whether targeted changes to these regulations could boostthe take-up of these investment funds.

The Commission is proposing a regulatory framework forsecuritisation which promotes ‘simple, transparent and standardisedproducts’ which are subjected to adequate supervisory control. It is looking at introducing new rules on Solvency II’s treatment ofinfrastructure projects and removing ‘unjustified prudential obstacles’so insurers can play an important role in long-term finance. Inparticular, it is proposing to introduce legislation that creates adistinct infrastructure asset class and reduces the amount of capitalwhich insurers must hold against the debt and equity of qualifyinginfrastructure projects.

Finally, the Commission is launching a call for evidence to gatherfeedback and gauge the cumulative impact and interaction ofcurrent financial rules. Through the consultation, it is seeking toidentify possible inconsistencies, incoherence and gaps in financialrules, as well as unnecessary regulatory burdens and factorsnegatively affecting long-term investment and growth.

Delivering on market reformsOn 28th September 2015, ESMA published its final draft RTS onthe MiFID II, MAR and CSDR. These regulations are amongst themost important in the post-crisis reform agenda and willsignificantly alter how European financial markets operate byincreasing their transparency, safety and resilience as well asinvestor protection. The magnitude of these changes should not be‘underestimated’, ESMA warns, and will require firms to carefullyconsider how it will impact their implementation programmes.

In preparing for MiFID II, ESMA published over 400 pages ofexplanations underpinning their standards, not counting the actual30 or so draft RTS and ITS which were finalised. This has providedindustry which much needed details on several of the mostcontroversial elements of the new regime, from EU-widecommodity derivatives positions limits to rules governing high-frequency-trading. But a significant holes persist and uncertaintyprevails. But like with EMIR, firms can’t afford to wait for Level 3text to be published and will have to act in the coming monthswith the information available.

Concurrently to the MiFID II release, ESMA published final draft RTSon MAR, as part of measures to strengthen the existing marketabuse framework by extending its scope to new markets, platformsand behaviours. The final draft technical standards focused on theconditions under which transactions in buy-back programmes andstabilisation measures are not considered market abuse andreporting requirements, amongst other things.

Finally, ESMA published final draft RTS on CSDR, a package ofreforms designed to harmonise the authorisation and supervisionof central securities depositories within the EU. The RTS deals withcooperation requirements among national authorities, requirementsfor third-country recognition and risk monitoring tools, recordkeeping, investment policy and reconciliation measures. While thisis significant for depositories, buy-side firms are still waiting onsettlement discipline standards that have a more direct impact onindustry, especially around mandatory buy-in.

Conduct supervision: less is moreIn September, the FCA announced plans to simplify its approach toconduct supervision as the number of firms under its purview hasincreased. Firms will now be differentiated as either fixed orflexible portfolio firms, with the incumbent C1-C4 categorisationfor conduct supervision being scrapped.

Fixed portfolio firms are a small population of firms (approx. 70firms) that, based on factors such as size, market presence andcustomer footprint, require the highest level of supervisoryattention. These firms are allocated a named individual supervisor,and are proactively supervised using a firm-specific continuousassessment approach.

The lion’s share of firms will be classified as flexible portfolio (theremaining 70,000 firms). These firms will be supervised through acombination of market based thematic work and programmes of‘communication, engagement and education activity’ aligned withthe key risks identified in each sector. These firms will have nonamed individual supervisor and will use the FCA’s CustomerContact Centre as their first point of contact.

While these changes may appear cosmetic at first, it’s part of awider trend in conduct supervision for smaller firms. Flexibleportfolio firms will likely notice a fall-off in the level of proactiveengagement with their conduct regulator, as the FCA will not assessflexible portfolio firms individually. Instead, the FCA will take amarket-based approach to assess the sector as a whole. The FCAwill be geared toward analysing current events and investigatingpotential drivers of poor outcomes for consumers and markets. TheFCA will do this ongoing basis, so it can address risks common tomore than one firm or sector before they can cause widespreaddamage. These could be issues like a trend for a particular businesspractice, or a problem with a certain product. This work rangesfrom large and detailed studies (via thematic reviews) to smallersample-based work. To support this shift, the FCA will put morefocus on the data it receives from these firms through the variousregulatory reporting requirements.

About Baringa PartnersBaringa Partners LLP is an award-winning managementconsultancy specialising in the energy, financial services andutilities markets in the UK and continental Europe. We partner withorganisations when they are developing and delivering keyelements of their business strategy, as well as working extensivelywith government and regulators providing policy and advisoryservices. Baringa works with our clients either to implement new oroptimise existing business capabilities relating to their people,processes and technology.

Baringa Risk and Compliance TeamBaringa Partners’ Risk and Compliance team specialises in helpingfirms understand and respond to the strategic, financial andoperational implications of new regulation and to enhance riskmanagement. A trusted advisor to risk, compliance and treasuryleaders, Baringa Partners’ capabilities and credentials span banking,insurance, asset management, capital markets, commodities andwholesale energy.

For more information please contact:risk@baringa.com, James Nicholls, Partner, Risk and Compliance on +44 7414 686 006 orGuy Munton, Director, Risk and Compliance on+44 7976 710 567

Baringa Partners LLP, 3rd Floor, Dominican Court, 17 Hatfields, London SE1 8DJT +44 (0)203 327 4220 F +44 (0)203 327 4221 W www.baringa.comE risk@baringa.com

Regulatory Developments Tracker 2015-17+

Market Reforms

Market Conduct

2015 2016 2017

MiFID II/EMIR/MAD/SFTR

UCITS/AIFMD/PRIIPS/CMU

EC to extend passports to

Non-EU AIFMs

PRIIPS comesinto force

FCA

Review of suitability of wealthmanagement client

portfolios

Theme Sub-theme

This document: (a) is proprietary to Baringa Partners LLP (“Baringa”) and all copyright resides in Baringa; (b) should not be disclosed to any third parties or re-used without our consent; (c) shall not form part of any contract nor constitute an offer capable of acceptance or an acceptance; (d) excludes all conditions and warranties whether express or implied by statute, law or otherwise; (e) places no responsibility on Baringa for any inaccuracy, incompleteness or error herein; and (f) is provided in a draft form ‘as is’ and should not be relied upon for commercial purposes. Copyright © Baringa Partners LLP 2015.

EC publishesDelegated Acts

on MiFID II

FCA consultation onimplementing MiFID II

requirements

EMIR: Initial margin requirements phased in (lasting until Dec-19); Variation margin requirements apply

EMIR: IR derivatives clearing phased in

FCA Policy Statement on

MiFID II implementation

MiFID II transposed intonational law

SM&CR in effect;Post-authorisation

review of funds

Results of Asset Management market study published by

the FCA

SM&CR deadline to transition certified

individuals into Certified Regime

MAR/MAD IIcomes into effect

across the EU

Phased implementation of

the TLAC/MREL capital standards.

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

EMIR: CDS clearing

phased in

MiFID II rulescome into effect

MLD 4 comesinto effectacross the EU

EMIR: Effective date for clearing of derivatives by

NFCs

EC public consultation on venture capital; covered bondscloses

ESAs RTS on article 8 of

PRIIPS to be submitted to

the EC

UCITS V transposed into nationallaw; Non-EU AIFM passports becomeoperational

EC begins review of AIFMD

implementationFully functioning

CMU in place

Start of Asset Management

market study

FATCA

FFIs in Model 1IGA jurisdictionsstart reporting

First CRS reporting period

starts

FFIs in Model 2 jurisdictions start

reporting

Due Diligence for identifying low-value preexisting individual

account in early adopter jurisdictions

Withholding ongross proceeds

begins

CRS

New account opening procedures

to record tax residence in early

adopter jurisdictions

New account opening procedures

to record tax residence in early

adopter jurisdictions

Due Diligence for identifying low-value preexisting individual

account in early adopter jurisdictions

Remuneration

EBA to submitdraft RTS on

extending CRD IVremuneration rules to asset

managers

UCITS remuneration rules in effect

EBA and FCA rules on

remuneration expected to be

in force

2018+

SFTRadopted by the EUCouncil ofMinisters

SFTR enters intoapplication