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LEGAL SHORTS

Welcome to Legal Shorts, a short briefing on some of the week's developments in the financial services industry for the week ending 2 June 2023.

ESMA UPDATE PRE-MARKETING UNDER AIFMD

It’s always worth keeping an eye on updates and amendments in the EU, and this one on pre-marketing under AIFMD is a hot topic among our clients.  Not just that, but this update is about those of us who are not in an EU member state. 

The European Securities and Markets Authority has published an updated version of its Q&A with a new question on whether non-EU AIFMs are allowed to carryout pre-marketing activities pursuant to Article 30a of the AIFMD.  

Here are the question, and ESMA’s answer:  

Question: Are non-EU AIFMs allowed to carry out pre-marketing activities pursuant to Article 30a of the AIFMD? 

Answer: No, Article30a of the AIFMD does not cover pre[1] marketing activities by non-EUAIFMs. Therefore, non-EU AIFMs should not be allowed to carry out pre-marketing activities pursuant to the AIFMD. However, national laws, regulations and administrative provisions may allow non-EU AIFMs to carry-out pre-marketing activities at national level and where this is the case, non-EUAIFMs do not benefit from a passport allowing them to carry out these activities in other Member States. In line with recital 12 of Directive(EU)2019/1160, such national laws, regulations and administrative provisions should not in any way disadvantage EU AIFMs vis-à-vis non-EU AIFMs.

NEW AND UPDATED FCA AUTHORISATON

We have a brand new FCA authorisation homepage.  The FCA has launched this and has included in it links to a range of FCA webpages that explain the authorisation application process, set out how newly-authorised firms can get support and detail various tasks for firms relating to authorisation.  

And we have an even more shiny new and updated webpages, some being:

• a new webpage on how to apply for authorisation and registration with  new and revised content. In particular, the FCA outlines the concept of firms" being ready, willing and organised" to comply with current FCA rules and guidance on an ongoing basis and any future rules to be introduced. In an application, a firm will need to show it can do this and that it has planned ahead. A short table on the webpage expands on the FCA's expectations in this regard. The FCA also sets out three "top tips" to avoid delays in the application process and explains its commitments to firms once it has received their application.

Here at Cummings Pepperdine we remain proud to have had an application fast tracked as the FCA deemed it as demonstrating that the firm was "ready, willing and organised"; 

• a new webpage on preparing a firm's financial information. This gives details about the financial information firms must include before they submit an application to be FCA-authorised or registered. The FCA explains that the financial information it receives with many firms' applications falls short of its expectations and that this leads to delays. It is applying increased scrutiny to this information and firms must meet the FCA's minimum standards. The aim of the webpage is to help firms fully prepare before they apply; and

  
  

• an updated webpage on authorisation and registration application fees. The FCA has revised the content of this webpage and changed the title (it previously referred only to the authorisation fee). The webpage now contains a table that indicates the fees for common types of firms and a table that details the pricing categories covering different groups of permissions.

  
  

THE WORLD ECONOMIC FORUM CALLS FOR GLOBAL CRYPTOASSET REGULATIONS

A new study from the World Economic Forum has been published and identifies the importance of a global approach to crypto-asset regulations and provides potential solutions to these barriers. 

The report, which it titled “Pathways to Crypto-Asset Regulation: A Global Approach”, emphasizes that while full global coordination for crypto regulation would be ideal, varying ecosystem maturity in different jurisdictions, evolving use cases, capacity of regulators and other factors make it difficult to achieve. 

As such, regulators and industry players should explore alternative regulatory pathways to collaborate and regulate the crypto-asset ecosystem through a principle-based, agile approach that takes local context into consideration. Along with the existing efforts on global coordination, these additional regulatory solutions can be leveraged to attain the desired outcome. 

Matthew Blake, the Head of the Centre for Financial and Monetary Systems at the WEF has said, “The evolving crypto-asset ecosystem and recent market events have underscored the pressing need for collaboration and the building of robust guardrails. While jurisdictions may take a different approaches to regulating crypto-assets, it is important to foster partnerships between international organizations, national authorities, and industry stakeholders, to ensure a baseline level of consumer protection and market integrity."

THE FCA - FEAR AND LOVE

Let’s look at fear first. The FCA are warning firms that there are scammers out there trying to trick firms into revealing important information.  And they do this by pretending to work for the FCA.  They might reach out to you via email, phone or post with convincing communications that appear genuine and while the FCA does have measures in place to try and prevent certain scams, it’s important that all firms check the communications they receive. Particularly if it’s unexpected. 

The FCA has kindly provided a list of the fake FCA communications they are aware of, which is worth reviewing. 

And for those of us who are looking for love, are you also looking for investments to help sustain your joy in the long term?  New FCA research shows that young investors think more long-term when dating than investing with just 31% investing to earn more money than they would in a savings account and almost half (48%)investing time into dating to find a life partner.   

The advice from us here at Cummings Pepperdine is do both but perhaps keep them separate.  Droning on about pension plans isn’t likely to get you further than one glass before, mysteriously,there arises some strange and sudden reason for your love to hightail it out of the door…

FSB EUROPE GROUP DISCUSSES RISKS TO FINANCIAL STABILITY INCLUDE DeFi

The Financial Stability Board (FSB) Regional Consultative Group for Europe met in London this month to consider a range of global and regional financial market developments and financial stability risks arising from decentralised finance (DeFi).  

It was noted that in July, the FSB will finalise its recommendations for the regulation, supervision and oversight of crypto-assets and markets and its revised recommendations specifically addressing global stablecoin arrangements. The FSB discussed its analysis of the financial stability implications of developments in the DeFi area and discussed risks arising from DeFi, which has emerged as a fast-growing segment of the crypto-asset ecosystem, and implications for regulatory and supervisory policies. 

We expect to hear more this year.

ESMA CONSULTS ON DRAFT RTS UNDER REVISED ELTIF REGULATION

The European Securities and Markets Authority (ESMA) published consultation paper on draft regulatory technical standards (RTS) of the Regulation on European Long-Term Investment Fund (ELTIF Regulation). 

ESMA’s intention is for these new RTSs to specify the way in which the new requirements of the revised ELTIF Regulation will apply.  It is seeking views on:

• the circumstances in which the life of an ELTIF is considered compatible with the life-cycles of each of the individual assets, as well as different features of the redemption policy of the ELTIF;

  
  

• the circumstances for using the matching mechanism (that is, the possibility of full or partial matching of transfer requests of units or shares of the ELTIF by existing ELTIF investors with transfer requests by potential investors, before the end of the life of the ELTIF); and

  
  

• costs disclosure.

If this EU legislation is one for you, have your say by sending in your comments before 24 August 2023. ESMA expects to publish its final report and submit the final draft RTS to the European Commission for endorsement by 10 January 2024.

ESMA WARNS THE CRYPTO MARKET

The European Securities and Markets Authority(ESMA) has warned that those companies which market crypto as well as traditional securities might mislead consumers about access to fair advice and compensation.  

ESMA’s concern is that these companies might leverage their regulatory approval for traditional finance to imply secure financial advice or compensation schemes for cryptocurrency.  ESMA regards cryptocurrency as a high risk investment. 

ESMA has therefore recommended that the relevant investment firms take all necessary measures to ensure that clients are fully aware of the regulatory status of the product/service they are receiving and clearly disclose to clients when regulatory protections do not apply.  

It is worth noting that EU legislation on cryptoassets, known in its abbreviated form as “MiCA” is due to come into force in the UK in approximately 18 months and bring with it some fairly stiff rules.  ESMA’s concern is that until then, some crypto firms might take advantage of that time to get away with marketing activities which will not be possible under MiCA.

THE OFSI AND COUNTER-TERRORISM

If you are involved in crypto, you will know that the main thrust of the UK’s registration regime is anti-money laundering and counter terrorist financing. 

 And if you’re not, you will still fall within certain rules to prevent these types of crime. 

To keep you abreast of developments we are reporting this week on guidance from the Office of Financial Sanctions Implementation (OFSI) on how to request a variation or revocation of a financial sanction designation under the Counter-Terrorism(Sanctions) (EU Exit) Regulations 2019 (SI 2019/577). 

This starts with some other but highly relevant legislation, section 23 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA).  This says that a person who has been designated under a designation power contained in regulations made pursuant to SAMLA may request a variation or revocation of their designation. The process involves the completion of a Sanctions Review Request Form, together with supporting evidence to establish why the designation should be modified or revoked. Where the evidence supportive of the application is not in English, an official translation must be provided, supported by a declaration of truth from the translator. 

We now have a decision on there view.  This states that the designated person may seek a further review of the decision by virtue of Chapter 4 of SAMLA. Any such review is conducted as if it were judicial review proceedings, with the court only being required to set aside a decision on judicial review applicable grounds and providing such relief as could be provided in judicial review proceedings.  

Watch this space but for now our advice is to keep strongly adhered to all AML and CFT rules and regulations.  We can keep our industry clean!

THE ESRB ON CRYPTO-ASSETS AND DeFi

The European Systemic Risk Board’s (ESRB) Taskforce on crypto-assets and DeFi has published a report on the systemic implications of, and policy options for, crypto-assets and decentralised finance. 

Overall there is some good news. It concludes that while the past year has been turbulent for crypto-assets and DeFi, systemic implications have not materialised.  

Looking ahead, they see the future of the crypto-asset market as uncertain.  To counter this, the report recommends that the potential for systemic risk should be closely monitored.  

In addition, the report gives an indication that risks could materialise if the interconnectedness of the crypto-asset market with the traditional financial system increases over time, their connections to the traditional financial system are not identified before they cause problems, and if similar technologies are adopted in traditional finance. 

The ESRB proposes policy options to enable a better understanding of developments in crypto-assets and their potential financial stability implications, which could also inform any future regulatory initiatives. The policy options focus on:

• strengthening monitoring capacity - they believes that it is key to promote standardised reporting and disclosure requirements for traditional financial sector institutions such as banks that are exposed to crypto-assets, investment funds with crypto-asset exposures, and entities such as stablecoin issuers or wallet service providers in the crypto sector;

  
  

• identifying and assessing risks from crypto-assets conglomerates and leverage using crypto-assets, and identifying potential additional actions to mitigate observed risks (in particular taking account of market developments following the application of MiCA; and 

  
  

• monitoring market developments to ensure potential risks to financial stability and the effectiveness of macroprudential policy can be identified, assessed and mitigated, with a focus on operational resilience (the use of different underlying technology for crypto-assets may bring about varied novel operational risks), DeFi, and crypto-asset staking and lending.

Here at Cummings Pepperdine, we support all steps taken for the EU and the UK to work together and call out for sensible regulation which understands the industry and what individuals want and need to be able to control their own finances.

CRYPTIONARY TERM OF THE WEEK

Cryptionary Term :

CUSTODIAN WALLET PROVIDERS

These are firms that provide services to safeguard, or to safeguard and administer: crypto-assets or private cryptographic keys on behalf of its customers, or which hold, store and transfer cryptoassets. They need to be registered with the FCA for this business.”

PEP PIC OF THE WEEK

Who are we?

Cummings Pepperdine is a unique leading legal advisor on crypto and alternative assets, advising a large and diverse global client base and the only firm to provide a complete solution building on the three key areas of law, tax and FCA with legal underpinning at every point.

For more information, visit www.cummingspepperdine.com