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Podcast: COVID-19: European Regulatory Update for Asset Managers: 22 June 2020

Time to Listen: 9:52 Practices: Asset Management, Government Enforcement / White Collar Criminal Defense, Private Funds, Regulatory Compliance for Private Funds

Welcome to the fourth installment of Ropes & Gray’s European regulatory podcast for asset managers. These fortnightly podcasts and accompanying speaker notes are intended to provide an overview of updates relevant to GCs, CCOs and other compliance professionals to help you navigate both COVID-19 and other developments relevant to your business. The speakers on today’s podcast are Eve Ellis, a partner in Ropes & Gray’s asset management group specialising in fund regulation, and Rosemarie Paul, a partner in the firm’s litigation & enforcement group specialising in regulatory enforcement matters. 

This update covers topics relating to business interruption insurance, the European Commission’s (“EC”) review of AIFMD, the Financial Conduct Authority’s (“FCA”) enforcement action in relation to financial crime, and other developments relating to ESG, capital requirements and Brexit.

COVID-19 Insights

COVID-19 updates

Business interruption insurance

Business interruption insurance in the current crisis has become a key concern for many firms. You may be impacted directly, may have an investment in an insurer/intermediary or have portfolio companies that are affected by these issues.

As noted in a previous podcast, the FCA is taking a test case in the High Court, seeking to clarify the meaning and effect of certain business interruption insurance policy wordings. The FCA wants to resolve the uncertainty about the claims made related to the current crisis, and ensure that policy holders are being treated fairly.

The FCA has now published guidance setting out its expectations for insurance and insurance intermediaries in relation to management of claims and complaints for business interruption insurance policies (the “Guidance”).

The Guidance states:

  • insurers must review the test case, and assess whether or not their decisions on claims for relevant policies may be affected by the final resolution of the test case. The FCA needs to be provided with the outcome of the review by 8 July so that it can publish a consolidated list of affected policies;
  • firms need to consider what general communications they need to make to relevant policyholders. This includes updating previous statements regarding how their relevant policies respond to the COVID-19 crisis;
  • firms need to assess what communications need to be made to individual policyholders who have made a claim or complaint following the guidance and the review of relevant non-damage business interruption policies. Firms need to make any necessary communications to policy holders by 15 July; and
  • relevant firms need to identify claims and complaints (including those already declined or where the firm has made an adjustment or deduction for general causation) that are potentially affected by the test case, and take account of the FCA guidance when handling these claims and complaints.

The Guidance comes into immediate effect.

Non-COVID-19 updates

European Commission report on application and scope of AIFMD

On 10 June, the EC published a report assessing the application and scope of the Alternative Investment Fund Managers Directive (“AIFMD”) (the “Report”).

The Report has a number of findings. In relation to marketing, which is a key focus for many of our asset management clients, the following is relevant.

  • The Report highlighted certain limitations to the AIFMD passport due to national goldplating, divergences in national marketing rules and varying interpretations of the AIFMD by national supervisors. In addition, the passport only permits marketing to professional investors, which subjects managers to restrictive national rules when marketing to semi-professional or retail investors.
  • The Report highlighted that distribution of funds is subject to MIFID and therefore any changes to investor scope would have to take into account the relevant provisions in that legislation as well (which is also currently being reviewed). The reference to fund distribution being subject to MIFID is potentially a key point, particularly in the context of Brexit planning.
  • In relation to the national private placement regimes (“NPPR”), the Report acknowledged the different approaches taken by member states and also the un-level playing field between the rules which apply to non EEA managers and those based in the EEA. This is clearly a key point for non EEA managers and is a point to watch as the review progresses.

In relation to monitoring and risk management, there was reference to the recommendations from the European Systemic Risk Board to enhance powers under AIFMD to set leverage limits and suspend redemptions. This is something we have discussed on earlier podcasts and emphasises the focus the regulators have on liquidity management.  

Other matters raised in the Report related to the role of the depositary, valuations, streamlining of reporting, setting common standards for loan originating funds, aligning remuneration rules with those in other sectorial legislation and considering the rules on private equity firms investing in unlisted companies. 

In terms of next steps, the EC is still assessing whether any amendments to the AIFMD are required as a result of their findings, although it was acknowledged that more action to deepen the EU market for AIFs and to respond to technological developments is needed. As such, this is still at a preliminary stage but is something to be monitored.

Enforcement action re: AML systems and controls failings

The FCA has fined the London branch of a European bank over £37 million for failing to put adequate anti-money laundering (“AML”) systems and controls in place over a five-year period.

  • conduct timely periodic due diligence on its clients, which resulted in a significant number of existing clients not being subject to timely know-your-client checks; 
  • address long-standing weaknesses in its automated tool for monitoring money laundering risk on transactions for clients; and
  • have adequate policies and procedures in place when undertaking customer due diligence on clients.

Notably, the firm was apparently aware of the weaknesses in its systems (the FCA had raised specific concerns with them about these over several years) but failed to take reasonable and effective steps to fix them.

The FCA emphasised that these weaknesses also persisted during a period when the FCA was publishing guidance on steps firms could take to reduce financial crime risk, as well as taking enforcement action against a number of firms in relation to AML controls. Despite what the FCA describes as “these clear warnings”, the failures continued.

The firm undertook a significant remediation exercise to bring its AML controls into compliance and voluntarily implemented a wide-ranging business restriction, which included temporarily stopping taking on new high-risk customers and suspending all new trade finance business activities.

The case is a warning to firms operating in the UK, including branches of overseas firms, that they must take reasonable care to organise and control their affairs responsibly and effectively, and to establish and maintain an effective risk-based AML control framework.

Other developments

Other developments worth briefly mentioning are:

  • ESG. The European Parliament approved the Taxonomy Regulations (the “Regulations”). The Regulations will create a classification system for sustainable economic activities and certain disclosure requirements, and will come into force 20 days after publication in the Official Journal. In addition, draft delegated acts have been published which amend various sectoral legislation including AIFMD, the UCITS Directive and MIFID relating to the Sustainable Finance Disclosure Regulations.
  • Capital requirements. As part of the amendments to the European capital regime, the EBA has published a consultation paper on draft technical standards that provide a set of templates and instructions for investment firms making disclosure and reporting requirements under certain rules in the Investment Firm Regulations.
  • Brexit. The UK government confirmed it will not agree to an extension of the transitional period. As such, unless a deal can be reached, firms will face a no-deal Brexit and should consider contingency planning if this hasn’t been done already.

Contact us

For more information on the topics we have discussed or other topics of interest, please visit our website at www.ropesgray.com. Also, if Eve or Rosemarie can help you navigate any of these areas, please do not hesitate to contact any of us. You can also subscribe to this series wherever you regularly listen to podcasts, including on AppleGoogle and Spotify.

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