Finding Stability in an Unpredictable World

At this year's Regulatory Horizon 2022: Preparing for the Challenges of Tomorrow conference, we examined key governance, risk and compliance challenges that firms face in 2022, and beyond. A whitepaper has now been developed, capturing key takeaways and benchmarking polls from the event.

This blog features one of the nine chapters in the paper. Click here to view the full paper and access on demand recordings of panel sessions embedded throughout.

Overview

• Firms should ensure they are meeting their financial sanctions/ Anti-Money Laundering (AML) obligations in the light of the ongoing conflict in the Ukraine
• The UK’s Financial Conduct Authority (FCA) has a full agenda, which includes regulatory reform post-Brexit, “green” finance, financial promotions, market abuse, and transaction reporting.
• The US SEC is developing new rules around Environmental, Social, and Governance (ESG), cyber risk management, and crypto assets.

Ukraine Conflict

The past two years have been tumultuous for financial firms and their compliance teams; and the conflict in Ukraine has meant that compliance managers have had a busy start to 2022. Recognising that this is a rapidly-evolving situation, we recommend that firms:

• Review their financial crime systems and controls, particularly in relation to financial sanctions. This should include the review of clients and investors against those ever-changing, ever-growing lists of sanctioned persons and institutions.
• Liaise with third party administrators and other vendors, to seek confirmation that they too have taken appropriate steps to implement their sanctions obligations.
• To the extent that assets within those strategies include Russian company-issued equity or debt, review those investments in the light of the sanction measures. Take a forward-looking approach to any potentially new prohibitions that may be imposed.
• Those in the private markets space should assess the exposure of their portfolio companies to Russia and Russian-recognised territories and the Ukraine, taking particular care with supply chains.
• Consider the firm’s cybersecurity in the light of these events. The FCA published a Dear CEO letter to banks only recently warning them of the threat of Russian cyberattacks. These warnings should be heeded by all firm types. Business continuity and operational resilience, as well as training for staff should be re-evaluated in the coming weeks.

Meanwhile, regulators in the UK and the US are pressing ahead with their respective agendas in 2022.

The US SEC’s focus for 2022

In the US, the Securities and Exchange Commission (SEC) has one of the fullest agendas that it has ever had. Its priorities include:

• ESG – The SEC published an ESG exam priority document on 30 March 2022, and stated that ESG will remain an examination priority in 2022, with the regulator getting down into the weeds of firms’ ESG programmes. Firms can expect to see, for the first time, ESG and climate risk related enforcement cases in 2022. New rule proposals are also expected soon for disclosure of ESG information and climate risks in public company filings and public statements. Asset management firms should also expect disclosure rules designed for their industry from the SEC in 2022.
• Private funds – The SEC has also come out with a new private  funds proposed rule, which is a very significant sea change for  what the regulator expects from that industry.  For insight into the regulator’s thinking behind these changes, firms should look at the two risk alerts published in the summer of 2021 and in January 2022. The proposals would require quarterly statement reporting around fees, expenses, and performance. They also prohibit certain activities, to eliminate certain conflicts of interest the regulator has been concerned about.

UK FCA priorities

In the UK, the Financial Conduct Authority’s (FCA’s) key themes are:

• UK Future Regulatory Review and international competitiveness – the regulatory review was initiated back in 2019 as a conscious attempt to reform the architecture of UK regulation in the aftermath of Brexit. The project has progressed to a recent consultation about the respective roles of the government, parliament, and the regulators. The Chancellor recently confirmed that a package of measures will be included in the Queen’s speech later in 2022. Over the medium term, potential outcomes of this new structure could include a much-rationalised FCA handbook. A second review, focusing on the UK funds industry, is promising measures that will make the UK a more competitive jurisdiction for fund structures and administrators. The third review, focusing on the wholesale markets, will result in a set of proposals put out to consultation in H2 2022.
• UK MiFID and AIFMD reforms – so far, the FCA has made a series of “quick fix” changes to the way Markets in Financial Instruments Directive (MiFID II) is implemented in the UK, which are similar, but not identical, to changes that the European Union (EU) has recently made. Firms need to be quite agile to ensure they meet the MiFID II obligations in both regimes. UK firms are likely to face a similar situation with the EU’s coming Alternative Investment Fund Managers Directive (AIFMD II) reforms.
• New financial promotions regime – although the primary focus of the UK Treasury and FCA proposals is on protecting retail investors, there are elements that will have an impact on wholesale firms. For example, there is a proposal for a gateway for regulated firms wanting to approve financial marketing materials from non- regulated firms. There has also recently been a consultation on a review of the rules for the promotion of high-risk investments, including crypto assets. This will include a new category of restricted mass market investments, that will be subject to enhanced risk warnings and a prohibition on financial inducements.
• Compliance programme considerations – market abuse remains a high priority for the FCA, just as it has been for some time now. The FCA has warned about how market abuse risks have evolved as a result of the conflict in Ukraine. Transaction reporting is likely to remain another big priority for the FCA over the coming year, as it continues to be underwhelmed by the quality and timeliness of the data being submitted by financial firms. Work by ACA has shown that 97% of transaction reporting and European Markets Infrastructure Regime (EMIR) reporting by firms has errors. Firms may want to undertake an operational review of the processes used to meet these regulatory obligations. Lastly, firms – including private market firms – are engaging with the new climate-related disclosure obligations, and will be facing many more over the coming 18 months as the FCA fleshes out its ESG Sourcebook.

On Demand Webcast

Click here to watch a recording of the panel discussion on which this article is based. 

Questions?

Our specialists are on hand to help you to navigate these challenges while considering the complexity of your firm’s unique compliance, managed services, and ESG requirements.

In addition, our ESG advisory team are on hand to help you gain clarity on your ESG requirements and build a strong ESG program that meets incoming regulatory needs. This practice helps firms of all sizes develop and monitor ESG programs to mitigate risk, make informed choices, grow profitably and sustainably, and combat greenwashing in the process. 

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