Structured products bulletin: Q4 2022

EU

EU Prospectus Regulation

European Commission proposes reforms to the EU Prospectus Regulation

On 7 December 2022, the European Commission published proposals for a new Listing Act, which will include amendments to the EU Prospectus Regulation. The Listing Act will also amend a range of other existing legislation (for instance, amendments to MiFID II and repealing the Listing Directive (2001/34/EC), with the overall objective of making public markets more attractive and facilitating access to capital for small and medium-sized companies.

Amongst the proposed changes to the EU Prospectus Regulation, the Listing Act will:

• Remove the requirement to list risk factors in order, by listing the most material risk factors first.
• Remove the requirement to supplement for updating annual or interim financial information incorporated by reference into a base prospectus.
• Allow a more flexible language regime permitting all issuers to draw up prospectuses in English.
• No longer allow supplements to be used to introduce a new type of security to a base prospectus.
• Require prospectuses to be presented in a standardised sequence, with summaries to follow a prescribed form.
• Mandate that incorporation by reference is no longer optional.
• Consider matters such as sustainability reporting under the EU Transparency Directive and whether debt securities are advertised as taking into account ESG factors or pursuing ESG objectives.

Issuers and arrangers may therefore need to review their existing practises and documentation against the new proposals. Feedback is requested until 13 March 2023, following which the feedback will be summarised and presented to the EU Parliament and Council for legislative debate.

Note that the proposals do not envisage broader changes to the EU’s prospectus regime – for instance, there are no changes to the public offer exemptions.

CSDR

Commission Delegated Regulation on settlement discipline to defer application of CSDR mandatory buy-in regime published

On 13 October 2022, the Commission Delegated Regulation (EU) 2022/1930 amending the RTS on settlement discipline to suspend the application date set out in the CSDR was published in the Official Journal of the European Union.

The Delegated Regulation defers the application of the mandatory buy-in rules until 2 November 2025 and entered into force on 2 November 2022.

Further, the European Parliament’s Committee on Economic and Monetary Affairs draft report on its review of CSDR noted that regulation-driven mandatory buy-ins are a significant interference in the execution of securities transactions and the functioning of securities markets, and has suggested discarding the regime in its entirety

ESMA updates its Q&As on CSDR

On 20 October 2022 and 17 November 2022, ESMA published an updated version of its Q&As relating to the implementation of the CSDR.

The updated Q&As cover topics such as the calculation, scope and costs of processes of cash penalties (October 2022) and settlement fails (November 2022) governed by Article 7 CSDR under the settlement discipline.

PRIIPs

European Supervisory Authorities update PRIIPs KID Q&As

On 14 November 2022, the three European Supervisory Authorities (ESAs) updated their Q&As on the PRIIPs KID. Further updates were made by the ESAs on 21 December 2022 to include amendments introduced by the Commission Delegated Regulation (EU) 2021/2268.

These updates relate to, amongst other things:

• Product categories.
• Performance and past performance scenarios.
• Derivatives and multi-option products.
• Methodology for the calculation of costs.
• Presentation of costs.

Please also see our Insights article dated 3 January 2023 for further analysis.

UK

Edinburgh Reforms – Prospectus Regulation

HM Treasury publishes proposals to repeal and replace the UK Prospectus Regime

On 9 December 2022, HM Treasury announced its package of “Edinburgh Reforms”, comprising around 30 regulatory reforms in the UK’s financial services sector.

As part of the reforms, the Government plans to repeal the UK’s onshored Prospectus Regime and replace it with a new successor regime for public offers and admissions to trading. A key component of the successor regime is the specification of the following activities, amongst others, as ‘designated activities’ for the purposes of the Designated Activities Regime (the “DAR”) being introduced through the Financial Services and Markets Bill:

• Offering relevant securities to the public in the UK.
• Requesting or obtaining admission of transferable securities to trading on a regulated market.
• Requesting or obtaining admission of transferable securities to trading on a ‘primary’ multilateral trading facility (a “primary MTF”).

The FCA will then be empowered to make rules in relation to certain of these activities, including (in relation to admissions to trading on a regulated market) rules setting out the circumstances in which a prospectus is required, what a prospectus should contain and the method and timing of validation and publication. Drafts of the FCA’s new rules are expected to be consulted on soon.

Generally, though, the new regime will be centred on there being a general prohibition against offering relevant securities to the public in the UK, unless an exemption applies. The exemptions often relied upon by structured products manufacturers (i.e. those set out in Article 1(4) of the UK Prospectus Regulation) will be retained, or broadened in some cases – for example, the threshold for the minimum denomination exemption will be lowered from €100,000 to £50,000. Certain new exemptions have been added too, such as the exemption allowing companies to make public offers through regulated “public offer platforms”.

Certain other changes will be introduced as part of the new successor regime. For example, a new liability threshold will be established in relation to certain categories of forward-looking information (based on recklessness). The ‘necessary information’ test for prospectuses will also be reformed.

Details of the highly anticipated ‘regulatory deference’ regime for offers into the UK of securities listed on overseas stock markets were omitted from the draft Edinburgh Reforms, but are expected to be added at a later stage.

Save for the omission of the regulatory deference regime, the proposals are closely aligned with HM Treasury’s “UK Prospectus Regime Review Outcome” (March 2022). For further information, please refer to our Insights article dated 7 March 2022.

Edinburgh Reforms – PRIIPs regulation

FCA publishes Discussion Paper on the future UK retail disclosure framework

On 9 December 2022, as part of the package of “Edinburgh Reforms”, HM Treasury indicated its plans to repeal the current onshored PRIIPs Regulation. Following this, on 13 December 2022, the FCA published discussion paper DP22/6 setting out the proposals for a retail disclosure framework assisting investors to make informed investment decisions.

HM Treasury does not intend to keep any UCITS or PRIIPs disclosure requirements in legislation, but will instead transfer these to the FCA Handbook.

The FCA believes a replacement regime should be supportive, engaging, accessible and flexible, safeguarding investor protection while increasing choice and reducing unnecessary or over-prescriptive constraints on firms.

The FCA has requested input on the following issues:

• Delivery of retail disclosure.
• Presentation of retail disclosure.
• Content of retail disclosure.

Comments are invited until 7 March 2023, at which point the FCA will review the feedback and issue its consultation paper. The FCA further intends to conduct consumer testing ahead of consulting on the new disclosure rules.

HMT consults on a new UK retail disclosure regime post-PRIIPs

On 9 December 2022, HM Treasury published a consultation paper, “PRIIPs and UK Retail Disclosure”, setting out proposals for a new retail investor disclosure regime to replace the PRIIPs Regulation, due to be repealed in the UK. The new disclosure framework to replace it in the UK will, according to HMT, “work more effectively with the UK’s dynamic capital markets and foster more informed retail investor participation”.

Amongst other things, the consultation comments on the following areas:

• KIDs – HMT has criticised these as too prescriptive, and under the proposed reforms it can be expected that KIDs will be phased out and replaced with a bespoke approach allowing for greater flexibility and tailoring to the needs of retail clients. The FCA would determine the format and presentation requirements for disclosure that can be incorporated into existing information documents. Note, however, that firms will still need to provide KIDs for EU retail investors.
• Comparability - The Consultation flags a move away from comparability of products – HMT’s view is that it is not feasible to meaningfully compare a wide range of varied products by use of a single format.
• Disclosure regime - HMT’s view is that it would not be appropriate for different disclosure regimes to govern UCITS and PRIIPs in the long-term. Accordingly, it proposes that the FCA would be empowered to integrate UCITS and PRIIPs disclosure into a coherent UK retail disclosure framework before the UCITS exemption ends (currently, at the end of 2026).

The consultation will close on 3 March 2023.

UK Consumer Duty

FCA publishes new webpage for firms on consumer duty

On 5 October 2022, the FCA published its new webpage for firms relating to consumer duty. The page contains information for firms relating to areas on which it has received certain queries.

These areas include:

• Implementation plans – Firms should have agreed their plans by 31 October 2022, which must be sufficiently developed to provide firms’ governing bodies and the FCA with assurance that the expectations have been considered and will be implemented for new and existing products by 31 July 2023.
• Consumer duty board champions – To support the chair and CEO in ensuring the duty is raised regularly in relevant discussions. The role is not a prescribed responsibility under SMCR. Firms can set the role up in a way that fits with existing roles and responsibilities on their boards.
• Definition of closed products - The FCA refers to closed products as "those that are no longer marketed or distributed to retail customers or open to renewal". It goes on to clarify that where existing customers can continue to make payments under the existing product terms, this would still be considered closed, provided the product or service is not open to new customers. It is up to firms to consider each product and determine whether it is closed.

On 16 December 2022, the FCA further updated its webpage on consumer duty to provide information on the following matters:

• FCA's expectations for outcomes monitoring.
• Confirmation that the consumer duty will not apply retrospectively.
• Requirements for firms seeking authorisation.
• Application of the consumer duty to non-UK firms and non-UK customers.
• Information sharing in the distribution chain and how the duty applies throughout the distribution chain.
• Clarifying the scope of the consumer duty.

The FCA also confirmed that it will publish a package of portfolio and sector-specific letters to firms in early 2023, setting out expectations for implementation and a reflection on its findings from its review of firm implementation plans.

LIBOR

LIBOR transition

FCA publishes notice of first decision to ICE Benchmark Administration Ltd (“IBA”) on cessation of 1- and 6-month synthetic sterling LIBOR

On 21 October 2022, the FCA published a notice of first decision under Article 21(3) of the UK Benchmarks Regulation, following feedback from its consultation paper CP22/11, ‘Winding down ‘synthetic’ sterling LIBOR and US dollar LIBOR’.

The notice states that the FCA has decided to compel IBA to continue publishing 1- and 6-month LIBOR versions under the existing synthetic methodology for a further 3-month period, which is now to end on 31 March 2023.

The notice also states that there is no intention to compel IBA to continue to publish these LIBOR versions beyond 31 March 2023.

IBA to end publication of all USD LIBOR ICE Swap Rate runs after 30 June 2023

On 14 November 2022, IBA released a feedback statement on its consultation on cessation of USD LIBOR.

12 out of 13 responses agreed with IBA’s intention to cease the publication of USD LIBOR ICE Swap Rates for all tenors immediately after 30 June 2023. A key theme throughout the responses was the importance that the rate remain available until that time in order to give market participants sufficient time to transition away from USD LIBOR ICE Swap Rates towards SOFR based rates.

Based on the feedback received, IBA announced that it intends to cease publication of all USD LIBOR ICE Swap Rates for all tenors immediately after 30 June 2023.

FCA publishes further consultation paper on the wind down of LIBOR

On 23 November 2022, the FCA published a further consultation paper on the wind-down of USD LIBOR, seeking information on exposures to help assess whether continued publication of USD LIBOR on a synthetic basis for a limited period after the end of June 2023 is required.

The main theme from respondents was that there is expected to be a small but material sub-set of contracts governed by non-US law referencing USD LIBOR that would be unable to transition by this date. As such, the FCA considers there to be a case for:

• Requiring publication of the one , three and six month synthetic USD LIBOR settings until end-September 2024.
• Using CME Term SOFR plus the relevant ISDA fixed spread adjustment as the methodology for these synthetic USD LIBOR settings.
• Permitting use of these synthetic USD LIBOR settings in all legacy contracts other than cleared derivatives.

ISDA publishes guidance on cessation of USD LIBOR ICE Swap Rate

On 28 November 2022, ISDA published guidance on the cessation of USD LIBOR ICE Swap Rates after 30 June 2023, following the announcement of the IBA on 14 November 2022 (the “IBA Cessation Announcement”). The guidance is of particular relevance to Supplement 88 to the 2006 ISDA Definitions, published on 10 November 2021, following the implementation of fallbacks for the GBP LIBOR ICE Swap Rate and USD LIBOR ICE Swap Rate.

The guidance seeks to describe the following, with a particular emphasis on defining fallback provisions and Index Cessation Events:

• How the terms of the 2021 ISDA Interest Rate Derivatives Definitions apply to the IBA Cessation Announcement.
• How the terms of the 2006 ISDA Definitions, both for transactions entered into before and after publication of Supplement 88, will apply to the IBA Cessation Announcement.
• How the terms of the ISDA Benchmarks Supplement apply to the IBA Cessation Announcement.
• How the terms of the June 2022 Benchmarks Module apply to the IBA Cessation Announcement.

FCA published notice of first decision to IBA compelling publication of 3-month sterling LIBOR until end-December 2022

On 14 December 2022, the FCA published a notice of first decision under Article 21(3) of the UK BMR, compelling the IBA to continue publishing 3-month sterling LIBOR. Subject to the reviews required by Article 21(3) of the UK BMR, the FCA intends to use its powers to compel IBA to continue to publish the LIBOR Version for a final period until 31 March 2024, but not beyond that date.

This notice follows the decision of 21 October 2022 pertaining to 1- and 6-month sterling LIBOR versions.

ESG

ESG templates

Financial Data Exchange Templates publishes its updated ESG template

On 7 October 2022, Financial Data Exchange Templates (FinDatEx) launched its public consultation on the update of its ESG template, reflecting on market feedback and reconsidering existing regulations. Comments were due to be provided by 21 October 2022.

On 24 October 2022, FinDatEx launched its updated European ESG Template (EET), recommended for use for information exchange as of 1 December 2022. The use of the existing version should end by 30 April 2023 at the latest.

The update is not structural in nature but reviews all data fields in view of the applicability of the SFDR RTS as of 1 January 2023. The wording of data fields has been reviewed and typos and other mistakes have been corrected.

SFDR RTS

FinDatEx issues a statement on the European Commission’s adoption of the amended SFDR RTS

On 9 November 2022, FinDatEx published a short statement confirming that its EET working group will consider the short-term inclusion of related data fields in to its recently published EET as a result of the adoption by the European Commission of the Delegated Regulation implementing the amendments to the SFDR RTS relating to investments in nuclear and gas.

Further information and explanations in light of these considerations will be published once available.

Sustainability Disclosure Requirements

FCA consultation on new proposals to tackle greenwashing

On 25 October 2022, the FCA launched consultation paper CP 22/20: Sustainability Disclosure Requirements (SDR) and investment labels.

Following growth in a number of investment products marked as ‘green’, the measures aim to protect consumers and improve trust in sustainable investment products. The FCA proposes to introduce:

• Three categories of sustainable investment product labels underpinned by objective criteria.
• Restrictions on how certain sustainability-related terms can be used in product names to avoid misleading marketing of products.
• Consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product.
• More detailed disclosures, suitable for both retail and institutional investors wishing to learn more about a product.
• Requirements for distributors to ensure that the labels and consumer-facing disclosures are accessible and clear.

The consultation is open until 25 January 2023.

Sustainability factors

Sustainability objectives and factors implemented into German law

On 30 September 2022, the Securities Services Conduct and Organisation Ordinance (Wertpapierdienstleistungs-Verhaltens- und -Organisationsverordnung (WpDVerOV)), implemented the Commission Delegated Directive (EU) 2021/1269 of 21 April 2021 amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors into the product governance obligations (OJ L 277/137, 2 August 2021, p. 137-140).

The amendments to the WpDVerOV implement sustainability-related factors and objectives in the design and distribution of financial instruments into German law. The Commission states that ‘a general statement that a financial instrument has a sustainability-related profile should not be sufficient. Investment firms manufacturing and distributing financial instruments should rather specify to which group of clients with sustainability related objectives the financial instrument is supposed to be distributed’, and that ‘The sustainability factors of a financial instrument should be presented in a transparent manner to enable the distributor to provide the relevant information to its clients or potential clients.’

Marketing

Retail distribution and digitalisation

IOSCO produces final report on retail distribution and digitalisation

On 12 October 2022, the International Organisation of Securities Commissions (IOSCO) published its final report on retail distribution and digitalisation.

The report outlines toolkits of policy and enforcement measures that its members are encouraged to consider when determining their policy approach to retail online offerings and marketing promotions in relation to financial products, both domestically and on a cross-border basis. The aim is to assist members in forming and adapting their regulatory and enforcement approaches to meet the developing challenges facing online activities. The measures relate to, amongst other things:

• Firm-level rules for online marketing, distribution and onboarding.
• Capacity for surveillance and supervision of online marketing and distribution.
• Staff qualification or licensing requirements for online marketing.
• Proactive technology-based detection and investigatory techniques.
• Promoting enhanced understanding by, and collaboration with, providers of electronic intermediary services with regard to illegal digital activities.