Welcome to our structured products bulletin for Q2 2023, where we round up key legal and regulatory developments in the structured products space over the previous quarter – just in time for the summer break, in fact.
For those in the UK, the main points of note concern the forthcoming ‘Public Offers and Admissions to Trading’ regime (the less succinctly-named successor to the UK prospectus regime), where six engagement papers have been published as well as the revised and ‘near-final’ statutory instrument. The engagement papers allude to the UK moving away from the existing disclosure rules in a structured products context, so is something we’re monitoring closely. We also look at various Consumer Duty-related updates in light of the 31 July 2023 implementation date, and finally bid farewell to LIBOR panel rates (which came to an end on 30 June 2023). For those (like us) who enjoy interesting case law, the recent High Court judgement regarding the nature of fixed and floating charges will be of interest: this brings into question long-held views of how these charges should be characterised.
Across the Channel, in this quarter (among other updates) we cover the European Commission’s new Retail Investment Package, plus an update on the EU Listing Act. For the ESG-ers amongst our readers, we then take a look at ESMA’s public statement on prospectus sustainability disclosures, the European Commission’s recent legislative proposal for rules on ESG rating activities, and its new Sustainable Finance package. Quite a lot to cover, in all.
EU
Retail Investment Package
European Commission adopts new Retail Investment Package
On 24 May 2023, the European Commission adopted a new Retail Investment Package with the aim of empowering retail investors to make investment decisions that are aligned with their needs and preferences, placing their interests at the centre of retail investing. The strategy aims to enhance retail investors' trust and encourage participation in EU capital markets.
The new strategy was born out of one of the Commission's three key objectives of the 2020 capital markets union action plan: the objective of making the EU a safer place for retail investors. The package includes measures to:
improve the way information is provided to retail investors about investment products and services, by adapting disclosure rules in order to make more meaningful and standardised;
increase transparency and comparability of costs, by requiring the use of a standard presentation and terminology;
ensure all retail clients receive a clear view of the investment performance of their portfolio at least once a year;
protect retail investors from misleading marketing by ensuring financial intermediaries are fully responsible for the use of marketing communications; and
encourage Member States to implement national measures to support citizens' financial literacy (regardless of age and social and educational background).
The package aims to be wide-ranging in scope and consists of an amending directive, which amends the existing rules in a number of sector-specific legislative instruments, including MiFID II, the UCITS Directive, AIFMD, Solvency II, as well as a regulation amending the existing PRIIPs Regulation.
Regarding the proposed amendments to the PRIIPs Regulation, the amending regulation proposes to make several changes to the PRIIPs Key Information Documents ("KID") to make them more suitable to changing needs of investors and use on digital devices, and to increase legal clarity. In particular, the changes would affect the contents of the KID including: new sections in the KID with dashboards, a simplification of the rules on providing a KID by electronic disclosure, specifying how layering can be used in the digital provision of a KID, specifying the disclosure of costs information with respect to Multi-Option Insurance Products (MOPs) to promote choice between different products, the removal of the comprehension alert ('You are about to purchase a product that is not simple and may be difficult to understand') at the start of the KID, and confirming that some corporate bonds with make-whole clauses are out of scope of the PRIIPs Regulation.
The Commission's proposals are open for feedback until 28 August 2023. Simmons & Simmons have a dedicated webpage for the EU RIS, including comparison texts outlining the proposed changes and podcasts on elements on the proposals.
EU Listing Act
Update on the EU Listing Act
On 14 June 2023, the Council of the EU agreed its negotiating mandate on the "Listing Act", a package of rules aiming to make public capital markets in the Union more attractive for EU companies and to facilitate access to capital for small and medium-sized enterprises.
The Commission's proposal for the new Listing Act was published on 7 December 2022, and broadly comprises the following:
a proposal to amend the Prospectus Regulation to harmonise requirements for the drawing up, approval and distribution of prospectuses to be published when securities are offered to the public / admitted to trading on a regulated market;
a proposal to amend MiFID II and to repeal the Listing Directive coordinating the conditions for admission of securities to official stock exchange listings and the information to be published on those securities; and
a proposal for a new directive on multiple-vote share structures in companies that seek the admission to trading of their shares on an SME growth market.
On the same date, the European Parliament's Committee on Economic and Monetary Affairs ("ECON") published a draft report on the proposed Listing Act Regulation, which will amend the Prospectus Regulation, Market Abuse Regulation (MAR) and Markets in Financial Instruments Regulation ("MiFIR"). ECON's draft report sets out a series of suggested amendments to the proposed regulation, as summarised in the explanatory statement towards the end of the report.
Benchmarks Regulation
ESMA publishes final report on the review of the RTS concerning authorisation and registration under the BMR
On 30 May 2023, ESMA published its final report on the review of the regulatory technical standards ("RTS") on the information to be provided in an application for authorisation and registration under the Benchmarks Regulation ("BMR").
In summary, the report sets out that the RTS needs to be amended to ensure alignment with the changes to the RTS on recognition, which will in turn ensure an equal treatment between EU and third-country based administrators when submitting applications under the BMR.
Product governance
ESMA launches Call for Evidence on sustainability in suitability and product governance arrangements
On 16 June 2023, ESMA launched a call for evidence ("CfE") on integrating sustainability preferences into suitability assessment and product governance arrangements under MiFID II.
The CfE will help gather industry feedback on the main trends relating to the provision of sustainable investment products and services to retail clients, as well as develop a better understanding of how MiFID II requirements are being implemented by firms in the EU.
ESMA and the relevant national competent authorities will assess responses to the CfE and continue monitoring application of the MiFID II rules on suitability and product governance.
UK
UK Consumer Duty
FCA publish findings in its fair value framework review
The findings of the FCA's review of firms' fair value frameworks were published on 10 May 2023. Firms should consider the findings from this review and whether they need to develop their approach to implementing the price and value outcome rules in line with good practice outlined in the report.
One of the key findings included firms failing to properly consider outcomes for different groups of customers, and instead relying on broad averages which could hide where certain types of customers are receiving poor value.
The FCA also found that firms were not challenging themselves enough on uncomfortable questions, such as where high profit margins on a specific product may be a sign that customers are not getting fair value. The FCA also commented that further work was needed around the collection and monitoring of data evidencing to enable decision makers to "robustly discuss" whether the products and services are providing fair value.
The FCA emphasises that firms should use the remaining time prior to the deadline to ensure their fees are fair and transparent and that particular groups of consumers are not disproportionately disadvantaged. The FCA also confirms that it is working with industry bosses to clarify expectations in relation to the sharing of information between manufacturers and distributors, indicating it does not want firms to create overly burdensome processes.
FCA speech on the countdown to implementing Consumer Duty
The FCA published a speech by Sheldon Mills, Executive Director of Consumers and Competition, which reminds firms of the rationale for the introduction of the Consumer Duty, including enhancing the UK's competitiveness in the financial services sector (with this aim being introduced as part of the Financial Services and Markets Bill).
Mr Mills highlighted a number of the 41 "key questions", which the Consumer Duty Champion and the Chair should internally be asking themselves, indicating that these will be the questions the FCA will be asking of firms post the 31 July:
Does the purpose and culture of firms align with their obligations under the Duty and support the delivery of good outcomes for customers?
Is the Duty being considered in all relevant discussions such as strategy, remuneration and risk?
Have firms made sure their remuneration and incentive structures drive good outcomes for customers?
Are firms prioritising delivering good outcomes for customers in a changing external environment?
In light of the July implementation deadline, the FCA has also published a list of the 10 key questions from the FCA Final Guidance which firms should be asking themselves in order to reflect on their implementation and identify gaps or areas of improvement.
FCA Handbook Notice 108 – Non-retail Financial instruments
In the FCA Handbook Notice 108 published in March 2023, the FCA confirmed that they are not going ahead with implementing the proposed amendments in relation to non-retail financial instruments (including the £50k minimum investment exemption). This means the £50k minimum investment exemption remains available for all products sold to retail e.g. investment funds, structured products and derivatives with a minimum denomination or investment of £50k.
The FCA has also now sent some informal emailed guidance around the application of the £50k exclusion to derivatives notional following AFME discussions. The FCA has noted that this aligns with point 41 of PRIIPS RTS Annex IV used for the purposes of calculating performance scenarios: "For those PRIIPs that are forward contracts, future contracts, contracts for difference or swaps, performance scenarios shall be calculated assuming that the amount specified in point 40 is the notional amount."
The wholesale market is generally interpreting the emailed guidance as being applicable beyond those listed contracts in the PRIIPS RTSs (given that was primarily noted for alignment purposes).
Distributor and Manufacturer questionnaires for feedback loop
Since the 31 April 2023 milestone (when manufacturers were expected to share with distributors the information necessary for them to meet their obligations under the Consumer Duty), industry focus has turned to the reverse flow, i.e. the types of questions manufacturers will be asking distributors as part of the distributor feedback loop in response to a request under PRIN 2A.3.18R or PROD 3.3.30R.
A draft version of the questionnaire has been prepared by a group of manufacturers which will require intermediaries in the distribution chain to pass on information obtained from the end distributor. It will now be shared with a distributor group for feedback.
The Joint Trade Association Group published new guidance to members in relation to manufacturer and distributor data exchange sharing in the context of the Consumer Duty. The objective of the joint trade association work has been to help develop a coordinated and proportionate approach to data sharing, providing manufacturers and distributors with the information they need to help meet the Consumer Duty requirements. The guidance, which has been seen by the FCA, covers the following areas:
general messages with respect to proportionality by both manufacturers and distributors;
areas of industry collaboration and the role of the EMT;
issues relating to vulnerable customers;
the rationale for the new value fields in EMT; and
implementation timeline and the significance of the 30 April milestone.
FCA Podcast on Consumer Duty Outcomes Monitoring
The FCA published a podcast with Ed Smith, the FCA's Head of Competition Policy, on outcomes monitoring under the Consumer Duty.
Mr Smith focusses on the importance of firms using data and technology to monitor compliance with the Outcomes and tackle any breaches. The FCA expects firms to have a strategy to identify the appropriate data sources which should be proportionate to the size of the firm, the client base, and the products and services offered, noting that the majority of the data may already be readily available to the firm (e.g. customer retention records, complaints data). When collecting this data, Mr Smith reiterates the FCA's focus on vulnerability, but also on cohorts of customers who may be receiving worse outcomes than others, such as long-standing customers or those from different socio-economic backgrounds.
Once the evidence has been obtained, the FCA expects firms to tackle harm by "drilling down to the root causes" of the harm, and develop a strategy to address these with clear and compelling reasoning. Firms should be able to evidence that changes are having an impact on customer outcomes and that the Duty is embedded in all decision making which can impact customers.
The FCA reiterates that they do not expect brilliance from day 1, but they do expect firms to be able to use some data to assure themselves that customers are getting good outcomes, and develop a strategy going forward to be able to improve their data and monitoring capabilities and use better types of data.
FCA Consumer Duty Firm Survey – Spring 2023
The FCA published the results of an anonymous survey of 1,230 firms from 6 different sectors which ran between March and May 2023, aimed at understanding how prepared firms were in meeting the implementation deadline.
The survey results show that there are high levels of engagement and understanding of the Duty across the sectors, and most firms believed they were on course to meet the deadline. 64% of those surveyed indicated that they would be fully compliant by the deadline, 23% indicated that most requirements would be met, and only 7% indicated that they would still have significant work to do after the deadline or had not started work on the Duty. The FCA have indicated that they will use these results to tailor further communications on the Duty.
Fixed and floating charges
Nature of fixed and floating charges questioned in judgment of Re Avanti Communications Limited (In Administration)
The recent High Court judgement Re Avanti Communications Limited (In Administration) [2023] EWHC 940 (Ch) (25 April 2023) questions long-held views of how fixed and floating charges are characterised.
In deciding whether a charge is fixed or floating, English courts traditionally consider and apply two leading judgements: Agnew v Commissioners of Inland Revenue (2001) and Re Spectrum Plus (2005).
In Re Avanti, the security arrangement considered by the court permitted the borrower to dispose of certain charged assets without the consent of the lender. Each permitted disposal was subject to conditions.
The judge (Edwin Johnson J) decided that the borrower's ability to dispose of the charged assets was compatible with the nature of a fixed charge and that the charges in this case took effect as fixed charges, both at creation and subsequently.
Assuming the judgment is not overturned, Re Avanti will change the nature of the analysis commonly undertaken by lawyers and insolvency practitioners when characterising fixed and floating charges.
UK prospectus regime
FCA publishes engagement papers on the UK’s public offers and admissions to trading regime
On 18 May 2023, the FCA published a series of engagement papers on the UK's forthcoming public offers and admissions to trading regime (the successor to the UK prospectus regime). Two further engagement papers were published on 13 July 2023.
The six engagement papers published by the FCA are as follows:
Engagement papers 1 and 4 are particularly relevant to structured products manufacturers. By way of an example of what is being covered by the engagement papers, engagement paper 1 seeks views on:
The FCA's starting assumption that they should continue to set requirements for a prospectus for admission to trading on regulated markets, as is done under the current regime.
The current rules on exceptions to when a prospectus is required, particularly those related to takeovers and transfers between regulated markets.
Largely reproducing content requirements for a prospectus for admission to trading on a regulated market, or whether a different approach should be taken.
How format requirements for a prospectus may be simplified, with a focus on achieving a balance between standardisation and flexibility.
The starting assumption that the FCA should not consider changes to other adjacent regimes, such as the advertisements regime or COBS 11a.
And engagement paper 4 seeks views on:
Dispensing with the dual disclosure standards for wholesale vs retail debt, and instead adopting a single standard based on the current wholesale disclosure regime.
Adapting the existing prospectus disclosure annexures for debt securities, to require different or additional prospectus disclosure for certain structured financial products (which may be drawn from the disclosure requirements applicable to closed-ended funds). There is also a reference to imposing eligibility rules to ensure organisers / manufacturers are appropriately regulated.
Extending the validity of certain base prospectuses beyond the current 12-month period.
Enabling future financial information to be incorporated by reference without the need to publish a supplement.
Allowing issuers to decide not to supplement a base prospectus as otherwise required under the current rules, as long as no new securities are issued under that base prospectus.
Reducing the disclosure requirements for secondary issuances of certain debt securities.
Creating new and additional disclosure obligations for green, social or sustainability labelled debt instruments.
Feedback on the engagement papers is requested by 29 September 2023.
ISDA publishes letter to HMT on proposed amendments to UK prospectus regime
On 8 March 2023, ISDA published a letter raising its concerns around the proposed definition of "relevant securities" under the Government's proposed draft Prospectus SI, and its potential impact for OTC derivatives.
UK HMT’s draft SI (The Public Offers and Admissions to Trading Regulations 2023) published for final checks
On 11 July 2023, HM Treasury published a 'near-final' version of the statutory instrument ("SI") outlining the new Public Offers and Admissions to Trading Regime, the successor to the UK's prospectus regime.
The SI follows the earlier first draft, published as part of the Edinburgh Reforms. An explanation of the changes made to the SI since the earlier first draft (for instance, amending the definition of "relevant securities" as used in the SI) are set out in the explanatory policy note which accompanies the SI.
Technical comments on the draft SI are requested by 21 August 2023.
LIBOR
LIBOR transition
Panel bank LIBOR comes to an end
On 30 June 2023, the last panel setting of the London Interbank Offered Rate ("LIBOR") was published, marking a historic milestone in the transition to risk-free reference rates.
Although the LIBOR panel publications have ended, the 1-, 3-, and 6-month US dollar LIBOR settings will continue being published in synthetic form until the end of September 2024, for use in legacy contracts only (other than in cleared derivatives).
The FCA has reiterated that use of synthetic LIBOR settings are only a temporary solution to allow for more time to complete the transition, and to ensure an 'orderly' wind-down of LIBOR. Firms are encouraged by the FCA to continue actively transitioning contracts that reference LIBOR.
ESG
Sustainability disclosures
ESMA publishes public statement on prospectus sustainability disclosures
On 11 July, ESMA published a public statement (Link) setting out its expectations on how the specific disclosure requirements of the Prospectus Regulation should be satisfied in relation to sustainability-related matters. Certain provisions in the statement are relevant to issuers preparing non-equity prospectuses for securities not marketed as having an ESG component or objective.
Greenwashing
ESAs publish reports on greenwashing in the financial services sector
On 1 June 2023, the ESAs, being the European Banking Authority ("EBA"), the European Insurance and Occupational Pensions Authority ("EIOPA") and ESMA, published the following reports on greenwashing in the financial services sector:
The reports put forward a common high-level understanding of the ESAs of greenwashing applicable to market participants across their respective remits. Broadly, there is a shared understanding of greenwashing as a practice where sustainability-related statements, declarations, actions and communications do not clearly reflect the underlying sustainability profile of an entity or financial product or service. The reports highlight that consumers, investors or other mark participants can be misled and that certain misleading claims may spread through the market.
The ESAs have also identified high-risk areas in their respective sectors that may be exposed to greenwashing, and set out preliminary remediation actions in order to mitigate certain risks. At this stage, the ESAs have not included any proposed amends to the existing regulatory framework.
The ESAs are expected to publish their final greenwashing reports in May 2024, setting out final recommendations which may include proposed changes to the EU regulatory framework.
ESG Regulation
European Commission publishes legislative proposal for Regulation on ESG rating activities
On 13 June 2023, the European Commission published a legislative proposal for a Regulation on the transparency and integrity of Environmental, Social and Governance ("ESG") rating activities.
The proposal specifies that ESG rating providers based in the EU must be authorised by ESMA, and imposes requirements on ESG rating providers relating to their internal organisation, disclosures concerning methodologies and mechanisms addressing conflicts of interest.
The proposal notes that ESG ratings are becoming increasingly important in the context of investor confidence in sustainable products, in particular by providing critical sources of information for investment strategies, risk management and disclosure obligations by investors and financial institutions.
Sustainable finance
European Commission publishes Sustainable Finance package
On 13 June 2023, the European Commission published a new package of measures to build on and strengthen the foundations of the EU sustainable finance framework.
The aim of the package is to ensure that the existing sustainable finance framework is able to continue supporting companies in the finance sector (in part by ensuring that the sustainable finance framework works for companies that want to invest in their transition to sustainability and making the framework easier to use), while encouraging private funding of transition projects and technologies.
ICMA updates its Q&A on its bond principles
In June 2023, the International Capital Markets Association ("ICMA") published a revised version of its Q&As for Secured Sustainable Bonds. The revised Q&A adds further guidance and detail, including in relation to the double counting of green bonds, social bonds or sustainability bonds issued in accordance with ICMA's bond principles.
ESG Charter
ESG Structured Product Charter to be launched in France
A Charter on ESG structured products drawn up by the French structured product association ("AFPDB"), Association française des marchés financiers ("AMAFI") and the French Banking Federation ("FBF") is currently being finalised. Its aim is to provide a common framework setting out specific requirements for structured products with ESG characteristics or objectives. Voluntary in application, it will enable issuers who adhere to it to communicate clearly on the level of sustainability of their products to their distributors, in order to help them implement their product governance obligations. The Charter is not intended to be mentioned or publicised to end investors.
An event will be organised shortly to present the Charter to AMAFI (the French financial market association) members.
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