Investment Funds Update - Europe: Legal and regulatory updates for the funds industry from the key asset management centres and primary European fund domiciles: UK

by Dechert LLP

MiFID II – FCA Issues Discussion Paper on MiFID II Implementation Measures

The FCA issued a discussion paper (DP15/3) on 26 March 2015, asking firms for their views on a range of MiFID II implementation measures, including on:

  • The revised inducements standards.
  • Receipt of commissions and other benefits by discretionary investment managers.
  • Disclosure of costs an charges.
  • Changes to complex and non-complex product designations for the purposes of the appropriateness test.
  • Professional client categorisation of local public authorities and municipalities. 

The FCA asked to receive comments by 26 May 2015.

Read the press release "FCA to ask firms for their views on MiFID II implementation".

FATCA – HMRC Updates to Reporting Requirements

In advance of the 31 May 2015 reporting deadline for returns under Intergovernmental Agreement (IGA) between the UK and the US in relation to FATCA, HMRC has issued new guidance as to which UK entities fall within the reporting requirements. The US Internal Revenue Service has recently clarified that UK financial institutions will not have to submit a return if they do not have any accounts requiring disclosure, and no return will be required from them. However, UK financial institutions that are in a nil return position only because their existing reportable accounts fall below the de minimis threshold of US$50 or US$250,000, as applicable, will still be required to submit a nil return in they wish to elect to treat the accounts as non-reportable.

Under the new guidance, holding companies and treasury companies are no longer defined as financial institutions. They will now be classified as Non-Financial Foreign Entities, and either "active" or "passive", depending on the activities carried out. The HMRC will issue further guidance on this subject.

Read the guidance

Background: The Foreign Account Tax Compliance Act (FATCA) is a US law aimed at tax evasion by US tax residents using foreign accounts. It includes certain provisions on withholding taxes and requires financial institutions outside the US to pass information about their US customers to the US tax authorities, the Internal Revenue Service (IRS). Failure to meet these new reporting obligations would result in a 30% withholding tax on the financial institutions. The FATCA provisions impose new and substantial burdens on UK businesses in identifying US taxpayers, and registering and reporting information to the IRS. Significantly for UK institutions the Data Protection Act precludes UK businesses from passing the required information to the US.

Enforcement – FCA Fines £13.2 Million for Transaction Reporting Failures

The FCA fined Merrill Lynch International (MLI) £13.2 million on 22 April 2015 for incorrectly reporting 35,034,810 transactions and failing to report another 121,387 transactions between November 2007 and November 2014.

The fine was calculated on the basis of £1.50 per line of incorrect or non-reported data, rather than the £1.00 per line used in the three most recent FCA transaction reporting cases, because the FCA viewed the past fines as not high enough to achieve credible deterrence. The final level of the fine included a 30% reduction for settlement at an early stage of the investigation.

Read the press release "FCA fines Merrill Lynch International £13.2 million for transaction reporting failures".

Enforcement - FCA Fines £126 Million for Custody Rule Failings

The FCA fined the London branch of the Bank of New York Mellon and Bank of New York Mellon International Ltd, collectively, £126 million on 14 April 2015 for failing to comply with the rules in the FCA’s Client Assets sourcebook (CASS).

The FCA found that, between November 2007 and August 2013, the banks failed to arrange adequate protection for safe custody assets by, amongst other things:

  • Failing to implement adequate organisational arrangements for safeguarding client assets.
  • Maintaining records and accounts on a global, rather than entity-specific level.
  • Failing to conduct external reconciliations between the banks' records and accounts and those of affiliate group companies appointed as sub-custodians.
  • Failing adequately to identify proprietary assets, resulting in commingling of bank and clients' assets, and using some client assets without consent to settle other clients’ trades.
  • Failing to implement (until 2011) CASS-specific governance arrangements.
  • Failing to provide (until March 2012) CASS-specific training to employees with operational or oversight responsibility for custody assets.
  • Having inadequate CASS resolution packs.

Read the press release "FCA fines The Bank of New York Mellon London branch and The Bank of New York Mellon International Limited £126 million for failure to comply with the Custody Rules".

Enforcement – FCA Fines Deutsche Bank £227 Million for LIBOR and EURIBOR Misconduct

The FCA fined Deutsche Bank AG £227 million on 23 April 2015 for misconduct in relation to LIBOR and EURIBOR in the period up to December 2010 and for failing to deal with the FCA in an open and cooperative way, by giving the FCA misleading information about its ability to provide a report commissioned by the German regulator BaFin.

In this matter, the FCA had worked closely with US regulators which issued the following additional fines concurrently with the FCA’s: $800 million by the US Commodities Futures Trading Commission, $775 million by the US Department of Justice and $600 million by the New York Department of Financial Services.

Read the press release "Deutsche Bank fined £227 million by Financial Conduct Authority for LIBOR and EURIBOR failings and for misleading the regulator".

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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