Key Regulatory Developments in the UK/EU – January 2025
PISCES – FCA proposal for a UK Trading Venue for Private Securities
The Financial Conduct Authority (FCA) is currently consulting on a proposal for a new type of trading platform (PISCES) that would enable intermittent secondary trading of private company shares. PISCES would use certain features of public markets, such as multilateral trading, and retain features of the private markets to give companies greater discretion over disclosures and permitted participants. Trading would be intermittent and of limited duration, and the issuer would have discretion to determine when shares are traded, who can participate in trading, to whom disclosures are distributed and to set price parameters.
The consultation1 and the accompanying proposed FCA rules would, together with the draft Financial Services and Markets Act 2023 (Private Intermittent Securities and Capital Exchange System Sandbox) Regulations 20252 (Draft PISCES Regulations) form the regulatory framework for a preliminary period of five years, following which the PISCES platform may be made permanent. The regulatory framework is likely to be adjusted over the preliminary period. The consultation follows the UK government’s proposals for new regulated market for private company shares, the legislation for which is expected to be delivered by May 2025.
The proposals will improve the ability of private companies to raise capital and are intended to make private secondary markets more transparent and efficient. The proposals are of particular interest to investors in growth companies, as is the Chancellor’s announcement at the Autumn Budget 2024 that PISCES transactions will be exempt from Stamp Duty and Stamp Duty Reserve Tax. The Tx exemption is comparable to the exemption for growth markets such as AIM and Aquis’ growth market.
PISCES will not operate within the existing regulatory framework applicable to most other platforms and will not be considered a “trading venue” under the Markets in Financial Instruments Directive (MiFID). No transaction reporting is required for the trades that take place on PISCES and disclosure requirements are proposed to be non-public and limited to core information. The rules under the UK Market Abuse Regulation (UK MAR) will not apply directly, although it may apply in limited circumstances where shares traded on PISCES have an impact on the price or value of another financial instrument admitted to trading on a trading venue within the scope of UK MAR.
The FCA’s proposals are aimed at enabling growth of UK private companies and the market trend for greater investor activity in shares of private companies, which partly reflects the significant legal and regulatory burden of publicly traded companies. The proposals reflect a similar initiative by the Channel Islands’ International Stock Exchange in 2023. The consultation closes on 17 February 2025.
UK Short Selling Regime
The UK’s new Short Selling Regulations 2025 (SI 2025/29) came into force on 14 January 2025 and implemented material reforms to the UK short selling regime. The new UK rules replace the Short Selling Regulations onshored from the European Union (EU) regime and introduce a new regime which grants the FCA broader discretion to set and amend rules from time to time without requiring legislative changes. This allows for a nimbler and more responsive regulatory mechanism. The new rules retain the requirement for firms to notify the FCA of net short positions above 0.2% of issued capital.
The new rules introduce material changes to the EU rules, including changing the public disclosure basis to the disclosure of aggregated net short positions on an anonymised basis reflecting individual position notifications and requiring the FCA to publish a positive list of shares that the FCA considers are subject to the short selling rules, rather than requiring market participants to establish, the application of the short selling rules through a process of search of various databases.
In addition, the new rules remove restrictions on uncovered short selling of sovereign debt and sovereign credit default swaps and sovereign debt notification requirements.
The FCA will have broader powers going forward, including to proactively exempt shares from requirements, where it considers it appropriate to do so, and to exempt market making activities and stabilisations from short selling-related requirements.
The new rules provide an extended basis for the market making exemptions from the short selling rules, including market makers that are members of certain overseas trading venues in jurisdictions which HM Treasury has designated as capable of falling within the scope of the exemption.
UK Developments in Cryptoassets Regulation
Following confirmation by the UK Government in November 2024 that it will proceed with legislation to bring cryptoassets into the FCA’s regulatory perimeter, the FCA issued a consultation paper in December 2024 on the future market abuse regime for cryptoassets (MARC) and cryptoasset admissions and disclosures regime (A&D). The proposals support HM Treasury’s proposals for a new regime for public offers of cryptoassets and their admission to trading on a Cryptoasset Trading Platform (CATP). The cryptoassets subject to the consultation include spot cryptoassets, such as stablecoins and unbacked cryptoassets including, for example, Bitcoin and Ether. The FCA aims to develop a balanced regime that addresses market risks without stifling growth. The consultation closes on 14 March 2025.
The UK government has more broadly proposed to bring within the scope of regulation by 2026 (subject to changes in the timeline) the offering and trading of fiat-referenced stablecoin activities and certain associated and ancillary activities.
Cryptoassets are defined as “any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and that uses technology supporting the recording or storage of data (which may include distributed ledger technology)”.
The scope of the definition of cryptoassets may be narrowed through secondary legislation, where appropriate, in order to allow specific regulatory regimes to operate appropriately. The definition of cryptoassets will not include those assets that would already be captured under the existing list of ‘specified investments’ in Part III of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), such as tokenised financial instruments, including security tokens.
It is expected that the FCA’s regulatory remit will with respect to cryptoassets will be expanded from the current requirements under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) and the UK Financial Promotions regime to a more comprehensive conduct regime, encompassing cryptoasset trading, regulation of stablecoins, intermediation, custody and other core activities.
EU Markets in Crypto-Assets Regulation (MiCA)
The EU rules on issuing and trading cryptoassets, adopted in April 2023, took full effect on 30 December 2024. MiCA supersedes the fragmented national legislation in the EU an introduces an EU-wide comprehensive framework for the offering of cryptoassets and related services across the EU.
The key focus under the new rules is on the transparency and disclosure requirements for issuing and trading crypto-assets, the requirements applicable to the issuing of crypto-assets and the supervision of issuers and service providers, and requirements for appropriate organisational standards for cryptoasset issuers and cryptoasset service providers. The services within the scope of the new rules include providing custody and administration of cryptoassets; providing advice on cryptoassets; operating a trading platform for cryptoassets; receiving and transmitting orders for cryptoassets and executing orders for cryptoassets.
MiCA regulates the public offering of cryptoassets, but excludes airdrops and mining or staking rewards, as well e.g. utility tokens. Exemptions may apply to an offer to fewer than 150 natural or legal persons per EU Member State (acting on their own account), an offer the total consideration of which does not exceed €1 million over a 12-month period and an offer solely addressed to and concerning crypto-assets that can only be held by qualified investors (comparable to the Prospectus Regulation exemptions). Offers must be notified with the relevant national authority and a disclosure document must be produced, compliant with certain content and publication requirements. Other requirements also apply, including safeguarding requirements and conduct standards, and a right of withdrawal offered to retail investors (natural persons acting outside their trade, business or profession). Admission of cryptoassets to trading on an EU cryptoasset trading platform is subject to similar requirements.
Authorisation, governance and other requirements apply to a person offering “asset-referenced tokens” (ARTs, essentially stablecoins) that purport to maintain a stable value by referencing a basket of fiat currencies or other assets, e.g. other cryptoassets or precious metals. MiCA distinguishes ARTs from e-money tokens (EMTs) which are pegged to a specific fiat currency and are generally also regulated under the Electronic Money Directive (as amended) (EMD). Some requirements under MiCA apply to e-money activities exempt from the scope of EMD. Issuers of EMTs may only publicly offer EMTs in the EU or seek admission to trading on an EU cryptoasset trading platform if they meet certain criteria. EMTs which reference any fiat currency of the EU (including the Euro or e.g. the Polish Zloty) is automatically considered to be offered to the public in the EU.
A key set of rules under MiCA regulate the provision of certain services in relation to cryptoassets, which services comprise activities typically provided by custodian wallet providers and crypto exchanges but also include e.g. portfolio management and investment advice with respect to cryptoassets. The provision of cryptoasset services in the EU will generally require a regulatory license. This requirement will apply to service providers in the EU and to those outside the EU that provide their services to EU clients. MiCA recognises and permits reverse solicitation if the client requests the services of its own exclusive initiative. The guidance issued on reverse solicitation of cryptoasset services makes it clear that the concept is interpreted very narrowly. Certain EU entities (including UK Alternative Investment Fund Managers (AIFMs)) may, in principle, provide cryptoasset services subject to a regulatory notification and a simplified licensing procedure instead of a new, full license. Licensed cryptoasset service providers are permitted to “passport”, i.e. provide the cryptoasset services they are licensed to provide across the EU either through a branch or on a cross-border basis without an additional licensing requirement in other EU Member States.
Although the EU Market Abuse Regulation does not apply to cryptoassets, MiCA introduces a comparable cryptoasset-specific market abuse regime, which prohibits insider dealing, unlawful disclosure of inside information and market manipulation related to cryptoassets.
FCA Proposals to Extend Research Payment Optionality to Fund Managers
Following the FCA’s new rules that allow MiFID investment managers to rebundle research (which took effect in August 2024), the FCA consulted on extending the same rules to fund managers, subject to some technical differences reflecting the relationship with the underlying investors.
Broadly, the new rules introduce an additional option to the existing research payment options of paying for research out of the firm’s own resources and allocating research costs to the fund through the operation of a separate research payment account. The new option facilitates rebundling, i.e. reintroducing joint payments for third-party research and execution services, subject to complying with certain regulatory safeguards. The safeguards include setting budgets for research costs, appropriate cost allocation, assessment of research for value and client disclosure requirements. The FCA stated at the time that its policy intention was to ensure a level playing field between investment managers authorised under different legislative acts and that it would, in due course, propose rules on extending the new research payment option to fund managers.
The consultation, which closed mid-December, proposed substantially similar rules to apply to fund managers, including full-scope AIFMs. Final rules are expected to be published in the first half of 2025.
The new payment optionality is subject to the following regulatory safeguards.
A written policy on bundled payments. The manager must have a written policy on bundled payments, applicable to each fund under its management. The policy must set out the manager’s governance, decision-making and controls in respect of third-party research purchased using bundled payments. The policy should explain how research costs are accounted for and separated from execution costs.
Cost methodology. The manager must set out its methodology for the identification and calculation of research costs, including the basis for calculating research costs separately from the aggregated charges for research and trade execution.
Setting a budget. The manager must set a budget at least annually for each fund under its management. The budget must be based on the anticipated cost of third-party research to be consumed in the coming year in connection with the manager’s investment management and execution activities in respect of the relevant funds but must not be linked to anticipated trade or transaction volumes or values. This means a straightforward calculation of anticipated research costs as a percentage of fund NAV is unlikely to meet the requirements.
If it is necessary to exceed the research budget for the relevant fund, the manager must inform the governing body of the fund (where applicable) and make appropriate periodic disclosures, including in the annual report. In addition, before seeking to increase the budget, the manager must determine whether the higher research costs would in fact be in the interests of the fund and its investors and, where applicable, consider whether the increase represents value to the investor in accordance with the Consumer Duty Principle.
Fair cost allocation. The manager must allocate the costs of research using bundled payments fairly across the funds under its management taking into consideration the budget of each fund.
Value assessments. With respect to each unauthorised AIF or an unregulated collective investment scheme, the fund manager must at least annually undertake an assessment of the value, quality and use of research purchased using bundled payments, including the relevance and value the research represented to the investment decision-making process. The value assessment should also take into account whether the quantum of the research charges is reasonable when benchmarked against comparable services.
Pre-investment disclosure. The manager must disclose in appropriate detail the use of bundled research payments in the fund offering materials. The disclosure must include details of the manager’s use of bundled research payments for research for the fund, as well as details of how research may be paid for using other, additional permitted research payment arrangements, and the expected annual research costs. The manager must also disclose a summary of its policy on the use of bundled research payments for the fund in a way that is clear, fair and not misleading.
Periodic disclosure. The manager must disclose in the annual report or other periodic disclosures the most significant services or other benefits received from research providers or the most significant research providers from which such services are purchased. In addition, disclosure of the total costs incurred by the client, disclosed on an annual basis, reflecting the total research payments made using bundled payments over the relevant financial period.
Authorised funds are subject to certain additional safeguarding requirements.
Research provider payment allocation arrangements. The manager must establish a basis and arrangements for the allocation of payments between different research providers and consider the proportion and rationale for using the different research providers, including:
- Third-party providers of research and execution services (namely, brokers providing bundled research and execution services)
- Independent research providers, i.e. non-broker associated providers.
Administration. The manager must remain fully responsible for the administration of commission sharing accounts and similar accounts for purchasing research using bundled payments, as well as the timely reconciliation of payments and charges and reports on account use and activity.
Potential Extension of Transaction Reporting Obligations to CPMIs
The FCA issued its Discussion Paper 24/2 (DP)3 on “Improving the UK transaction reporting regime” in November 2024. The FCA seeks industry views on whether the transaction reporting requirements set out in the MiFID framework should be extended to apply to fund management firms carrying on MiFID portfolio management activities.
The DP is part of broader industry engagement by the FCA and HM Treasury concerning the UK asset management sector and the applicable legal and regulatory frameworks, including the FCA’s 2023 Discussion Paper “Updating and improving the UK regime for asset management”4. The FCA’s initiative to create a level playing field for asset management is likely to ultimately extend transaction reporting requirements to all asset managers, not only MiFID firms.
The DP outlines also potential options for evolving the transaction reporting and instrument reference data requirements, including changes to the scope of financial instruments captured by the requirements, for example, the scope of reporting obligations for over-the-counter (OTC) derivatives.
The DP notes that, currently, AIFMs, which are subject to the requirements in the UK Alternative Investment Fund Managers Directive (AIFMD), and UCITS management companies, which are subject to the Directive(s) for Undertakings for Collective Investment in Transferable Securities (UCITS),5 are not subject to transaction reporting requirements for their MiFID activities, although the same activity would be reportable if it was conducted by a firm authorised under MiFID.
The FCA is considering whether to bring CPMI firms into scope of the transaction reporting regime. However, including the MiFID activity by CPMIs within the scope of the transaction reporting regime would only provide only a limited increase of information available to the FCA.Presently the FCA is unclear whether the additional cost of reporting imposed on CPMIs would be justified by the benefit of the data it would receive. The FCA acknowledges that it may be preferential to ensure alignment with international transaction reporting requirements, including with the EU reporting requirements as the EU transaction reporting regime evolves.6The FCA invites industry participants’ views and comments by 14 February 2025.
AIFMD II – Open-ended Loan Funds
The European Securities and Markets Authority (ESMA) is currently consulting7 on regulatory proposals for technical standards to determine requirements which loan-originating AIFs must comply with to be permitted to operate as open-ended funds. These requirements include liquidity requirements (i.e. the availability of liquid assets, liquidity stress testing), sound liquidity management systems and redemption policies appropriate to the liquidity profile of the AIF. The consultation closes on 12 March 2025.
5 Where such firms are also authorised to provide portfolio management services, they are referred to as CPMI firms.
6 ESMA recommended that the EU MiFID transaction reporting obligations should be extended to the MiFID business of AIFMs and UCITS management companies in its Final Report of March 2021.
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