Welcome to the latest edition of Gem Compliance’s monthly regulation newsletter. The aim of the newsletter is to present industry news in an easily digestible format. As such, not all sources of industry information and FCA publications (and no PRA publications unless specified) will be covered. Therefore, clients and associates of Gem Compliance should periodically check the FCA’s and PRA’s websites for regulatory developments. We hope you find this newsletter useful and should you have any compliance queries or require advice on any of these topics, please do not hesitate to contact us.
As at the time of this newsletter, the current position on Brexit is that the new legal default date is 31 October 2019 and domestic legislation has been amended to confirm this. If the EU Withdrawal Agreement is ratified before then, the UK will leave with a deal on the 1st of the following month. Currently, the UK must participate in European Parliament elections if a deal hasn’t been agreed by 22 May. In any case and as before, firms should continue to prepare (and evidence this preparation) for a range of scenarios, including one still in which the UK leaves without a deal.
Otherwise, the latest edition of the FCA Regulation Round up was issued on 18 April. As March 2019 was the last version to appear on the FCA website, firms are encouraged to subscribe directly to that newsletter to ensure that they continue to receive this directly.
The latest edition of the FCA Policy Development Update was issued on 5 April. FCA February Board Minutes are now available, which includes discussions on Brexit and business planning.
Internal changes at Gem this month include Agie Mackay starting maternity leave and Lee McGreevy joining as a Junior Compliance Associate. Main features
The FCA has issued its 2019/2020 annual business plan, outlining the key issues that it considers will impact on FCA regulation over the next 12 months including its priorities, both generally but also across different sectors.
As the UK finalises preparations to leave the European Union, the FCA’s immediate priority will remain supporting an orderly transition post-exit. The FCA will also continue to play a leading role in shaping the global regulatory framework working with other national regulators and international bodies.
The plan also compares some of the current priorities identified with those identified in last year’s plan including where these have been carried forward. It also reviews the priorities on a sector by sector basis although in some areas, these priorities have not changed significantly from last year. The plan however confirms that the FCA will carry out a number of ‘deep dive’ reviews into specific areas over the next 12 months.
The Business Plan outlines four ongoing cross-sector priorities:
Work on firms’ culture and governance, including extending the Senior Managers and Certification Regime to all firms.
Ensuring the fair treatment of firms’ existing customers by monitoring firms’ practices, including the information they give prospective and current customers.
Developing the work being done on operational resilience, which will play a vital role in protecting the UK’s financial system.
Combating financial crime and improving anti-money laundering practices, by enhancing the use of technology and data, as well as engaging with multiple agencies and government bodies.
The plan also sets out three additional cross-sector priorities, which have longer time horizons:
the future of regulation
ensuring innovation and the use of data work in consumers’ interests
examining the intergenerational challenge in financial services
Andrew Bailey, FCA Chief Executive, said:
‘Dealing with Brexit will be the most immediate challenge we face. But this plan also commits us to a stretching programme of work across the financial sector.
‘In order to ensure we are a regulator that continues to serve the public interest, we need to adapt to the ever-changing environment. This is why the future of regulation is a key priority in this year’s Business Plan. We will be leading a debate about this with stakeholders so that we can keep pace with the developments taking place in the markets that we regulate and in wider society.’
Alongside the Business Plan, the FCA is also publishing its annual fees Consultation Paper and a paper setting out the FCA’s Research Agenda.
For further information on the FCA’s business plan, a summary of the key issues is shown here and a link to the full business plan here. All firms are encouraged to review the annual business plan and we recommend evidencing an assessment of any key areas of focus depending upon the sector involved. We would also recommend that all firms raise general awareness at senior management level of these current messages from the FCA.
Links to the Fees Consultation paper and the Research Agenda are also contained elsewhere in this newsletter. In addition, the PRA has also issued 2019/2020 Business Plan, linked here.
The FCA has concluded its investigations into two areas of Standard Chartered Bank’s (‘SCB’) business identified by the bank as higher risk: its UK Wholesale Bank Correspondent Banking business and its branches in the United Arab Emirates (UAE). The FCA found serious and sustained shortcomings in SCB’s AML controls relating to customer due diligence and ongoing monitoring. According to the FCA, the bank failed to establish and maintain risk-sensitive policies and procedures, and failed to ensure its UAE branches applied UK equivalent AML and counter-terrorist financing controls.
Under the Money Laundering Regulations 2007 (MLRs) (in force at that time), SCB was required to establish and maintain appropriate and risk sensitive policies and procedures to reduce the risk it may be used to launder the proceeds of crime, evade financial sanctions or finance terrorism. The MLRs also imposed a duty on the bank to require its global (non-EEA) branches and subsidiaries to apply policies and procedures in relation to due diligence and ongoing monitoring that are equivalent to those required of SCB for UK based activity.
The FCA found significant shortcomings in SCB’s own internal assessments of the adequacy of its AML controls, its approach towards identifying and mitigating material money laundering risks and its escalation of money laundering risks. These failings exposed SCB to the risk of breaching sanctions and increased the risk of the bank receiving and/or laundering the proceeds of crime. Examples include:
opening an account with 3 million UAE Dirham in cash in a suitcase (just over £500,000) with little evidence that the origin of the funds had been investigated;
failing to collect sufficient information on a customer exporting a commercial product which could, potentially, have a military application. This product was exported to over 75 countries, including two jurisdictions where armed conflict was taking place or was likely to be taking place; and
not reviewing due diligence on a customer despite repeated red flags such as a blocked transaction from another bank indicating a link to a sanctioned entity.
SCB’s failings occurred in its UK Correspondent Banking business during the period from November 2010 to July 2013 and in its UAE branches during the period from November 2009 to December 2014.
Today, US authorities have also taken action against the Standard Chartered group for significant violations of US sanctions laws and regulations.
The FCA press release includes a statement from Mark Steward, Director of Enforcement and Market Oversight at the FCA relating to their findings and the international co-operation received by the FCA during their investigation.
SCB did not dispute the FCA’s findings and exercised its right, under the FCA’s partly contested case process, to ask the FCA’s Regulatory Decisions Committee to assess the appropriate level of sanction. The bank’s agreement to accept the FCA’s findings meant it qualified for a 30% discount. Otherwise, the FCA would have imposed a financial penalty of £145,947,500.
The FCA’s Decision Notice provides greater detail around their investigation and penalty imposed to Standard Chartered Bank.
The FCA has issued its annual consultation (CP19/16) on regulated fees and levies rates for 2019/2020.
In this consultation paper, the FCA includes proposals for 2019/20 regulated fees and levies to fund itself, the Financial Ombudsman Service ('FOS'), the Money and Pensions Service ('MAPS'), debt advice delivered by the Devolved Authorities and HM Treasury's illegal money lending (IML) expenses.
The FCA's annual funding requirement ('AFR') for 2019/20 is £558.5 million (an increase of 2.7%). This figure includes the costs it needs to recover for changes to regulatory responsibilities and additional costs related to Brexit. The FCA policy for allocating the AFR recovery across fee-blocks is to maintain an even distribution of increases or decreases, other than where for individual fee-blocks there have been material and explainable exceptions. The exceptions to an even distribution of the FCA's 2019/20 AFR cover scope change costs, Brexit costs and set-up costs relating to the Securitisation Regulation ((EU) 2017/2402). More information on the exceptions is set out in chapter 2.
Table 1.1 in chapter 1 of CP19/16 helps fee payers identify which chapters relate to them.
The FCA's fee calculator is available for fee payers to use to calculate their periodic fees for the forthcoming year. The fees calculator is based on the draft periodic fee rates in Appendices 1 and 2 to CP19/16 and therefore may not be final rates. The Financial Services Compensation Scheme (FSCS) levies data will also not be available until early May 2019.
In chapter 6, the FCA is consulting on clarification of the definition of income as the tariff base measure used to calculate the fees of regulated benchmark administrators.
The draft instruments making the proposed changes to the Fees manual (FEES) are set out in Appendices 1 and 2.
Comments can be made on the proposals until 29 May 2019. The FCA plans to publish its response and the final fee rates and levy rules in a policy statement in early July 2019, subject to FCA Board approval in June 2019.
For further information, a link to CP19/16 is shown here.
The FCA has published its Approach to Supervision document, which followed on from the FCA’s March 2018 consultation paper on the same topic. The Approach gives an insight into the FCA’s approach to supervising firms and individuals, and sets out the FCA’s role in ensuring fair and honest markets; why and how the FCA priorities supervisory work; and how the FCA supervises in practice. An overview of key aspects of the Approach is set out below.
Chapter 2 of the Approach sets out eight supervisory principles underpinning the FCA’s work, which are designed to complement the FCA’s Principles for Businesses. The supervisory principles are
forward looking;
focus on strategy and business models;
focus on culture and governance;
focus on individual as well as firm accountability;
proportionate and risk based;
two way communication;
co-ordinated; and
put right systematic harm that has occurred and stop it happening again.
Chapter 3 sets out the FCA’s priorities and focus as regards supervision, including cross-market priorities, and otherwise priorities across for example retail markets and wholesale markets. Particularly, and alongside its market priorities, the FCA details the following as key to its supervisory approach:
Business models: the FCA uses business model analysis to identify aspects of a firm’s business model that indicate higher levels of risk. This analysis also helps to anticipate problems in individual firms and markets;
Culture and individuals: the FCA focuses on the drivers of behaviour and the role individuals play within firms. A firm’s managers are responsible for the firm’s culture, and for preventing harm. The FCA provides feedback on, and challenges, the behaviour it observes through supervisory engagement. The FCA will look at the purpose of a firm to understand what it is trying to achieve in practice, not just what is written in its mission statement; and
Prudential supervision: the FCA is the prudential supervisor for approximately 46,000 firms. As described in its Mission, the FCA’s supervisory work aims to avoid disorderly failure and minimise the harm to consumers or the integrity of the UK financial system.
Chapter 4 sets out a detailed structure of how the FCA supervises. This is focused around four prime processes: (i) the identification of harm including acting pre-emptively and for example, reliance on whistle-blowers and other bodies and organisations: (ii) diagnostic tools; (iii) remedy tools; and (iv) evaluation including individual firm evaluation.
Annex 1 of the Approach sets out the FCA’s feedback statement to its consultation on the Approach. Annex 2 sets out the FCA’s firm assessment model. This comprises nine key areas of a firm that the FCA makes a judgement on, the areas are separated into two categories: business model and strategy; and culture.
Following this, the FCA rulebook has been updated to give further guidance at SUP 1A on the FCA’s Supervisory Principles and further guidance can be shown here. All firms are encouraged to evidence that they have reviewed this specific part of the rulebook. The FCA aims to be more proactive overall in its approach to supervision.
A link to the finalised Approach to Supervision document is here.
At the same time, the FCA also issued their ‘Approach to Enforcement’ final guidance document, a link to which is also shown below. This again has been subject to consultation previously. The current guidance covers such areas as:
the FCA’s role in enforcement
how the FCA identifies harm
diagnosing harm through its investigations.
Sanctions and remedies available to the FCA.
Evaluating their approach to enforcements and how it measures its performance.
Consultation Papers
The FCA has announced that mortgage customers who have previously been unable to switch mortgages despite being up to date with their payments (commonly known as mortgage prisoners) could soon be able to find a cheaper deal. The FCA has issued consultation paper CP19/14 regarding changes to responsible lending rules and guidance following the publication of a final report MS16/2.3 on a mortgage market study being issued.
The FCA has issued a press release and consultation paper CP19/15 on proposed changes to Independent Governance Committees (IGC’s) currently providing independent oversight of the value for money by providers of workplace pensions.
Policy Statements PS19/9: Applying the Senior Managers and Certification Regime to Claims Management Companies
The FCA has issued a policy statement PS19/01 giving feedback and final rules on previous consultations. CP18/34 and CP19/1 regarding fees structure for credit rating agencies, trade repositories and securitisation repositories when responsibility for their regulation passes to the UK post Brexit.
The FCA has issued a policy statement, PS19/11, giving feedback and final rules on introducing a permanent ban on the sale, marketing and distribution of binary options to retail customers, following consultation under CP18/37. In the meantime, they have announced a delay to a similar prohibition in relation to contract for differences (CFD) and CFD like options as previously proposed under CP18/38.
Guidance & Feedback
A warning to General Insurance firms about manufacturing, sales and distribution approaches that can lead to customers purchasing inappropriate products, paying excessive prices or receiving poor service has been issued. This follows the issue of a report on the outcome of thematic review work Thematic Review (TR 19/2) on the general insurance distribution chain, setting out the FCA’s expectations of firms and next steps. These steps include a guidance consultation (GC19/2) for insurance product manufacturers and distributors and a Dear CEO letter to general insurance firms giving the background to this review and its recommendations.
The FCA has announced the issue of a thematic review (TR19/3) on the fair treatment of with-profits customers and has also issued a Dear CEO letter on the finding for the attention of relevant firms.
The FCA has issued a press release and Feedback Statement, FS19/2, summarising the responses received to its Discussion Paper (DP18/5) relating to options for change that are most likely to address potential deficiencies in consumer protection. This includes reviewing how the FCA applies the regulatory framework and new/revised Principles to strengthen and clarify firms’ duties to consumers including a potential private right of action for Principles breaches.
The FCA has announced it has issued a final report into its recent supervisory work on conflicts of interest and payment for order flow (PFOF) following the preliminary findings covered in Market Watch no. 56 in September 2018. The report focuses on how wholesale broking firms manage conflicts of interest when firms charge a commission from market makers or liquidity providers for eligible counterparty client business in listed derivatives markets.
Miscellaneous Publications
The FCA has announced that the FCA Board has decided that there should be an investigation by an independent person into the issues raised by the failure of London Capital and Finance. The FCA has written to HM Treasury requesting that HM Treasury commission the FCA to ensure such a review is carried out.
As part of preparation of a range of outcomes from Brexit, the FCA has announced it has developed a new UK Benchmarks Register. This is a public record of all benchmark administrators that will be able to operate in the UK post Brexit, including UK and non-UK located entities.
Market Watch no. 59 has been issued covering issues relating to transaction reporting and telephone recording under MIFID II.
Primary Market Bulletin 23 has been issued including, amongst other things, updated guidance on certain new regulatory requirements for firms managing securities options introduced following MiFID II.
Handbook Notices HN64 and HN65 have been issued which included implementing the amendments required to increase the Financial Ombudsman Service aware limits, certain technical standards in relation to Brexit, and FCA supervisory principles, amongst other matters.
The final report of a review of retained provisions under the Consumer Credit Act has been issued.
The FCA has issued a report on its research agenda setting out the broad areas of research most relevant to carrying out its overall Mission. Research interests fall across 5 broad and complementary themes of:
household finance and consumer behaviour;
securities markets: microstructure, integrity and stability;
competition, innovation and firm behaviour and culture;
technology, big data and artificial intelligence; and
regulatory efficiency and effectiveness.
The FCA and the US Securities and Exchange Commission (SEC) have reaffirmed their commitment to continue close co-operation and information sharing in the event of Brexit.
The FCA has signed an Innovation Functions Co-operation Agreement between a number of Canadian regulatory bodies to ensure that innovative financial businesses are not constrained by national borders.
Two standalone Dear CEO letters have been issued recently relating to FCA expectations on firms approving financial promotions for retail investments and their views on the key harms that wholesale marketing broking firms can pose to their customers and its intended supervisory strategy to manage such risks.
ESMA has issued a supervisory briefing covering guidance on appropriateness issues and execution-only business following the implementation of MiFID II.
Following the delay in Brexit from 29th March, the FCA issued final rules that will apply in the event that the UK leaves the EU without a deal or implementation period, reflecting near-final versions issued in February in PS19/5 other than changing relevant potential exit dates.
The FCA began regulating claims management companies from 1 April. All such firms will now have to demonstrate that they meet and maintain minimum standards by the FCA and will need to apply to the FCA for authorisation.
The FCA has announced the publication of complaints data for regulated firms for the second half of 2018. Complaints decreased by 5% and it’s the first time that levels have fallen since firms were required to change the way they report complaints. PPI continued to be the most complained about product, making up 40% of all complaints although a decrease in PPI complaints levels occurred. Monthly data on PPI complaints is also available.
Speech on Effective Stewardship by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, delivered at the London Stock Exchange, including reference to the recent discussion paper (DP19/1) on stewardship issued jointly by the FCA and the Financial Reporting Council “(FRC’).
Speech by Mark Steward, Director of Enforcement and Market Oversight at the FCA, delivered at the Global Investigations Review Live event in London, related to enforcement processes including partly contested cases, and AML investigations.
Speech by Andrew Bailey, CEO of the FCA: Future of conduction regulation delivered at Bloomberg, London. Highlights from Mr Bailey’s speech included the view that there should be a debate about the future of regulation, although this needed to be in a public interest framework and that the FCA will undertake further work to examine the role of their principles. Mr Bailey also indicated that the FCA will consider the most efficient and proportionate options for achieving the substance of a duty of care. This is also linked to the issue of FS 19/2 as described above.
The FCA has fined Goldman Sachs International £34.3m in connection with transaction reporting failures and for failing to provide accurate and timely reporting concerning 220.2m transactions between November 2007 and March 2017, under MiFID I.
The FCA has issued a final notice for Samrat Deep Bhandari relating to a prohibition of performing any form of controlled function as a result of previous convictions and imprisonment relating to creating false impressions regarding investments in shares.
The FCA’s Upper Tribunal has issued its decision upholding the decision taken by the FCA against Linear Investments Limited. This was reference to them by the firm regarding the financial penalty imposed by the FCA concerning a lack of monitoring and systems and controls of trading undertaken via the firm’s brokerage services, thereby increasing the risk that market abuse could take place without detection.
The Information Commissioner has issued a fine to Grove Pensions Solutions Limited for being responsible for sending nearly two million direct marketing emails without consent.
Four individuals have been arrested as the Serious Fraud Office launches an investigation into failed mini-bond manufacturer London Capital & Finance. The launch of the SFO probe followed a formal referral by the FCA for law enforcement.
Two individuals, Carlo Palombo and Colin Bermingham were sentenced to a total of 9 years imprisonment for manipulating the EURIBOR at the height of the financial crisis.
An accountant, Roger Bessent, has been jailed for more than three years after he fraudulently took more than £290,000 from a pension scheme. Mr Bessent was a trustee and administrator for the Focusplay Retirement Benefit Scheme but transferred members funds into new businesses that he and his family owned and operated.
A court has heard that a trader, Walid Choucair, who allegedly received a series of insider trading tips from UBS Group’s former compliance boss, Fabiana Abdel-Malek, regularly spent thousands of pounds on champagne at a Mayfair nightclub. Originally charged in 2017, the pair are currently facing a retrial after the jury in the original trial became deadlocked in late 2018.
Following the implementation of the requirement under MiFID II, it is reported that many platforms were sending out incorrect 10% portfolio drop notifications to clients in 2018 because of confusion on how to report them.
Regulatory consultancy Bovill has reported that almost one in four companies which submitted transaction data under new MiFID II rules from 2018 have been done so inaccurately.
The FCA has been reviewing robo-advice firms accounts and costs and charges disclosures since its highly critical review in 2018 of their suitability. Despite this heightened regulatory scrutiny, the FCA has not taken any formal enforcement action against robo-advisers.
With the upper limit the Financial Ombudsman Service (‘FOS’) can award against advisers for complaints rising from £150k to £350k from 1 April, advisers have reacted with dismay to a communication email sent by to them by the regulator in advance of this warning firms to ensure that their professional indemnity insurance (‘PII’) policy will provide sufficient cover for any such awards.
Keith Richards, CEO of Personal Finance Society, (‘PFS’) has issued an announcement confirming that the PFS has already raised its concerns on the increase in FOS limit, both independently and as part of the FCA consultation highlighting the challenges that PFS members will face in being able to obtain appropriate PII cover in what is already a hardening insurance market in this area.
In the meantime, Pimfa (the Personal Investment Management & Financial Advice Association) has cited the potentially negative impact of the regulator’s proposals on the PII Market. Pimfa said it was disappointed that the FCA had failed to properly assess the impact of this previous proposal on advisers’ ability to obtain insurance and therefore, the increase in risk of breaching of the requirement.
FOS has upheld a complaint against an IFA from a former client who acted against advice not to invest his £61,000 pension in the collapsed Harlequin Property scheme. The dispute rested on whether the client could be classified as ‘insistent’.
FOS has instructed Lighthouse Group plc to compensate any future lifetime allowance charged which may be incurred by a client who was a member of the NHS pension scheme after she breached the annual allowance due to unsuitable advice.
It is reported that nearly all 2,500 clients in collapsed discretionary fund manager, Standard Capital, will get the total sum of their investments back.
The FCA has launched a probe into rugby club, Wasps, to try and determine whether the Premiership club mislead the market about the state of its finances and how quickly it rectified the situation.
The Money and Pensions Service (‘MAPS’) has launched, starting with a number of events across the UK. Formerly the Single Financial Guidance Body, MAPS brings together Pension Wise, the Pensions Advisory Service and the Money Advice Service. It intends to develop a joined up approach to tackle debit issues and provide money and pensions
The Financial Services Compensation Scheme (‘FSCS’) has announced that former RBS executive, Caroline Rainbird, will take over as its new chief executive in May.
At the public launch of the FCA’s 2019 Business Plan, Andrew Bailey, FCA Chief Executive Officer, has defended the FCA’s handling of the collapse of mini-bond manufacturer, London Capital & Finance, following the launch of a criminal enquiry. Accountants have warned that as little as 20% of the £237m run by the firm may be recovered. It is reported that both the financial press and a number of financial advisers previously sounded warnings about the company. The FCA has already announced that it has launched an investigation into the handling of the case.
As part of the FCA’s Feedback Statement (FS19/2 - see above) on a previous discussion paper (DP18/5) regarding duty of care and how the FCA prioritise, protect and intervene in financial markets to protect consumers, the FCA has promised a shake up in how it regulates consumer finance.
Standard Life contacted clients holding international bonds to inform them that these bonds will no longer by covered by the Financial Services Compensation Scheme (‘FSCS’) post Brexit and that such protection would only continue to apply to in respect of policies issued by EEA insurers where the insurer remains authorised in the UK.
According to the Investment Association, UK stock strategies saw redemptions worth £236m in the month of March leading up to the original Brexit deadline, their highest level since October.
In advance of the original Brexit deadline, a notice on the FCA website had confirmed that the register would be out of action for three days from 12th April while changes were made to firms’ details, if the UK head left the EU without a deal.
HMRC & Tax
HMRC has won a £40m legal case against a tax avoidance scheme promoter which will help collect unpaid taxes. Hyrax Resourcing, which promoted a disguised remuneration avoidance scheme, will now have to disclose the details of the scheme along with the identifies of 1,180 high earners who used it.
Tax offices fail to use new laws to find dodgy ‘McMafia’ wealth. Tax investigators have not made a single application to use Unexplained Wealth Orders more than 14 months after they were introduced to court.
In the FCA’s 2019 business plan, the FCA has warned that wealth management is increasingly being used as a vehicle for financial scams.
The FCA has issued a Dear CEO letter to pension providers outlining the risks to consider when designing products and services in relation to Defined Benefits (‘DB’) transfers to Defined Contribution (‘DC’) schemes. Following this, a number of firms including DP Pensions and Westbury Trustee Services have confirmed that they intend to stop these services in the future.
The Pensions Advice Taskforce is to launch a new ‘Gold Standard’ adviser code to help the public identify good defined benefit transfer advice. This will be based on nine principles underpinning good practice in pension transfer advice.
The Financial Services Compensation Scheme (‘FSCS’) has topped up compensation for five steelworkers following recalculations. Advisers and MPs had previously campaigned for higher payouts to steelworkers who had been given unsuitable pension transfer advice.
This newsletter contains generic information and has been generated for professional clients and associates of Gem Compliance Consulting Limited only and should not be regarded as advice. We will not be liable for loss, however caused by parties acting on the information contained herein.
