Welcome to the latest edition of Gem Compliance’s monthly regulation newsletter. The aim of the newsletter is to present a summary of relevant industry news which has occurred during the month in an easily digestible format. As such, not all sources of industry information or FCA publications (and no PRA publications unless specified) may be included.
Clients and associates of Gem Compliance should periodically check the FCA’s, and where relevant, the PRA’s websites for regulatory developments. We hope you find this newsletter useful and should you have any feedback, compliance queries or require advice on any of these topics, please do not hesitate to contact us.
During December, the general news in the UK continued to be dominated by Covid, including the impact of the new variant, Omicron, which has led to a major increase in transmission but to date, possibly slightly milder symptoms being reported. However, it is likely the overall impact of this will only come to light further into January. The new variant has influenced UK government guidance on restrictions, with Scotland, Wales and Northern Ireland (but not England) returning to increased restrictions and isolation advice but to date, not back to lockdown. The FCA continues to remind firms to check the dedicated coronavirus section (for firms and consumers) on the FCA’s website on a regular basis for updated information.
In respect of regulatory news, it has been a busy month since the end of November, with a number of consultation papers and policy statements issued before the year end. The new prudential regime, the Investment Firm Prudential Regime (IFPR) for those firms within MiFID scope, also came into force on 1 January 2022. The most recent update on the FCA website on these changes is shown here.
Other general updates included that the FCA published Handbook Notice no.94 and the latest policy developments updates can be found here (but has not been updated since September). The minutes for the FCA Board meetings on 21 October and 11 November have been issued. The FCA’s Regulation Round up for December is shown here.
With regard to future industry topics, the FCA has scheduled a seminar on Operational Resilience and we have also been made aware that a further Covid survey will be issued in mid-January, and issued to those firms in ‘Tranche 1’ i.e. those firms who received this for the first time in June 2020.
For other regulatory newsletters, the Financial Ombudsman Service (FOS) published its most recent newsletters, edition no.166 and no.167 and the latest PRA regulatory digest for November 21 has been issued. The e-newsletter from the ICO has restarted at the end of November 2021 and a further edition for December has been issued.
Finally, we would like to take the opportunity to wish all recipients of the Gem newsletter best wishes for the New Year and for a good 2022.
The FCA has launched a consultation (CP21/34) on improving the Appointed Representatives regime and tackling potential harm from abuses of this regulatory business model. An appointed representative (AR) is a firm or person who can carry on certain (but not all) regulated activity without the need to be directly authorised by the FCA where this is on behalf, and under the responsibility of, a firm authorised by the FCA (the principal). In appointing an AR, the principal assumes responsibility for the regulated activities the AR carries out.
Whilst the FCA sees benefits to consumers in the regime, it also considers that it is seeing a wide range of potential harm across all sectors where firms have ARs. It is considered harm often occurs because principals don’t perform enough due diligence before appointing an AR, or from inadequate oversight and control after an AR has been appointed. Consumer complaints arising from the Principal/AR regime are also considered to be a concern.
In addition to these proposed rule and supervision changes to the regime, the FCA is exploring with HM Treasury whether legislative change is needed. HM Treasury has issued a related consultation and a 'Call for Evidence' paper, seeking industry and consumer feedback on the advantages and disadvantages of the regime itself. This has partly come about indirectly from the outcome of the review of the Greensill Capital collapse given one part of the overall structure involved was an AR. Whilst recognising that the AR arrangements that Greensill Capital had in place at the time did not bring about the key harms of the Greensill business model, it was felt that it did highlight certain risks of the AR regime in general including in relation to FCA oversight. Therefore the Treasury Select Committee recommended that the FCA and HMT consider reforms to the AR regime in case either changes in FCA oversight or limitations of the scope of the regime were required to reduce the opportunities available to abuse the system.
This also follows previous thematic reviews conducted by the FCA on the Principal/AR regime, initially in the insurance industry in 2016, followed by the investment sector in 2019.
The FCA’s proposed changes to the regime aim to address the harm arising in this market while retaining the cost, competition and innovation benefits the AR model can provide. The proposals would improve principals’ oversight of ARs and require principals to provide the FCA with more information on their ARs, allowing the FCA to spot risks more quickly.
The FCA will also expect ARs to be more effectively overseen by their principals.
The FCA is also seeking views, through a discussion chapter in the consultation, on the wider risk posed by some of the business models operated by principal firms, and whether setting limits on such arrangements may help to reduce potential harm. This includes regulatory hosting services which allows new businesses to operate initially under an ‘incubatory’ arrangement with a principal taking responsibility for an AR’s compliance, given the length of time it can take for new businesses to become directly authorised.
Sheldon Mills, Executive Director for Consumers and Competition at the FCA, said:
'The appointed representative model helps bring choices to consumers, but the level of harm we are currently seeing is too high. There are real risks of consumers being misled and mis-sold with little scope for recourse. We have already started work looking at high risk ARs and these proposals build on that work. We want to ensure that principals are properly overseeing their appointed representatives, ensuring they are competent, financially stable and delivering fair outcomes for consumers.'
Consultation on both CP21/34 and HM Treasury’s Call for Evidence closes on 3rd March 2022, with a policy statement on any confirmed changes to be issued in due course. The FCA also recognises that since the AR regime forms part of the UK financial services regime, any major fundamental changes to the regulatory structure itself would require changes in legislation. In addition, major change in itself could bring about harm for existing consumers and investors who currently benefit from the regime and could also reduce competition in the financial services markets which would be contrary to its own objectives.
The FCA has issued two policy statements relating to enhancing climate-related disclosures by regulated firms. The first one, PS21/23, is directed at listed companies with PS21/24 directed at asset managers, asset owners, life insurers and regulated pension providers. For the purpose of this feature, we have also chosen to focus on PS21/24 (which gave feedback on previous consultation under CP21/17) although given the nature of the messages, all regulated firms may benefit from keeping up to date with the FCA’s recent initiatives in this area.
This follows on from similar legislation being implemented in the EU under the Sustainable Finance Disclosure Regulation, (SFDR), which the UK chose to opt out of given this was implemented in the EU post Brexit.
As a result of the recent policy statements, the FCA is introducing a new Environmental, Social and Governance (ESG) sourcebook which will contain rules and guidance for firms, including asset managers and owners to make disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
Appendix 1 of PS21/24 provides further guidance on the firms in scope, either in the first phase of implementation or once fully implemented. This will depend upon certain threshold levels at firm level and also certain types of product at ‘product’ level including authorised funds and unauthorised Alternative Investment Funds (AIFs).
For in-scope firms and entities, there will be mandatory disclosures that will require to be made in the future on an annual basis as follows:
Entity level – at firm level, a TCFD report setting out how the firm take climate-related risks and opportunities into account in managing or administering investments on behalf of clients and consumers; and
Product or portfolio level – a baseline set of consistent, comparable disclosures in respect of products and portfolios, including a core set of metrics.
The rules aim to increase transparency on how firms are managing climate-related risks and opportunities so clients and consumers can make considered choices.
The FCA will build on this work as it contributes to the implementation of the Government’s Roadmap to Sustainable Investment and has issued a discussion paper (DP21/4) on how such disclosure requirements and investment ‘labels’ can best build on TCFD-aligned disclosure rules and guidance.
The new disclosure rules will apply from 1 January 2022 for the largest in-scope firms which will be asset managers above a £50bn AUM threshold or asset owners above £25bn value, and 1 year later for ‘smaller’ firms above a £5bn AUM threshold. Firms that are under the £5bn AUM threshold are currently exempt from the mandatory disclosure requirements. However the FCA recognises many firms are already doing this either on a voluntary basis, or for corporate governance drivers or as a result of other ESG regulation, including where products may be available to EU investors and impacted by the EU SFDR. For in-scope firms, the first public disclosures in line with the requirements must be made by 30 June 2023 for ‘phase 1’ firms and a year later for phase 2 firms.
The FCA has issued Policy Statement PS21/16 which outlines and implements the reforms that it has made to its decision-making process to ensure it can make faster and more effective decisions for consumers, markets and firms. This follows earlier consultation in 2021 on related proposals in CP21/25.
As part of the FCA’s transformation to become a more innovative and assertive regulator, more decisions will be taken by the FCA’s senior managers rather than by the Regulatory Decisions Committee (RDC). The new process will ensure decisions to prevent or stop consumer harm are taken more quickly.
As part of consultation feedback, the FCA considered that the vast majority of respondents agreed with the aims of the proposals but did not agree with how the proposals would be implemented. There was a concern that speed and efficiency were being emphasised unduly and would increase the potential risk of a lack of fairness and objectivity in decision-making.
Therefore, more contentious cases will continue to be reviewed by the RDC, which is a committee of the FCA’s Board that operates separately from the regulator. Its members are drawn from business, consumer and financial services backgrounds. More information on the ongoing role of the RDC is linked here.
Otherwise the FCA’s senior managers are now able to take decisions on the following:
a firm’s authorisation or an individual’s approval
action in straightforward cases to cancel a firm’s permissions and that action is contested
starting civil proceedings, such as seeking an injunction
starting criminal proceedings, such as a prosecution for insider dealing
using the FCA’s powers to vary or limit a firm’s permissions
using the FCA’s powers to impose requirements on a firm
Emily Shepperd, Executive Director of Authorisations, said: 'We are taking a fresh approach to tackling firms and individuals who do not meet the required standards. Our new streamlined decision-making process will allow us to be more assertive in stopping harm.'
The changes have been outlined in updates to the FCA’s Enforcement Guide (EG) and Decisions Procedure and Penalties Manual (DEPP). The changes came into force on 26 November 2021.
CP21/31: FCA and Bank of England consult on changes to reporting requirements under the UK EMIR. Responses are requested by 17th February.
CP21/32: The FCA has announced proposals to improve outcomes for non-workplace pension customers. The FCA is proposing that pensions firms offer a new ‘default’ investment option to help such customers save for retirement. The default option would need to be an appropriately diversified basket of investments and take account of climate change and other environmental, social and governance risks. Consultation closes on 18 February 2022.
CP21/33: The FCA is consulting on regulatory fees and levies proposals for 2022/2023. This includes proposed changes to the fees financial services firms pay to cover the cost of regulation, with the minimum fee increasing from £1,151 to £2,200. It also includes the proposal that the regulatory cost of considering authorisation applications where new firms are brought within regulation is also shared amongst existing authorised firms. Consultation closes on 31 January 2022.
CP21/35: A quarterly consultation paper has been issued with a deadline for comments by 10th January. This relates to proposed miscellaneous amendments which tend to be minor rule changes, corrections or clarifications. This consultation covers, amongst other things, minor amendments to the Enforcement Guide, and amendments to MAR 9 to include wind-down guidance when a data reporting service provider wishes to cancel its authorisation.
CP21/36: The FCA has issued a consultation paper on a new ‘Consumer Duty’ which is intended to ensure a higher and more consistent standard of consumer protection for users of financial services and help to stop harm before it happens. This consultation also takes on board earlier feedback and engagement with the industry and consumer groups following initial proposals published in May 2021 (CP21/13) with the focus on products and services sold to ‘retail clients’. This current consultation is open until 15 February 2022 and the FCA expects to confirm any final rules by end July 2022.
Policy Statements
PS21/17: The third and final policy statement under the Investment Firm Prudential Regime (IFPR) was issued at the end of November. This was based on the consultation paper CP21/26 which was issued in August 2021. This policy statement included final rules on remaining areas such as disclosures, impact on own funds of excess drawings by partners, depositaries and the FCA’s approach to the UK resolution regime following IFPR implementation. The IFPR came into force on 1 January 2022.
PS21/18: Policy statement and final rules issued restricting the charges that claims management companies can charge for financial products and services claims. This is to protect consumers against excessive costs. The new rules come into force on 1 March 2022.
PS21/19: Policy statement and final rules issued on Regulatory Technical Standards for Strong Customer Authentication and Secure Communication. This also includes amendments to the FCA’s Payment Services and Electronic Money Approach Document and relevant wording in the Perimeter Guidance Manual.
PS21/20: Policy statement issued on relaxations to certain of the UK MiFID’s conduct of business and organisational arrangements. This relates to certain elements of the MiFID regime implemented previously under EU Regulation which the FCA has now taken the opportunity to review post Brexit to identify if any amendments are appropriate. This included the removal of the need for best execution reporting under RTS 27 and RTS 28 following feedback to consultation paper CP21/9. The removal came into effect from 1 December. It also introduces proportionate exemptions from 1 March 2022 from the inducement rules relating to investment research in certain circumstances.
PS21/21: FCA has published final rules requiring relevant firms to implement a stronger ‘nudge’ to Pension Wise guidance. From 1 June 2022, pension providers will have to give customers a steer to Pension Wise (a government service which offers free and impartial pensions guidance) when they decide to access their savings. The changes will also make it easier for consumers to book a free Pensions Wise appointment.
PS21/22: The FCA has confirmed a series of listing rule changes to ensure that the UK’s public markets remain a trusted and attractive place to list successful companies, providing opportunities for companies to grow from which investors will benefit. The new rules came into force on 3 December 2021.
Feedback Statements
FS21/12: Feedback statement on final decisions on the use of LIBOR, primarily relating to legacy references.
Discussion Papers
DP21/5: The FCA has issued a discussion paper on improving the financial services compensation framework. It is seeking views on fundamental questions about the purpose, scope and funding of the current compensation arrangements to ensure that it continues to meet the needs of consumers and firms. Comments should be submitted by 4 March 2022.
Other News
The FCA and the Practitioner Panel have published a report from a 2021 joint survey of regulated firms. The Practitioner Panel provides external and independent input to the FCA and this report covers feedback from both fixed portfolio firms (i.e. larger firms with a dedicated FCA case officer) and flexible firms. The survey gives views across the financial services sector of the performance of the FCA as a regulator and provides the FCA with important information to enable it to achieve its objectives. Feedback included concerns on the time taken for authorisations to be completed and also the suggestion that smaller firms aren’t engaging with the FCA’s consultation process.
The FCA has issued an update on the work that it has been doing to implement the recommendations and lessons learnt from the Independent Investigation into the FCA’s regulation of London Capital and Finance plc (the Gloster Report) and the Independent Review into the FSA’s and FCA’s handling of the Connaught Income Fund Series 1 and connected companies (the Parker Report).
The FCA has communicated how it is currently applying the principles of the Senior Managers Regime to its own internal structure including allocation of prescribed responsibilities. It also gives an update on corporate governance structures, committees and relevant terms of reference.
The FCA has provided answers to a number of questions that were raised but not able to be addressed at its latest Annual General Meeting in September 2021.
The FCA’s 'Mortgage Prisoner Review' has been laid before Parliament. The Government will now use the findings of the review to determine if there are any further practical and proportionate solutions that can be found for affected borrowers.
The FCA has issued a statement to the House of Commons regarding its position relating to the future of Liverpool Victoria Financial and a potential sale and demutualisation.
The FCA’s quarterly Whistleblowing report has been issued providing data on whistleblowing reports that it received during July to September 2021, including the nature of the allegations featured.
Final messages on LIBOR ahead of the end 2021 deadline have been issued by the FCA.
Primary Market Bulletin no.37 has been issued, focusing on current messages to primary market participants including on conflicts of interests requirements of listing sponsors.
The FCA has welcomed the announcement by the Cash Action Group’s that retail banks and building societies will create an independent body to assess the cash needs of local communities and direct cash solutions.
The FCA has announced a further extension until 31 December 2022 to the temporary measures put in place during Covid relating to 10% depreciation in value notices by investment managers. This is whilst the FCA reviews whether to continue with this rule requirement in the future. This allows firms to suspend such notices subject to certain pre-conditions being met.
The FCA’s Board has confirmed that it has asked for a consultation to be prepared on a redress scheme, under s.404 of the Financial Services and Markets Act, for former members of the British Steel Pension Scheme (BSPS) who transferred their pension.
The FCA has announced a number of changes in its Executive Committee, including that Megan Butler will step down from her role as Executive Director of Transformation. Emily Shepperd will lead the program instead, alongside her role as Executive Director of Authorisations. It is also separately reported that Nick Miller, Head of the Asset Management supervision sector is leaving to join ratings agency Moody’s.
The FCA has issued a summary of highlights of its new approach in 2021 in relation to its mission to protect consumers from harm, enhance the integrity of the UK financial system and to promote competition.
The FCA has published the Swift Review which was commissioned to review the design, implementation and operation of the redress scheme set up for customers who were mis sold interest rate hedging products (IRHPs) from 2001. The FCA has accepted recommendations made by John Swift QC and has also published its response, It has undertaken to ensure that any significant decisions on redress made in the future will be transparent, with appropriate governance and supporting evidence will be properly recorded.
Speech: Edwin Schooling Latter, Director of Markets and Wholesale Policy and Supervision, FCA, regarding the final three weeks of the LIBOR transition process.
First Supervisory Notices have been issued by the FCA to two firms, Grosvenor Associates and Renaissance Advisory. Both entities appear to have links to another firm, Marvell Enterprises, to which the FCA has previously also issued a First Supervisory Notice for carrying out investment activities outside its scope of permission and misleading investors over the extent of it’s regulated status. Amongst other concerns, Marvell Enterprises appears to be a significant controller of these entities but this had not been disclosed to the FCA previously. Both Grosvenor Associates and Renaissance Advisory have also failed to respond to three information requests from the FCA requesting clarity on its business model, current activities and links to Marvell Enterprises. Renaissance Advisory has now had its permissions removed.
In connection with three applications for authorisation, the FCA has issued warning notices in respect of Donna Worsfold, Willis Cars Ltd and Integer Vehicles Solutions Ltd for failing to respond to FCA enquiries regarding incomplete applications for consumer credit activity. The FCA has thereafter refused the applications due to incomplete information.
NatWest Bank has been fined over £264m following convictions for three offences of failing to comply with money laundering regulations. The judge viewed that ‘without the Bank, and without the Bank’s failures, the money could not be effectively laundered’. This is the first time that the FCA has pursued criminal charges for money laundering failures. The charges covered NatWest’s failure to properly monitor the activity, including large cash deposits, of a commercial customer, Fowler Oldfield, a jewellery business, between November 2012 and June 2016.
The FCA has fined HSBC Bank almost £64m for failings in its anti-money laundering processes. HSBC used automated processes to monitor hundreds of millions of transactions a month to identify possible financial crime. However, the FCA found that three key parts of the transaction monitoring systems showed serious weaknesses over a period of eight year from March 2010 to March 2018. HSBC has undertaken a large-scale remediation programme into its processes, which was supervised by the FCA.
The FCA has fined GAM International Management Ltd £9.1m and Timothy Haywood around £230k for conflicts of interest and gifts and entertainment disclosure issues. The background to the disciplinary is linked to relationships connected to Greensill Capital.
The FCA has issued a Decision Notice against BlueCrest Capital Management UK LLP (BCMUK) setting out its decision to impose a financial penalty of over £40m on the firm. The findings in the notice are provisional since BCMUK has yet to make representations and has elected to refer the case directly to the Upper Tribunal. The FCA considers that BCMUK failed to manage fairly a conflict of interest created by allocating portfolio managers working on an external fund, open to external investors, to an internal fund open only to its partners and employees. The FCA considers this resulted in a sub-standard investment management service being provided to the external fund and its investors. This also follows related action taken by the US Securities and Exchange Commission.
In a prosecution brought by the FCA, Craig Whyte, a former owner of Rangers Football Club, has been charged with failing to provide passwords for various laptops and phones under Section 49, Regulation of Investigatory Powers Act 2000.
The European Commission has announced that it has fined Barclays, Royal Bank of Scotland, HSBC and Credit Suisse a total of €344m for their participation in a cartel in the Spot Foreign Exchange (Forex) market of G10 currencies. UBS also participated in the cartel but received full immunity from fines under the Commission’s leniency policy.
The Advertising Standards Authority (ASA) has made the monitoring of cryptoassets a ‘red alert priority’ saying that many adverts fail to inform the public of the risks of advertising. The follows their ban on seven adverts on risk grounds. The ASA hopes to issue new guidance to ensure that cryptocurrency advertising is done safely.
In a recent interview with the BBC, deputy Bank of England governor Jon Cunliffe has warned on the threat that cryptocurrency poses to the financial systems. He believes that the Bank of England and other financial institutions must prepare themselves to manage the risks that it presents.
The Information Commissioner has published a review covering reflections and lessons learnt on data protection during the Covid pandemic.
HM Treasury has issued a consultation on financial promotions and existing exemptions from the regime relating to communications to high net worth individuals and sophisticated investors. It has been at least 15 years since these exemptions were last updated and the government considers that these should now be reviewed in light of significant economic, social and technological changes over that same period. The government is also aware of misuse of the exemptions, and these being used to market inappropriate products to ordinary retail investors. This also overlaps with restrictions on the promotion of unregulated collective investment schemes. Proposals include increasing the financial thresholds for high net worth individuals, amending the criteria for self-certified sophisticated investors and potentially increased systems and controls for firms in relation to evidencing such exemptions. Comments on the proposals are invited and consultation closes on 9th March 2022.
The FCA has written to the Treasury Select Committee, providing further detail into the process and timescales of its recent action against NatWest Bank for failures to comply with the Money Laundering Regulations. This includes its reasons why no individual has been held accountable at the Bank for the events that occurred.
The Financial Ombudsman Service (FOS) has announced a new action plan to overcome a backlog of cases that have built up during the pandemic. This was in response to an independent review commissioned by its board. It comes after it was reported in July that 62,000 people with open cases have had to wait more than six months for their cases to be resolved by the FOS, with nearly 17,000 waiting for more than 12 months.
FOS has issued a consultation on its 2022/2023 plans and budget and is inviting comments from the industry. The consultation closes on 31 January 2022 and final plans and budgets will be issued by 31 March 2022.
The Information Commissioners Office (ICO) has taken enforcement action against EB Associates Group relating to 107,003 unsolicited direct marketing calls made in relation to occupational pension schemes or personal pension schemes between January and September 2019.
The Financial Reporting Council has published its annual review of Corporate Governance with a finding that there has been a general improvement in reporting against the UK Corporate Governance Code. The report highlights areas of high-quality reporting but considers there is still room for improvement in respect of disclosure of Board appointments, succession planning and diversity.
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.
