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.
The news in February has continued to be dominated by the uncertainties of Covid-19, and this month the UK has seen legal restrictions being completely revoked in many areas around the country. 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.
Outside of the UK, global tensions have been increasing arising from the situation between Russia and Ukraine, with Russia amassing troops along its border in recent months. Conflict has increased within the last few days which includes global economic sanctions against an increasing number of Russian entities and individuals.
The February edition of the regulation round up from the FCA was published, and the latest FCA Handbook Notice was also issued in February under Handbook Notice No. 96. The FCA’s latest policy development update can be found here, although this has not been updated since September.
For other regulatory newsletters, the latest PRA regulatory digest for January 2022 can be found here. The Financial Ombudsman Service has published a newsletter for January with their latest issue, no 168, can be reviewed. The latest e-newsletter from the ICO was issued in February from the new Information Commissioner, John Edwards.
The latest published minutes for FCA Board meetings have been issued for meetings on 16th December and 21st December.
This speech on the UK’s capital markets was delivered by Sarah Pritchard (the FCA’s Executive Director for Markets) during The Future of UK Financial Regulation Summit held on the 8th of February 2022. The speech highlighted four significant subjects: How the FCA is transforming, The FCA’s role in capital markets and priorities, ESG and What to expect in 2022.
How is the FCA transforming
Since the FCA’s vision was set out by its CEO 6 months ago, it has announced the Regulatory Sandbox as a permanent aspect of its services. The motive behind this move is to enable new market entrants to test out their ideas with a safe incubator for firms and products to develop. Furthermore, in October 2021, the FCA finalised rules for new funds designed to invest efficiently in long term assets. In December 2021, it confirmed rules changes to the listing regime. This change was to enable the UK public markets to remain attractive, and support growth and innovation. The speech also highlighted the FCA’s increased assertiveness in prosecutions, for instance, NatWest Bank was penalised for failing to have adequate Money Laundering systems and controls. Finally, in terms of adaptability, the FCA are proposing to introduce new rules to embed diversity and inclusion across financial services and listed markets. Finally, it has also decided to implement recommendation on Climate Related Financial Disclosures.
The FCA’s role in capital markets and priorities
In Primary Markets, the FCA has already implemented steps to improve functioning of the UK listing regime. For instance, it has already implemented several changes in rules on free float, SPAC (Special Purpose Acquisition Company) listings and dual class share structures. In Secondary Markets, the FCA wants to introduce potential changes to the UK commodities regime transparency in fixed income and derivatives markets, and some of the requirements on firms admitted to trading on a potential new category of trading venue.
ESG
The speech underlines the growing importance of ESG in the financial sector especially with the FCA publishing its strategy in November 2021. Its progress since then includes the closing of a discussion paper on product labelling and product disclosures. The motive behind this paper is to assist consumers navigate the complex landscape of sustainable investment options. Formal proposals are in the works and aimed for mid 2022. Furthermore, the FCA is Implementing the second phase of climate related disclosures aligned with the recommendation of the TCFD (Taskforce on Climate-related Financial Disclosures). Finally, the speech states that the FCA will continue to help investors and other actors along the value chain to make informed decisions, and encourage companies to strengthen their climate transition plans.
What to expect in 2022
Sarah Pritchard concluded by stating that the FCA is focussed on its continued efforts on the aforementioned subjects, along with a motivation to build its team of people. There is an increased focused in diversity and current statistics state that 47% of their Seniors Leaders Team (SLT) being female as of end-January, up from 43% this time last year and at least 15% now from an ethnic minority. Finally, the FCA is keen to achieve market orderliness, cleanliness and transparency within the UK capital markets in the coming years through cooperation.
The FCA released a press release on the 9th February 2022 highlighting the achievements in the sterling market in the terms of LIBOR transition, and also stating its next steps. The month of December 2021 saw the largest single day amendments of over £13 trillion LIBOR-referencing contracts converting to SONIA (Sterling Over Night Indexed Average). Meanwhile, in cash markets, SONIA floating rate note issuance exceeded £120bn and lending exceeded £100bn across a range of sectors. Therefore, less than 2% of the total sterling LIBOR legacy stock remains, so the Bank of England (BoE) and FCA have manufactured plans to address this exposure.
In terms of next steps, the BoE, FCA and Working Group continue pursuing the active transition of legacy LIBOR contracts. The FCA has stated that these synthetic LIBOR are only a temporary bridge to Risk-Free reference Rates (RFRs), this availability will be reviewed annually. Meanwhile, the transition from US dollar LIBOR remains a great importance worldwide, especially the UK. The FCA is reinforcing this transition by prohibiting the use of US dollar LIBOR on any new contracts starting as of 2022. Instead, the regulatory authorities in the UK are encouraging transition to alternative rates such as SOFR (Secured Overnight Financing Rate).
The press release concludes by stating that The Working Group claimed that it met its goal to catalyse broad based transition to SONIA across the markets. Meanwhile, further support to the conversion of legacy sterling LIBOR remains to be completed. Therefore, the Working Group will be assisted in future by the BoE and the FCA to complete such objectives. Finally, Andrew Bailey, the Governor of the BoE, commended the progress that has been made to date based on this LIBOR transition. He noted that this ambitious roadmap was laid out in 2017 and the fact that most LIBOR settings ended at end-2021 with minimal disruption is a testament to the co-operation across a wide range of industry sectors and jurisdictions.
The Financial Stability Board (FSB) has released a report on the risks presented by Crypto assets to the financial system. The emergence of crypto assets has been significantly prominent in the last few years, the markets are constantly evolving and transforming. However, the volatility in their emergence and transformation has presented a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness. The crypto assets market grew up to $2.6 trillion recently, however, they remain a small proportion of the global financial system assets. Contrary to expectation on this market’s high volatility, this has been contained to an extent that it has not spilled over to financial markets and infrastructures. This can be credited to the fact that crypto assets are still yet to be utilised in critical financial services on which the global economy depends on. The FSB claims that significant risk pertained with these types of assets are primarily due to trading and lending platforms that fall outside the regulatory perimeter and associated reporting requirements.
Furthermore, there are several vulnerabilities that could undermine the integrity and functioning of the crypto assets market. These weaknesses include low levels of comprehension by investors and consumers on crypto assets costs, fees, conflict of interest, recovery mechanism and uncertainty around operational resilience of crypto institutions. In addition, there are environmental implications of crypto assets that arise from energy intensive consensus mechanisms. In terms of financial crime, these assets can be used in the context for money laundering and ransomware. Therefore, this report has evaluated risks relating to crypto assets in three segments of the market, unbacked crypto asset stablecoins, decentralised finance (DeFi) and crypto asset trading platforms.
Unbacked crypto asset stablecoins
Stablecoins are generally created, and distributed through trading platforms, in exchange for fiat currency. However, the composition and amount of reserve assets backing the stablecoin may vary significantly. As a result, the risks of various stablecoins might differ based on their design, including their reserve assets and redemption rights. Moreover, concentration risk is high, with the two largest stablecoins representing around 73% of total market capitalisation. In a recent report, the FSB noted that while the current generation of stablecoins are not being used for mainstream payments on a significant scale, vulnerabilities in this space have continued to grow over the course of 2020-21. Additionally, stablecoin issuers are not subject to a consistent set of standards regarding the composition of reserve assets backing the stablecoin, and there is a lack of consistency in disclosure practices among stablecoin issuers.
DeFi and Crypto asset Trading Platforms
DeFi applications and platforms offer lending, borrowing, trading and custody of crypto assets. The technology and distributed nature of DeFi poses several regulatory challenges and threats. DeFi platforms aim to provide a decentralised governance structure by issuing the governance tokens, making it challenging for public authorities and regulators to identify an entity or individual accountable for meeting regulatory obligations. Without sufficient regulation and market oversight, DeFi and associated platforms, might present risks to financial stability. Some of these risks are becoming apparent, such as concentration risk in terms of protocols and technology used.
In conclusion, due to this increased threat to global financial stability, the FSB has proposed the following plans of action:
The FSB will continue to monitor developments and risks in crypto-asset markets, based on the framework published in 2018.
The FSB will explore potential regulatory and supervisory implications of unbacked crypto assets.
The FSB will monitor and share information on regulatory and supervisory approaches to ensure the effective implementation.
Increase efforts to enhance monitoring and to minimise regulatory arbitrage through further cooperation and information sharing.
CP22/3: Pensions dashboards: proposed rules for pension providers. The FCA through this consultation paper focuses on its responsibilities in delivering pensions dashboards and sets out proposals to implement the duty placed upon it by the Pensions Schemes Act 2021. This consultation primarily affects individual, group stakeholders and personal pensions product providers, it closes on the 8th of April 2022.
Statements
The FCA released a statement in regard to new financial sanctions measure in relation to Russia. This statement was followed by the UK’s Prime Minister’s speech in the UK Parliament on 22nd February 2022, which stated a tranche of sanctions on Russia. The FCA has advised firms to screen against the UK Sanctions List to meet these new sanctions measures and screen against the OFSI list of asset freeze targets for financial sanctions obligations. Firms are also encouraged consider obligations to report to the UK Financial Intelligence Unit (UKFIU) at the National Crime Agency (NCA) under the Proceeds of Crime Act 2002.
The FCA has also released a statement on the recent statements made by Bitpanda GmbH (Bitpanda). The statement was underlying a recent transaction that resulted in Bitpanda becoming the new beneficial owner of Trustology for the purposes of the MLRs (Money Laundering, Terrorist Financing and Transfer of Funds Regulations). The FCA has warned that it can suspend or cancel the registration of a crypto asset business if it is not satisfied the firm or its beneficial owner are fit and proper.
Finalised Guidance
FG22/1: The FCA’s approach to the review of Part VII insurance business transfers. This guidance is aimed to assist with both the process and considerations of a Part VII insurance business transfer scheme. Furthermore, this guidance is specifically designed for applicants and their professional advisors and independent experts.
News Stories
The FCA has stopped AJH Financial Services Limited from disposing of assets without prior permission. This firm had advised on transfers from the British Steel Pension Scheme (BSPS). This action was undertaken by the FCA under suspicion that AJH does not have sufficient financial resources to pay potential redress claims and appears to have paid out dividends rather than retaining the assets.
The FCA released the recent Financial Promotions Data for 2021. The data states that last year saw an increase of approximately 300 amends or withdrawals of promotions in relation to authorised firms. The Retail investments and retail lending sectors were the highest amend/withdraw outcomes, amounting to 77% of all interventions with authorised firms. Regarding illegal financial promotions, there was an increase of 18% from 2020 and 30% of these were clone scams.
Others
The FCA published an article on Beyond Disclosure for high-risk investments. This article explores into the low interest and increasing social media hype persuading people to increase holdings in high-risk products. Investors surveyed by the FCAseemed to significantly underestimate these risks, 45% of these new self-directed investors are not aware that ‘losing some money’ was a potential risk of investing. Therefore, the FCA has revaluated the current regime due to a concern that many customers do not understand the impact of self-certifying. Thus, the FCA has launched a campaign targeting young investors and is also proposing changes to help strengthen the journey into these investments so consumers better understand the risks.
The FCA has issued a press release securing changes to potentially unfair and unclear terms in the contracts of Clearpay, Klarna, Laybuy and Openpay. This move was instigated after the Woolard review, that discovered the use of Buy-Now Pay-Later (BNPL) products nearly quadrupled in 2020 to £2.7 billion in the unsecured credit market. This type of buy-now-pay-later agreements offered by these firms is not yet regulated, therefore, the FCA is making terms on issues like contract cancellations and continuous payment authorities fairer and easier to understand. Finally, the FCA commented that they currently do not have the authority to regulate this market, however they do have the ability to review terms and conditions for fairness.
The FCA released a press statement on the 4th February 2022 announcing the interim chairs of the FCA and PSR. It was announced that Richard Lloyd OBE, currently the Senior Independent Director of the FCA Board is poised to take on the role of the interim chair of the FCA. Meanwhile, Aidene Walsh, the current non-executive director of the PSR will take on the role of the interim chair of the PSR. Charles Randell, who is the current Chair of the FCA & PSR commented that he was pleased for Richard and Aidene to take on his roles as the search for a permanent successor concludes. Furthermore, he commented that he is confident that both the leaders will continue to deliver on their strategies to become more agile and assertive regulators.
The FCA released an update on Estelle Croft, a former Finance Director at Redcentric, who pleaded guilty to the charges of manufacturing false statements and false accounting. Ms Croft was sentenced to 3 years imprisonment and is obliged to pay £120,346.70 confiscation proceedings. This was the result of the false and misleading unaudited interim results that materially overstated Redcentric’s cash position – by £13.1m and £12.2m respectively. As a result of the false statements, the share price of Redcentric shares was artificially inflated, which meant that investors paid more to purchase shares. Therefore, the FCA publicly censured Redcentric for market abuse on 26th June 2020. However, a third defendant, Fraser Fisher, former Chief Executive Officer, was today acquitted by the jury on all charges.
The FCA has published guidance consultation (GC22/1) for firms that seek to limit their liabilities, and has warned that firms could face assertive action if their proposals unfairly benefit them at the expense of customers. This warning was a result of the observation by the FCA that indicated increase in the number of firms developing proposals, such as Scheme of Arrangements, to deal with significant liabilities to consumers. The FCA wants firms to provide the best possible outcome for customers, including the provision of the maximum amount of funding possible to meet compensation claims by the customers. Failure to do so will result in enforcement actions on firms or senior managers. Meanwhile, some firms have requested a ‘letter of non-objection’ from the FCA in relation to their proposal to manage their liabilities. However, the FCA has commented that the issuance of such letter is very unlikely. The Executive Director of the Markets at the FCA commented that this guidance should help firms comprehend the expectations of the FCA and ultimately help firms to avoid proposing compromises that are unacceptable.
The HM Treasury released the consultation outcome of the Implementation of the Investment Firms Prudential Regime and Basel 3 standards consultation. The government had run this consultation to ensure effective implementation of the Investment Firms Prudential Regime and the outstanding Basel 3 standards. The Government, having consulted with the Bank, the PRA and the FCA, and considering consultation responses, has decided to remove FCA- regulated EUR 730,000 ICR firms from the scope of the UK resolution regime. Additionally, firms brought into the scope of the GBP 750,000 capital requirement will also not be within scope of the UK resolution regime. PRA-designated investment firms will continue to remain in scope of the UK resolution regime. Furthermore, the Investment Bank Special Administration Regime (IBSAR) will be available to manage failure of some investment firms. The IBSAR is a bespoke insolvency regime designed to provide an insolvency practitioner with specific tools to achieve better outcomes for consumers and markets in the event of an investment firm failure.
The ESMA has published a report warning consumers of the risk of significant market corrections. The report indicates that the EU financial markets has slowed down in terms of its recovery due to the resurgence of the Omnicorn Variant towards the end of 2021. The ESMA has assessed the EU markets as an environment with high liquidity risks, contagion, and operational risks. Verena Ross (Chair of the ESMA) commented that retail investors are of particular concern due to their increased participation in the financial markets. Many of these investors are taking advantage of the convenience and user-friendly features of mobile trading platforms. This diversification offers opportunities but also comes with risks. The ESMA remains concerned about risks to retail investors who buy assets with expectations of significant price growth, and without realising the high risks involved. The report’s findings indicate an increase in global equity prices in the securities market, however volatility remained low at that time. Energy commodity prices were particularly volatile, highlighting the potential financial risks associated with the energy transition. In the Asset management sector, the investment fund markets continued to grow, however, risks remained high in terms of liquidity risk and credit risk. The growth of ESG markets remained steady as investors continued to increase their investments in sustainable products. Finally, Crypto Asset markets reached new records with a peak at €2.6tn in November, fuelled by investor appetite for riskier assets and growing institutional adoption.
The UK Home office has announced that it has revoked granting of the Tier 1 Investor visa scheme for those spending at least £2 million. This scheme was launched in 2008 as an incentive to encourage wealthy individuals outside the EU to invest into the UK. The Home Office commented that this visa route has failed to deliver for the people of UK and instead gave way to corrupt elites access to the UK. Furthermore, the Home Secretary, Ms Priti Patel stated that closing this route is just the start of renewed crackdown on fraud and illicit finance. This was also a prerequisite to the publishing of the fraud action plan, which will crack down on people abusing UK’s financial institutions and better protect the taxpayer. This announcement was in expectation from parliament amid pressure on ministers to cut UK ties to Russia over the threat of invasion to Ukraine.
The European Banking Authority (EBA) published findings of its assessment of the competent authorities responses to the 2020 Luanda leaks. In January 2020, the International Consortium of Investigative Journalists (ICIJ) published documents underlying the financial affairs of Ms. Isabel dos Santos, daughter of the former President of Angola. The financial affairs undertaken by Ms. Isabel were implicated to be in breach of Money Laundering and Terrorist Financing Regulations. Therefore, the EBA were called on by the European Parliament to conduct an inquiry into the Luanda leaks. The EBA discovered through their inquiry that half of all competent authorities assessed the information provided in the leaked ICIJ documents. Several of those authorities subsequently identified institutions that had links with Isabel dos Santos and her associates. However, other competent authorities took no action when the leaks were released, indicating a risk that proceeds from corruption linked to Isabel dos Santos and her associates may not have been detected and may continue to be laundered through the EU’s financial sector. Meanwhile, the EBA also identified good practices in some Member States and authorities such as processes to identify and swiftly react to instances of crystallised ML/TF risks.
Andrew Bailey, the Governor of the Bank of England (BoE) delivered a speech at The CityUK Annual Dinner on the topic of ‘A Resilient Financial System’. He emphasised the importance of ensuring that the financial system was able to support the economy through the pandemic, and about the need to mobilise to ensure that long term capital would be available for businesses coming out of the pandemic. Furthermore, it was indicated that absence of significant intervention from authorities in countries globally have risked tightening financing conditions significantly and made the impact of the pandemic much worse. Therefore, resilient financial system is of great importance for recovery. One such system should have the resources and flexibility to respond to a range of shocks of different sorts. In doing so, it will support stronger growth over the long run, helping the economy to bounce back and reducing long-term economic scarring caused by the shock. It was quoted that to provide such resilience two planks are required, first, to provide a strong counter-cyclical capacity. The second plank of resilience are structural measures which are not designed to vary in a counter-cyclical manner, but instead always apply equally. The speech concluded by stating that the global financial institutions must maintain a shared deep commitment to open markets and open financial systems with strong and appropriate regulatory standards and cooperation to support them.
The Financial Ombudsman Service (FOS) published their latest quarterly complaints data for the period covering from October to December 2021. This reported the number of new enquiries to be 64,407, new complaints as 35,324, with uphold rates excluding PPI 39% and including PPI as 38%. Furthermore, the following products were the most complained about in the covering period:
Current accounts – 5522
Credit cards- 3263
Car or Motorcycle insurance – 2178
Personal loans – 1824
Packaged bank accounts
It was noted that the FOS received 1,477 new complaints about Packaged bank accounts but only upheld 4% in the consumers’ favour. This was the lowest uphold rate of all products this quarter. Additionally, running account credit was the product with the highest proportion of cases upheld in the consumers’ favour with an uphold rate of 80%. Finally, there has been a significant fall in complaints about business interruption insurance (BII) this quarter, as insurers have gradually been working through the very high number of pandemic-related claims they received.
The FCA has warned consumers about Nova Commercial Finance Limited which is a clone of a previously FCA Authorised Firm and dissolved UK company. It has been discovered that fraudsters are utilising details of the firm to convince people that they work for a genuine authorised firm. They may use the name of the genuine firm, including the 'firm reference number' (FRN) the FCA give an authorised firm or other details.
KPMG has reported that the number of fraud acts committed by employees has risen from 44 in 2020 to 66 in 2021, at management level it rose from 21 to 66. The reason was cited to be potentially linked to weaknesses in internal controls driven by the impact of the pandemic, remote working has increased this risk. The National Fraud Intelligence Bureau reported that 80% of the fraud is cyber enabled, the volume of this type of fraud has increased by 288% since 2020.
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.
