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.
In November, the new Chancellor announced his Autumn Statement and unveiled a £54 billion package of tax hikes and spending cuts. The UK is facing a cost-of-living crisis and with the cost of living rising at its fastest rate in 41 years.
As the war in Ukraine continues, Russian forces are targeting energy facilities and plunging cities in Ukraine into darkness. Ukraine is entering winter with snow and sub-zero temperatures setting in and running water is no longer a guarantee. The World Health Organization has warned that the country is facing a humanitarian catastrophe, as hospitals are left without energy.
In the latest regulatory news, the FCA has published its November regulation round-up. The FCA has also published Handbook Notice 103. The PRA’s latest Regulatory Digest was published in November and can be found here. Board minutes were published for meetings on 29th September and 4th October 2022.
As part of a consultation (CP22/20 - Sustainability Disclosure Requirements (SDR) and investment labels), the FCA has proposed new rules on greenwashing following their ESG business plan.
Greenwashing is the act of using misleading or false information on environmental impact/sustainability in marketing. The term was first coined in the 1980s by environmentalist Jay Westerveld to describe the advertising efforts of Chevron, an oil company who ran multiple marketing campaigns on their environmental efforts. These adverts gave the impression that environmental impact and sustainability was a core value for the company, despite all sustainability campaigns being mandated by the government. Chevron did very little outside of what was required and spent more on the advertising than the actual campaigns themselves.
In marketing, sustainability sells. Statistics by Nielson show that in 2018 sales of products with “grass-fed” and “free range” claims grew by 24% compared with previous years. This can also be seen in the investment markets, where studies show that investment behaviour is influenced by sustainability claims. Currently, there are 35 trillion dollars' worth of assets under management are in ESG-labelled funds.
This highlights the importance of tightening up on the policies surrounding sustainability. The intended outcomes for the current proposals are for greenwashing to be reduced, customers protected from associated harm, increased provision of standardised sustainability information and consumers use appropriate labels and disclosures to more effectively navigate the market and make informed decisions.
This consultation paper outlines a set of rules that will form the bulk of the anti-greenwashing policy, with the main areas these rules cover summarised below.
Sustainable investment labels
The proposed regime will distinguish between three different types of sustainable products according to the primary channel by which each can contribute to positive sustainability outcomes through classification and labelling of products. This aims to help consumers navigate a complex product landscape and give them confidence in the integrity of the sustainable investment products they are offered.
Consumer-facing disclosures
Pre-contractual disclosures, ongoing sustainability-related performance information, sustainability entity reports, and other detailed disclosures will be covered in this report, providing detailed product-level information to consumers in an accessible way.
Naming and marketing rules
An anti-greenwashing rule will be introduced, clarifying that sustainability claims must be clear, fair and not misleading. In addition, there will be restrictions placed on the use of sustainability-related terms in the naming and marketing of products offered to retail investors that do not use a sustainable investment label. This aims to ensure that product names and marketing align with the product’s sustainability-related objectives and strategy.
All firms should consider the consultation paper and examine their processes and marketing to understand how this proposal could affect their business. In particular, the restriction on how the terms “ESG”, “green” and “sustainable” are allowed to be used in marketing and reporting should be considered.
The current timescale suggests that a policy statement will be published mid-2023, with an anti-greenwashing requirement effective from 30 June 2023. All responses to CP22/20 should be sent to the FCA by 25th January 2023.
Nikhil Rathi, the FCA’s CEO, gave a speech to address the growing concerns on Consumer Duty, a new principle that requires firms to act to deliver good outcomes for retail customers. Mr Rathi states that this duty was mandated by Parliament due to falling public confidence in retail financial services, and that it will put the onus on firms to act to deliver good outcomes for customers. Firms will need to consider outcomes related to:
- Products and services
- Price and Value
- Consumer Understanding
- Consumer Support
The CEO explains that the duty does not guarantee a good outcome. But in asking firms to give customers information they can understand and that is fair, a culture and operational standard will be created which will raise public confidence in retail financial services. This is in the interests of both firms and consumers, Mr Rathi explained that implementing rules like this now requires less ‘reactive’ rules created in the future and can focus on helping businesses through reducing the Financial Services Compensation Scheme costs for firms.
Mr Rathi then turned his speech towards the future and innovation of regulation. Artificial Intelligence (AI) in particular was said to help solve the aforementioned issues through spotting signs of vulnerability and assisting tailoring products to individuals. One of the highlighted examples of how AI can be used for banking was a piloted study by the Dutch Authority for Financial Markets that used an AI tool to predict a customer’s bank account balance in a year’s time, which it was able to do to an accuracy of 99%. On the other hand, consumers had said they were not comfortable with such product integration in their banking app. The CEO continued by stating that consumers must do away with their fear as AI being used by Big Tech firms is a certainty, and there is a safe and responsible way for the technology to be introduced.
This led into financial inclusion, which is the availability and equality of opportunities to access financial services. Mr Rathi responded to criticisms that said that the Consumer Duty may prompt risk aversion in firms and even withdrawal of products, by saying that the FCA will monitor closely to make sure it does not happen. He also advocated for the implementation and use of banking hubs as a way of combatting the long-term cash availability issue in the UK. This, and many points like it (ensuring borrowers and savers are offered fair and competitive rates, supporting consumers with moving to digital, helping with the cost-of-living crisis), led to a general view with the Consumer Duty that there is an importance placed on vulnerable customers who find themselves most at risk for misleading advice.
Mr Rathi finished the speech by reiterating the overall goal of ensuring that the UK remains the largest destination for fintech investment in Europe and to build it up to become a gateway to global innovation. The FCA aims to help firms to take advantage of digitalisation, but market developments must not leave groups of consumers behind, particularly those most vulnerable or the least digitally enabled. Finally, the Consumer Duty will help FCA manage the entry of Big Tech firms into the UK retail financial services industry, ensuring a level playing field.
The FCA’s Chief Data, Information and Intelligence Officer Jessica Rusu delivered a speech at the City and Financial Global summit, on regulation and risk management of Artificial Intelligence in financial services.
Ms Rusu highlighted the ethical questions that surround Artificial Intelligence (AI) - it can be used for good, greed or for both. There are concerns regarding the ability of AI to mimic human intelligence and more immediate concerns over firms exploiting consumer data and the privacy concerns associated with hyper-targeting. There is still confusion regarding what AI actually is and what it can achieve.
The FCA recently published a survey with the Bank of England on the use of machine learning and AI in financial services. The purpose of the survey was to provide regulators with a better understanding of the use of machine learning in financial services so it can support its safe and responsible adoption. Ms Rusu was not surprised that the survey found that the use of AI in financial services is accelerating:
72% of firms responding to the survey reported actively using or developing machine learning applications.
That trend is expected to more than triple in the next three years.
The largest expected uptake is in the insurance sector, followed by banking.
Firms reported that machine learning applications are now more advanced and increasingly embedded in day-to-day operations, with nearly eight out of ten in the later stages of development.
The survey found that the biggest risk for consumers is data bias and data representativeness and the biggest risk for firms was identified as a lack of AI explainability. The FCA sees many benefits for AI and is using machine learning to analyse over 100,000 new web domains daily to identify potential scam sites. The FCA is investing in AI tools in its digital intelligence environment.
The FCA and Bank of England recently published a joint AI Discussion Paper to have a broad-based public debate on:
Whether the existing regulatory approach in the UK financial services works.
Whether there are gaps that need to be addressed.
Whether an entirely new regulatory approach is needed.
This discussion paper closes on 10 February 2023 – any comments or enquiries should be sent to DP5_22@bankofengland.co.uk.
Ms Rusu explained that poor data leads to poor outcomes and the use of AI must be fully compliant with existing legislation, particularly data protection. Ms Rusu finished her speech by covering the central role of the governance framework for AI. The FCA is leveraging existing frameworks – SMCR – and applying them to AI. The practical challenges that any AI governance mechanism must address:
Responsibility – who monitors, controls and supervises the design, development, deployment and evaluation of AI models.
Creating a framework for dealing with novel challenges, such as AI explainability.
How effective governance contributes to the creation of a community of stakeholders with a shared skill set and technical understanding.
Therese Chambers, Director of Consumer Investments, delivered a speech at the Festival of Financial Planning in Birmingham – organised by the Personal Finance Society. The speech covered the FCA’s key priorities for the financial advice industry.
Ms Chambers explained that there is a common misconception that the FCA does not like people investing. However, the FCA is supportive of consumers investing as it allows people to maximise their quality of life, whilst channelling money to companies looking to grow and innovate and as such supporting the UK economy. However, any investment needs to be done wisely and safely, which is why the FCA’s Consumer Investments Strategy has a vision of a market in which consumers can:
Invest with confidence, understanding the risk they are taking, and the regulatory protections provided.
Access and identify investments that suit their attitude to risk and circumstances.
Be better protected from scams.
Get advice or support to invest, should they want it.
The oversight of financial advisers is a key part of the Consumer Investment Strategy and Ms Chambers made it clear that financial advisers are crucial to delivering it. Following the decline of defined benefit pension schemes and longer life expectancy, people are making more complex financial decisions about their money. The variety of products that consumers are confronted with has also continued to increase making it overwhelming for consumers when making important financial decisions. This is why the FCA believes that financial advisers can play a vital role in helping consumers navigate financial markets and avoiding scams, inappropriately high-risk investments and into a financially secure future. The FCA found that there was an increase in adults currently holding high risk investments, up to 5.7 million and a 47% increase in reported investment fraud losses in financial year 2021/22 compared to 2020/21, up to £915 million.
Ms Chambers went on to discuss the Consumer Duty and that the successful implementation of it will help ensure that the outcomes sought by the Consumer Investment Strategy will be achieved. Both the Duty and Consumer Investment Strategy exist to ensure better outcomes for consumers. The Consumer Duty has three straightforward cross-cutting obligations:
A firm must act in good faith towards retail customers.
A firm must avoid causing foreseeable harm to retail customers.
A firm must enable and support retail customers to pursue their financial objectives.
The Duty means that consumers should receive communications that they can understand, products and services that meet their needs and offer fair value.
Ms Chambers finished by explaining that the FCA aims to strengthen the link between good consumer outcomes and successful firms – the incentive structure needs to be reshaped so that advisers only do well from themselves when they do well by their clients.
CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels. The FCA is proposing to introduce a package of measures aimed at clamping down on greenwashing. The proposals include sustainable investment labels, disclosure requirements and restrictions on the use of sustainability-related terms in product naming and marketing.
Policy statements
PS22/12: The FCA has set out final rules and guidance requiring FCA regulated pension providers to provide and enable information about personal and stakeholder pensions for pensions dashboards. Firms must implement final rules by 31st August 2023.
Discussion Pappers
DP22/5: The FCA has published a discussion paper on the potential competition impacts of Big Tech entry and expansion in retail financial services. Firms should provide response by 15th January 2023.
News stories
The FCA is looking for a panel of members to join its new Innovation Advisory Group. The role of the Innovation Advisory Group is to:
Share the FinTech and RegTech sectors’ views on issues and opportunities for innovation in financial services.
Act as a critical friend to the Innovation department and suggest topical matters to be explored through Innovation’s initiatives such as TechSprints and Spotlights.
Pass on important public messages from the FCA to their members and networks, such as regulatory publications.
The advisory group is due to meet for the first time in January 2023. For those interested in applying, they should email a CV and brief cover letter to the Innovation Advisory Group mailbox no later than 1st December 2022 (terms of reference should be read before applying).
On 18 October 2022, following a number of petitions by the FCA, the Court ordered that the following regulated financial services firms be wound up:
The FCA has welcomed the decision by the Court of Appeal to deny permission for a judicial review. The Court of Appeal has refused permission for a group of traders to proceed with a judicial review of the FCA’s decision to provide assistance to the United States Commodity Futures Trading Commission (CFTC) in an ongoing investigation. The FCA issued notices requiring production of information by UK residents in order to assist the CFTC in an investigation of certain crude oil trading on a U.S. derivatives exchange. Following this notice, an application to judicially review the FCA’s decision was brought by the UK subjects to overturn the decision to seek evidence from them. Under the Financial Services & Markets Act, 2000, the FCA is able to use its investigation powers to assist foreign regulators. The FCA also commonly seeks assistance from foreign regulators in relation to its own investigations. In this case, the FCA has arranged to ensure all materials requested by the CFTC are provided by the traders without further delay.
In a report it published, the FCA found examples of firms delivering good outcomes for customers however, it also found that a lot of firms need to make improvements to support borrowers in financial difficulty. The FCA found that just 30% of firms (15 out of 50) sufficiently explored customer’s specific circumstances meaning that repayment agreements were often unaffordable and unsustainable. The FCA has already told firms to make changes to improve the way they treat customers and as a result, seven of these firms have voluntarily agreed to pay £12 million in compensation to nearly 60,000 customers. The FCA confirmed it will also be closely reviewing a further 40 firms to ensure they are meeting expectations and to protect customers from harm.
The FCA has intervened to amend or withdraw 4,151 financial promotions between July and September – the highest since it started publishing data. Retail lending, investments and banking are the sectors with the highest rate of amends to or withdrawal of adverts and amount to 95% of the FCA’s interventions with authorised firms. As the cost of living crisis continues, there have been several cases involving unauthorised firms and individuals seeking to take advantage of consumers. In Q3 2022, the FCA issued 303 warnings about unauthorised firms and individuals, with over 20% being about clone scams. The FCA’s interventions have resulted in 66 Buy Now Pay Later (BNPL) promotions from one firm across various social media platforms being amended or withdrawn – it said the adverts did not give fair or prominent risk warnings and were misleading about fees. The FCA’s Executive Director of Enforcement and Market Oversight said “As consumers feel the financial squeeze, they could be tempted by high risk, unregulated products and services or they could become a target for scammers preying on moments of vulnerability”.
The FCA is prosecuting five individuals for their involvement in an ‘all-or-nothing' investment scheme. The trial for the alleged investment fraud is scheduled to begin on 6th February 2023 and is expected to last 6-8 weeks. It is alleged that between June 2016 and January 2020 Cameron Vickers, Raheel Mirza and Opeyemi Solaja (aka Opeyemi Olaja) ran a London based company called Bespoke Markets Group which defrauded £1.2 million from UK investors. It has been alleged that money was used to fund their lifestyle, rather than the binary options investments that were advertised. They were all charged with offences under the Financial Services and Markets Act 2000, the Proceeds of Crime Act 2002 and an offence of conspiracy to defraud contrary to common law. In May 2022, Reuben Akpojaro, who also worked at Bespoke Markets Group, was charged with the same offences relating to the scheme. Finally, in October 2022, a further charge was brought against Raheel Mirza and a fifth individual, Taheer Sardar, for preventing the course of justice relating to the FCA’s investigation. The FCA alleges that between 31 July 2022 and 1 October 2022, the two men created a false document to influence the case.
Mr Ashkan Zahedian has been banned from working in financial services following his conviction for serious, violent offences, which took place whilst he was an approved individual. In May 2020, Mr Zahedian pleaded guilty and was convicted of grievous bodily harm and possession of an offensive weapon, having attacked a security guard at a bar with a machete. The FCA decided to remove Mr Zahedian’s approval to perform the senior management function at Vast Cars Limited (where he was the sole director) and impose a prohibition order, preventing him from working in financial services in the future. Executive Director of Enforcement and Market Oversight at the FCA, Mark Steward explained that those authorised to provide financial services must meet and maintain high standards character, fitness and properness and Mr Zahedian’s acts of violence reflect that he should not be working in financial services.
The FCA has imposed several requirements on Lilium Markets Ltd, a registered small payment institution, and removed the firm’s ability to provide payment services. Lilium has never been authorised by the FCA and does not have permissions to carry out any regulated activities, including in relation to investments.
The FCA has obtained a judgement against London Property Investments (U.K) Limited (LPI), NPI Holdings Limited, their director Daniel Stevens and his father, Tony Stevens, for arranging mortgages without FCA authorisation and exploiting vulnerable customers who were in financial difficulty. The judgement found that the defendants arranged high-interest, unaffordable bridging loans for consumers about to be evicted from their homes, taking huge fees. The defendants bought some of these homes for less than their value from owners who were facing repossession and then rented the properties back to the consumers. The Judge has described these breaches as ‘exploitative of vulnerable individual consumers’ and found that they were undertaken to ‘obtain significant personal gain’. In 2020, the FCA obtained an interim injunction and a freezing order to stop these activities and freeze residential properties and other assets owned by Tony and Daniel Stevens and the two companies. There will be a later trial to determine remedies, including compensation for affected individuals. The trial will also hear evidence in respect of up to 88 further potentially affected individuals who were not part of the FCA’s first claim.
The FCA has announced that it has commenced civil proceedings against the former CEO and CFO of Global Plc for alleged market abuse. It is alleged by the FCA that the former CEO, Mr Konstantinos Papadimitrakopoulos and former CFO Mr Dimitris Gryparis, made misleading statements that caused the company’s shares to be traded significantly above their true value before the company’s total collapse in November 2015. The FCA claims that investors were adversely affected by the alleged misleading statements and as such it is seeking compensation.
The FCA has issued a final notice to Mohammed Ataur Rahman Prodhan as a result of his misconduct. On 16th May 2018, the FCA notified Mr Prodhan that it had decided to impose a financial penalty of £76,400 against him. Mr Prodhan was appointed to be CEO of SBUK in 2012 after a long career with its parent bank in Bangladesh. He was approved as CF1 and CF3 and was the senior manager responsible for the establishment and maintenance of effective AML systems and controls. In 2010, the Authority found that there had been serious failings in SBUK’s AML systems and controls and Mr Prodhan was made aware of this on several occasions before and shortly after taking up his role and the seriousness of AML issues. Despite warnings, Mr Prodhan failed to take reasonable steps to ensure that AML risk were adequately identified, assessed and documented. As a result, SBUK’s board was insufficiently informed of the AML risks faced by SBUK and SBUK’s strategic planning failed to take adequate account of AML risks. Therefore, the Authority considers that Mr Prodhan breached Statement of Principle 6 (exercising due skill, care and diligence in managing the business of the firm for which he was responsible).
The FCA has recently received information about a small number of firms not including all fees and charges in their defined benefit pension advice redress calculations, in line with current guidance FG17/9. The information received suggests that these firms are not considering ongoing fund costs and/or fully allowing for ongoing adviser charges in redress calculations. Some of these firms may also be unfairly terminating consumer contracts after consumers make a complaint. The FCA is investigating such matters and where it identifies firms not calculating redress correctly, it will take action using the full range of its powers which may include appointing an independent professional to check calculations and help consumers get the right redress.
Glencore Energy UK Ltd must pay almost £290 million after an SFO investigation found it had paid $29 million in bribes to gain preferential access to oil in Africa. The FCA opened an investigation into Glencore in 2019, focusing on the activities of the London-based West African desk – this desk sourced and traded in crude oil from countries across Africa. The investigation discovered text messages, large cash withdrawals and deliberately concealed payments that showed Glencore paid bribes worth a total of $29 million to secure access to oil in Cameroon, Equatorial Guinea, Ivory Coast, Nigeria and South Sudan. The bribes were often disguised as an unspecified ‘service fee’, ‘signing bonus’ or ‘success fee’ in financial reports, in Nigeria, Equatorial Guinea and the Ivory Coast. The approach used in Cameroon and South Sudan was different – in 2011, two Glencore executives from the West Africa desk flew to South Sudan by private jet, carrying $800,000 in cash. The cash had been withdrawn from the cash desk at Glencore Plc’s Swiss HQ and had been recorded as ‘expenses for the opening of the office in South Sudan’. Justice Fraser, reflected in his judgement that “the facts demonstrate not only significant criminality but sophisticated devices to disguise it” before sentencing the commodities trading giant to pay a financial penalty in response to the seven charges of bribery.
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.
