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 general news in the UK continues to be dominated by Covid-19, but has also revolved around the upcoming Fiscal Budget and the COP26 summit to take place in Glasgow from the 31st of October. 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.
The FCA also continues to update its designated Brexit webpage and firms are encouraged to regularly review.
The FCA published the Handbook Notices no. 91 and no. 92 and the latest policy development update issued can be found here. The latest FCA Board minutes issued were from its Board meeting on 3 September 2021.
For other regulatory newsletters, the Financial Ombudsman Service (FOS) published its most recent newsletter, edition no. 165 and the latest PRA regulatory digest for September 2021 has been issued. There has been no new ICO newsletter since March 2021 and no new FCA Market Watch newsletter since no. 67 in May. Main Features
The FCA published a webpage analysing firms' annual financial crime data return (REP-CRIM) submissions for the three reporting periods between 2017-20.
Over the three periods, the FCA received 5,685 REP-CRIM submissions from over 2,300 firms. As the responses of individual firms to REP-CRIM are confidential, the data presents aggregated information. From its analysis, the FCA's key observations include:
Firms reported around 89,000 Politically Exposed Persons as customers in 2019/20 and 2018/2019. This is a decrease of 111,000 PEP customers in 2017/18
Wholesale financial markets firms account for 67% of the 180 submissions received reporting non-EEA correspondent banking relationships. This is indicative of the complexity of services this sector provides which spans multiple jurisdictions
Retail banking firms have reported approximately 390,000 high risk customers in 2019/20 which is almost half of the high-risk customers reported by all firms. This is reflective of the sector’s business models which increase their exposure and vulnerability to be used for the purposes of money laundering
The number of SARs reported to the National Crime Agency (NCA) has increased, from 394,048 in 2017/2018 to 480,202 in 2019/2020
The number of firms reporting automated sanctions screening is increasing year on year, with a 16.5% increase over these 3 reporting periods. However, the investment management sector has the highest number of firms that do not use automatic screening
For the year 2019/20, firms which submitted the REP-CRIM collectively employed approximately 17,000 full-time equivalent staff in financial crime roles, this compares to approximately 15,700 in 2017/2018
A total of 761,437 customers were exited during the 2019/20 reporting period, which has more than doubled in the last 3 years. This was about 0.16% of total customers across all submissions that year. Retail lending and retail banking sectors have exited the most customers for each of those years.
The FCA's analysis aims to provide Money Laundering Reporting Officers (MLROs) and industry practitioners with insights on trends and developments to help inform the arrangements and risks of their respective firms.
The FCA introduced the REP-CRIM obligation in 2016 for certain firms, as announced in PS21/4, the scope of firms required to complete the annual return is widening in 2022. It published the first analysis of REP-CRIM data in November 2018, covering the reporting period 2016-17. The FCA subsequently received feedback through its MLRO forums that this analysis was useful. Firms also requested information about different industry sectors, which the FCA has included in its latest analysis.
The FCA uses data and technology to complement its risk-based financial crime supervision.
The FCA has published a press release highlighting the results of a recent survey which was conducted to determine how consumers make investment decisions. The research found that 76% of younger investors in the UK who place their bets on high-risk products such as cryptocurrency are driven by competition with friends and their own past investments. The FCA commissioned the survey of 1,000 people, aged 18 to 40, who had invested in one or more high-risk investment products, of which 68% likened it to gambling. Very few of those surveyed were investing for the long haul.
Only 1 in 5 respondents were considering holding their most recent investment for more than a year and less than 1 in 10 for more than 5 years. This is despite 60% of those surveyed saying that they prefer more stable returns than investments that rise and fall dramatically.
The survey found that hype on social media and the news drove new investors to take up these high-risk investments. 58% of respondents agreed that constantly hearing about a certain investment on the news, from friends and family and on social media encouraged them to purchase.
The FCA advised that it is concerned that new investors are increasingly accessing higher-risk investments which may not be right for them or reflect their risk tolerance. While the research shows that while those who have invested believe themselves to be more knowledgeable about financial matters than the general public, the new research found that majority of those who purchased forex or crypto incorrectly believed these to be regulated by the FCA. As a result, they were unlikely to understand the lack of investor protection and the risk to their money.
To help investors make choices that are right for them, the FCA is launching an £11m 5-year campaign, called InvestSmart. The campaign targets those who are inexperienced at investing, possibly dipping their toe for the first time. The campaign aims to reach those investors through social media and online, where much of the hype around investment happens. The campaign asks investors to consider their appetite for risk and to ignore the hype, directing them instead to advice available on the FCA’s website.
To encourage investors to understand the pitfalls of high-risk investments, the FCA has recruited Olympic BMX gold medallist Charlotte Worthington to warn of the dangers. She explains how her first Olympic outing not going to plan due to failure to prepare properly compares to the perils of high-risk investments.
The Climate Financial Risk Forum (CFRF) has published a second round of guides to help financial firms manage climate-related financial risk. The guides build on those published in June 2020, and are written by industry, for industry, and they focus on risk management, scenario analysis, disclosure, innovation and climate data and metrics.
The five CFRF working groups below are collectively publishing a total of 10 deliverables which are summarised as follows:
Risk Management. The outputs for the Risk Management Working Group (RMWG) are designed to help retail banks, corporate banks, insurers and asset managers produce and implement risk appetite statements that integrate climate-related financial risks. Additionally, the RMWG has produced a paper that summarises a firm’s training needs for climate risks and opportunities and how they could be delivered as a coherent syllabus.
Scenario Analysis. The Scenario Analysis Working Group (SAWG) has produced practical examples on how firms can incorporate sector specific points when developing an effective approach to scenario analysis. The SAWG will publish a publicly available online scenario analysis tool in Q1 2022. The tool is designed for use by smaller firms who may not have the experience or resources to attempt independently.
Disclosure. The Disclosure Working Group (DWG) has collated a number of case studies on disclosure from a variety of organisations that will be of interest to firms as they develop their approach to climate-related disclosures. The DWG has also produced guidance highlighting the legal risks associated with publishing a climate-related disclosure and how these risks can be effectively managed.
Innovation. The Innovation Working Group (IWG) has focused on identifying and sharing practical opportunities to mobilise financial capital and steward an economy-wide transition to meet climate targets and the resultant briefing paper highlights the key points. Additionally, the IWG has produced a set of 7 short films highlighting innovative approaches to mobilising finance in support of the transition to net-zero.
Climate Data and Metrics. The report on climate data and metrics recommends five areas where climate-related metrics could be employed: Transition Risks; Physical Risks; Portfolio decarbonisation; Mobilising transition finance and Engagement. The first part of the report provides detail on each of these areas. The second part focusses on implementation and provides practical guidance and support on convergence towards a set of common and consistent climate metrics.
Nikhil Rathi, Chief Executive of the FCA commented 'these guides will help firms overcome some of the difficulties they’ve faced. Importantly, they also focus on innovation, so financial firms can see the opportunities, as well as challenges, from more effective climate-related financial risk management.
CP21/29: Proposed decisions on the use of LIBOR. The consultation paper sets out the FCA proposals to use new powers for certain LIBOR settings. The consultation period was very short and has already closed.
PS21/12: Assessing value for money in workplace pension schemes and pathway investments: requirements for IGCs and GAAs. The FCA sets out its final rules on how Independent Government Committees (IGCs) and Governance Advisory Arrangements (GAAs) should compare the value of pension products and services, and promote the best value for pension scheme members. The rules came into force on the 4th of October 2021.
PS21/13: LIBOR transition and the derivatives trading obligation. This statement sets out the FCA’s finalised amendments to the UK regulatory technical standards on the trading obligation for certain derivatives, which are set out in the onshored version of Commission Delegated Regulation.
PS21/14: A new authorised fund regime for investing in long term assets. This statement sets out the feedback to proposing a new category of the authorised open-ended fund called the long-term asset fund (LTAF).
FS21/10: FCA use of powers over use of critical benchmarks.
The FCA has published its final rules to streamline and simplify prudential requirements for solo-regulated UK firms authorised under the Markets in Financial Instruments Directive (MiFID). This is part of the Investment Firms Prudential Regime (IFPR), a major change for FCA investment firms. Any FCA authorised investment firms must prepare for the regime which comes into force on 1 January 2022. The final rules are contained in legal instruments FCA 2021/38 and FCA 2021/39, this updates near final rules published in PS21/6 and PS21/9 earlier in 2021. The rules will focus requirements and expectations away from the risks faced by firms, to also consider and look to manage the potential harm firms pose to consumers and markets. The IFPR will apply to the following:
MiFID investment firms authorised and regulated by the FCA
Collective Portfolio Management Investment Firms and
Regulated and unregulated holding companies of groups that contain either of the above.
The IFPR will not apply to PRA designated investment firms, these will continue to be subject to supervision by the PRA. A third policy statement will be published by the end of 2021. The FCA has also issued updates to its IFPR page which also includes an option to sign up to a new IFPR newsletter.
The FCA advised that it has now written to a total of 3,591 defined benefit pension transfer customers this year to tell them they may be entitled to compensation. The letters were sent to customers of firms in liquidation where past business reviews have identified that the firm has given unsuitable advice to some customers. The letters also direct customers to the FCA’s DB pension transfer advice checker to help them identify whether the advice they received was suitable or not. The FCA has also published a full list of firms who are in insolvent liquidation and have given unsuitable advice to some customers, this list will be updated as work continues.
The FCA has published a new webpage on remote or hybrid working expectations for firms. The page sets out the FCA’s expectations so firms can plan and continue to meet their regulatory responsibilities. The guidance applies to existing firms, firms applying to be authorised or registered and firms proposing to submit further applications. Firms should evaluate how they operate their business and be able to prove that the lack of centralised location caused from remove working does not cause detriment to consumers.
The FCA has released an announcement regarding further arrangements for the orderly wind-down of LIBOR at the end of 2021. The sterling, Japanese yen, Swiss franc, and euro LIBOR panels are ceasing on the 31st of December 2021. The FCA is confirming that to avoid disruption to legacy contracts that reference the 1, 3 and 6-month sterling and Japanese yen LIBOR settings, it will require the LIBOR benchmark administrator to publish these settings under a 'synthetic' methodology, based on term risk-free rates, for the duration of 2022.
The FCA has published its latest annual perimeter report for 2020/21. The FCA perimeter determines which activities the FCA must authorise and what level of protection consumers can expect for the financial services and products they purchase. The perimeters are determined by Parliament and the Government through legislation. The report does the following:
Helps to explain what the FCA does and does not regulate.
Explains what the perimeter is and how it applies.
Describes specific issues around the perimeter and the action the FCA is taking in response.
Highlights where the FCA sees gaps in the legislation and where the perimeter needs to change.
In terms of where the perimeter needs to change, some of the highlights from the report include:
A recommendation that the Senior Managers and Certification Regime be extended to recognised investment exchanges, credit rating agencies, payment services providers and e-money firms.
A recommendation that duties on internet companies in the Online Safety Bill should be extended to paid-for advertising, as well as user-generated content. The FCA also believes that the Bill should designate content relating to fraud offences as ‘priority’ illegal content and so require monitoring and preventative action by platforms.
The FCA is concerned that unauthorised persons are increasingly relying on exemptions in the Financial Promotion Order relating to ‘high net worth’ and ‘sophisticated’ investors (the exemptions) to market high risk investments. The FCA has seen evidence that strengthening its financial promotion rules has resulted in more unauthorised issuers using, or purporting to use, the exemptions to target ordinary consumers with high-risk investments and scams. The exemptions were last reviewed in 2005 and the FCA is concerned that they are no longer fit for purpose.
The FCA will formally discuss the report with the Economic Secretary to the Treasury later this year. Minutes of this discussion will be published, to help improve transparency around actions being taken on the perimeter.
Andrew Bailey, Governor of the Bank of England, gave the speech ‘The Hard Yards’ at the Society of Professional Economists Annual Dinner. The speech highlighted the varying forces currently acting on the economy and what they mean for monetary policy. He discussed the supply bottlenecks that are currently impacting the availability of goods and services and how it will push up the cost of living, but that this is likely only temporary.
Sarah Pritchard, Executive Director at the FCA, delivered the speech ‘Partnerships, priorities and predictions for the future in the pensions market.’ It highlighted that effective pension regulation relies on a deep partnership between the many regulators and policy makers that operate in the pensions space. The FCA have 3 main priorities:
1. focusing on advice and guidance for consumers;
2. seeing that pension products are well designed and represent value for money and;
3. making the pensions market work well, without scams.
She advised that the FCA is already changing to become a more innovative, assertive and adaptive regulator, reflecting the world the FCA operates in, and will continue to do so in the months and years ahead.
Jon Cunliffe, the Deputy Governor of the Bank of England, discussed the impact of cryptocurrency on the stability of the UK’s financial system. He says unbacked crypto-assets (e.g., Bitcoin) and backed crypto-assets for payments (stablecoins) have begun to connect to the financial system. He also discussed how regulators are responding to their rapid growth. Mr Cunliffe advised that regulators around the world have begun work to establish a public policy framework through to manage the incredible growth of cryptoassets, but warned that this must be pursued as a matter of urgency.
The Financial Stability Board (FSB) published a speech by Randal Quarles, FSB Chair, titled ‘Financial Stability and Coordination in Times of Crisis’ that discusses how the FSB will address ongoing and future stability challenges in 2022. The speech explores four fundamental areas:
Reacting and responding to the crisis: Mr Quarles advised the FSB worked to leverage cooperation to ensure stability and working to reduce harm during the decade between the global financial crisis and the start of the COVID-19 pandemic, members of the FSB worked alongside each other and focused on enhancing the global financial system’s resilience to shocks. Through numerous ways, members built trust amongst themselves which helped prepare the FSB to work together during the pandemic.
Moving from analysis to action: the FSB assembled a team to assess vulnerabilities in the non-bank sector and to coordinate and drive forward any needed reform.
Lessons learned from the pandemic: The FSB will be publishing a range of reports which will cover topics that relate to the pandemic and their key lessons learned.
Focus for 2022 and beyond: The FSB will continue working with G20 policy makers and experts to assess vulnerabilities and coordinate responses.
The FCA has prohibited (and fined) a former director and senior financial adviser at a pension switching firm Consumer Wealth Ltd from working in financial services. Mr Omar Hussien was fined £116,000 for providing reckless and unsuitable pension switching advice. The FCA found that Mr Hussein advised customers to switch their existing pensions when this was often not necessary or in their best interest, which directly breached FCA Principles 1 and 7, ie. failing to act with integrity and failing to pay due regard to the needs of clients.
NatWest Plc has pleaded guilty to three offences under the Money Laundering Regulations 2007 at Westminster Magistrates Court. NatWest accepts that it failed to comply with regulations in relation to the accounts of a UK incorporated customer. These requirements require certain firms, including those regulated by the FCA, to ensure they have adequate anti-money laundering systems and controls to prevent money laundering.
Credit Suisse has been fined £147,190,276 by the FCA for serious financial crime due diligence failings, relating to loans worth over $1.3 billion which the bank arranged for the Republic of Mozambique. Mark Steward, Executive Director of Enforcement and Market oversight at the FCA, said the fine reflects the impact of these tainted transactions which included a debt crisis and economic harm for the people of Mozambique. The fine would have been higher if not for Credit Suisse agreeing to provide the debt write-off of US$200 million. The bank had sufficient information on the risk of bribery associated with the Mozambican loans and bond exchange but failed to take this into account. Credit Suisse was aware Mozambique was a jurisdiction where the risk of corruption of government officials was high and that the projects were not subject to public scrutiny or formal procurement processes. The contractor engaged by Mozambique on the projects was described as a “master of kickbacks.” The contractor secretly paid significant kickbacks, estimated at over US$50 million, to members of Credit Suisse’s deal team, including two Managing Directors, to secure the loans at more favourable terms. The FCA warned that it will continue to pursue serious financial crime control failings by regulated firms.
The Financial Crime News has published a study ‘Country Performance in Fighting Financial Crime’ which compares 10 countries, including the UK, in their fight against financial crime. The study found that the main Financial Crime risks to the UK are from fraud, drug trafficking, cybercrime, human smuggling, acquisitive crime, wildlife trafficking, tax offences and corruption. The study found that Italy rated the highest for money laundering convictions, with around 5,000 cases, with the UK second with 1,400 convicted cases. The report also found that despite the Financial Action Task Force (FATF) identifying virtual currency concerns as a priority sector of concern, virtual currency was only rated as having a high vulnerability to money laundering in one of the ten countries, Japan. Published results from the FATF 4th round mutual evaluation report highlights significant room for improvement, with no one country doing well enough, particularly on effectiveness.
HM Treasury has published a new statutory instrument, The Financial Services Act 2021 (Commencement no. 3) Regulations 2021. This regulation amends section 61 of the Criminal Justice Act of the Financial Services Act 2012 to increase the maximum sentence for conviction of insider dealer offences from 7 to 10 years. This amendment will come into force on the 1stof November 2021.
The FSB has published a report on cyber incident reporting. The FSB is exploring whether greater convergence could be achieved in cyber incident reporting following increasing financial stability concerns around the digitalisation of financial services. The FSB has identified three ways to move towards greater convergence:
Developing best practices. The FSB seeks to identify a minimum set of types of information authorities may require related to cyber incidents to fulfil a common objective that authorities could consider when developing their cyber incident reporting regime. This set of information would also help authorities in determining reporting thresholds, timeframes for reporting and notification, while recognising that a one-size-fits-all approach may neither be appropriate nor possible.
Identifying common types of information to share. The report seeks to identify key information items that should be shared across sectors and jurisdictions, and to understand any legal and operational impediments to sharing such information. This would facilitate more information-sharing and help authorities obtain a better understanding of impacts of a cyber incident across sectors and jurisdictions. As a multilateral solution to information- sharing problems would be challenging, it would be essential for FSB member jurisdictions to continue bilateral and regional efforts to reduce legal and operational barriers to information sharing.
Creating common terminologies for cyber incident reporting. Harmonised cyber incident reporting schemes necessitate a ‘common language.’ A common definition for ‘cyber incident’ is needed that avoids the reporting of incidents that are not significant for a financial institution or financial stability.
By the end of 2021, the FSB advised it will develop a detailed plan and timelines to progress the above points. The report predicts that greater harmonisation of reporting would promote financial stability by building a collective understanding, and monitoring, of cyber incidents affecting financial institutions.
The Financial Ombudsman Service (FOS) published a consultation on a proposal to help move faster in reducing customer waiting ties. During the past year, the Ombudsman received 90,000 more cases than expected which meant significant queue times. Therefore, the FOS is exploring a range of initiatives to help move faster and reduce customer waiting times, including a temporary proposed change to how it publishes firm-specific complaints data. It proposes that – for a limited period – complaints with services that are proactively settled by businesses before the Financial Ombudsman Service has issued its opinion will not count towards the business’s uphold rate. The Ombudsman was seeking stakeholders’ views on its proposal, and the consultation closed on the 18th of October, with findings to be published in November.
The Financial Ombudsman Service updated its guidance on compensation for distress and inconvenience for both businesses and consumers. Alongside the updated guidance, the FOS published a blog post by Garry Wilkinson, Principal Ombudsman and Director of Investigation, explaining that it updated the guidance not because the approach had changed, but because stakeholders had advised that more detailed guidance would help firms and customers reach a fair outcome.
The Productive Finance Working Group has published a series of recommendations which could facilitate greater investment in longer-term, less liquid assets. The report contains recommendations in four areas:
Shifting the focus to long-term value for DC scheme members. Among other things, DC schemes trustees, trade bodies and consultants should consider how increasing investment in less liquid assets could generate greater long-term value for their members.
Building scale: The DC market has a high proportion of small schemes. Their lack of scale can make it challenging for them to invest in less liquid assets for a variety of reasons.
A new approach to liquidity management: Most DC schemes currently invest predominantly in daily-dealing funds which in theory means their holdings can be sold at short notice. Investment in less liquid assets does not present the same daily dealing opportunity. Therefore a broader range of DC schemes should find ways to enable them to invest in less liquid assets as part of a diversified portfolio. To support that, the Group recommends industry develop guidance, in collaboration with the Bank and FCA, on good practices for liquidity management at a fund level.
Widening investment in less liquid assets: The group recommended that the FCA consult on changing its rules for investment in illiquid assets through unit-linked funds and reviewing the Long Term Asset Funds distribution rules to facilitate wider distribution to appropriate retail clients.
The Financial Stability Board has published a report setting out a surveillance framework to assess and capture new and emerging financial system vulnerabilities. The framework identifies four key principles to assist the FSB identify vulnerabilities in a proactive and forward-looking manner:
Focus on vulnerabilities that may have implications for global financial stability
Scan vulnerabilities systematically and with a forward-looking perspective, while preserving flexibility
Recognise differences among countries
Leverage the comparative advantages of the FSB while avoiding duplication of work.
The FSC will communicate its view on vulnerabilities through its annual reports.
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.