Welcome to the latest edition of Gem Compliance's monthly regulation newsletter. The aim of the newsletter is to present industry news in an easily digestible format. As such, not all sources of industry information and FCA publications (and no PRA publications unless specified) will be covered. Therefore, clients and associates of Gem Compliance should periodically check the FCA’s and PRA’s websites for regulatory developments. We hope you find this newsletter useful and should you have any compliance queries or require advice on any of these topics, please do not hesitate to contact us.
Although the revised Brexit date of 31 October continues to approach, at present the parliamentary focus, at least in the UK, is on the election of a new Prime Minister. Regardless, all firms are encouraged to review and update where necessary their Brexit contingency planning in the event of a ‘no-deal’ Brexit, given the potential increase in that risk, and until any certainty on the UK’s position in the EU post 31 October is available.
The latest edition of the FCA Regulation Round up was issued on 20June 2019. As March 2019 was the last version to appear to the FCA website, firms are encouraged to subscribe directly to that newsletter to ensure that they continue to receive this directly. The latest edition of the FCA Policy Development Update was also issued on 7June 2019 and the FCA’s most recent April Board Minutes are available. The ICO’s June newsletter has been issued. In addition, the latest PRA digest (May 2019) was published on 3 June 2019. Features
The FCA has published feedback on its consultation on loan based (‘peer-to-peer’) and investment-based crowdfunding platforms. The consultation was initially opened on 27July 2018 and closed on 27 October 2018 and looked at bringing proposals to prevent harm to investors but doing so in a proportionate manner that continues to permit innovation. The FCA’s Policy Statement, (PS19/14) published 4 June 2019, summarises the feedback received in its Consultation Paper CP18/20, and sets out the final policy positions it has reached, taking into account the feedback received. It also contains the final rules which implement the policy decisions that have been made by the FCA. The FCA is introducing a package of rules and guidance to improve standards in the sector. In summary, this Policy Statement confirms the below actions taken by the FCA:
Introducing more explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise.
Strengthening rules on plans for the wind-down of P2P platforms.
Applying marketing restrictions to P2P platforms, designed to protect new or less-experienced investors. The FCA has also clarified the practical implication of these new rules as they apply to P2P agreements.
Introducing a requirement that an appropriateness assessment (to assess an investor’s knowledge and experience of P2P investments) be undertaken, where no advice has been given to the investor. The FCA has also provided guidance on what the assessment should include.
Setting out the minimum information that P2P platforms need to provide to investors.
P2P platforms (and firms providing services to P2P platforms)
investment-based platforms, and other firms offering non-readily realisable securities
trade bodies for these sectors
consumers and businesses investing or considering investing through an online crowdfunding platform or in non-readily realisable securities
consumers and businesses that have entered, or plan to enter, into loan agreements as borrowers via P2P platforms
intermediaries who might refer home finance customers to P2P platforms
The FCA will enforce the new rules and guidance on 9th December 2019, with the exception of applying MCOB to P2P platforms that offer home finance products, which has come into force 4th June 2019.
For further information on this, please click here for the full text of PS19/14.
The FCA has announced it is publishing a Call for Input to expand and deepen the discussions on whether a cross-sectoral sandbox or similar mechanism is needed to ensure a consistent and efficient approach to emerging technologies. Technologies such as Artificial Intelligence (AI)
and Distributed Ledger Technology (DLT) are affecting the way consumers, firms and regulators interact. The FCA outlines that access to, and usage of, data is fundamental, underpinning both products and services. These changes have prompted the FCA to think about how it responds as a regulator to ensure financial markets can benefit from such innovation, while advancing their statutory objectives of market integrity, consumer protection and competition.
The FCA received support from the Regulators’ Pioneer Fund (a fund launched by the Department for Business, Energy and Industrial Strategy and administered by Innovate UK) to explore the need for a cross-sector regulatory sandbox. This would be a single-point-of-entry sandbox for firms to test innovative propositions with multiple UK regulators, in a controlled environment.
Given the cross-sectorial nature of this proposal, this Call for Input will be of interest to a very wide range of firms, regulators and consumers, including:
FCA regulated firms that (intend to) use emerging technologies to facilitate business models spanning at least one other regulator
Any firms that are subject to a UK regulatory authority and consider diversifying their business model into the financial services sector
Governmental bodies, policy makers and Think Tanks
Regulators and other authoritative bodies
Consumers and consumer organisations
The FCA is inviting responses to the Call for Input by 30August 2019. As part of this Call for Input, the FCA may meet (or hold telephone calls) with stakeholders. Please click here for the full text of the Call for Input.
The FCA has confirmed it will introduce new rules surrounding the Buy Now Pay Later (BNPL) market. The rules are expected to save consumers around £40-60 million per year. One of the changes will include banning firms from charging backdated interest on money that has been repaid by the consumer during the BNPL offer period. These changes will come into force by 12thNovember 2019.
These controls have been designed to minimize the financial struggles faced by some consumers tied into BNPL credit offers. There are a number of firms who offer BNPL as part of their credit offers, these include:
Retailers who offer finance at point of sale (in-store or online)
BNPL offers often provide the consumer with a promotional period, typically up to 12 months, and within this timeframe consumers do not have to make payments and are not charged any interest. However, if by the end of the promotional period the customer had not repaid the entire amount, interest will usually be charged back to the date of the purchase. Additionally, consumers who repay part of the amount owed are usually still charged for the backdated interest on the credit that has not been repaid. Over a third of consumers do not repay within the offer period therefore, leading them to incur interest charged from the date of purchase.
The confirmed changes mean:
Firms cannot charge backdated interest on amounts of money that have been repaid by the consumer during the BNPL offer period.
Firms have to provide better information to consumers about BNPL offers. The information should be more balanced and appropriately reflect the risks as well as the benefits of the product.
Firms must give prompts to consumers, to remind them when the offer period is about to end, so that consumers are more likely to repay the credit before they incur interest
Christopher Woolard, Executive Director of Strategy and Competition, at the FCA, said:
‘The rules we will be implementing will not only improve the information consumers receive about BNPL offers, but will stop firms from charging backdated interest on sums repaid during the offer period. We expect the overall package of measures will save consumers around £40-60 million a year and tackle the harm we identified in this market. As we have shown, we will intervene where we see harms and we remain vigilant in this and other sectors.’
On 13 June 2019, the FCA published a consultation paper on its framework for assessing adequate financial resources (CP19/20). CP19/20 seeks to clarify the purpose of assessing adequate financial resources, what the FCA looks for from firms when assessing this and its expectations as to the practices firms should adopt in an assessment. The FCA's expectations of firms to reduce potential harm as set out in CP19/20 cover:
Systems and controls, governance and culture.
Identifying and assessing the risk of harm.
Risks that can lead to harm or impair the ability to compensate for harm done.
The FCA explains in the paper that the Threshold Conditions and the assessment of adequate financial resources are important components of its supervisory work. The FCA's aim is to improve the way that firms operate so that it can prevent harm from occurring, improve controls, consider the risk in their activities, and put things right when they go wrong, with a view to reducing the likelihood of market disruption which may occur when a firm fails and exits the market. The proposals are relevant to all FCA solo-regulated firms who are subject to Threshold Conditions and the Principles for Businesses. The deadline for comments on the proposals is 13 September 2019.
CP19/16: Consultation on proposed 2019/20 regulatory fees and levels to fund the Financial Conduct Authority, Financial Ombudsman Service, Money and Pensions Service, Devolved Authorities and illegal money lending expenses of HM Treasury.
CP19/17: Consultation on mortgage advice and selling standards.
CP19/18: Consultation paper on Overdraft Pricing and Competition Remedies, as part of the FCA’s review of high-cost credit.
CP19/19: The FCA’s Quarterly Consultation Paper, No 24 on FCA Handbook Changes. The proposals this quarter include modifications to General Provision (GEN), new notification procedures for changes to the management body, amendment of Handbook form SUP 10C Annex 10D: Statement of Responsibilities and Handbook form SUP 8 Annex 2 for a waiver of modification of rules.
On 31 May 2019, the FCA published its policy statement (PS19/12), Changes to Align the FCA Handbook with the EU Prospectus Regulation: Feedback to CP19/6, setting out its near-final rules to align the Handbook with the new Prospectus Regulation, see Legal update, New Prospectus Regulation: FCA consultation on proposed changes to Handbook. The FCA confirms that the Prospectus Regulation Rules (PRR) will replace the existing Prospectus Rules. As proposed, the PRR will reproduce key sections of the new Prospectus Regulation and relevant EU and domestic law. The final rules are to include references to, and extracts from, additional EU legislative materials that are finalised in time. The FCA plans to finalise its rules once changes to FSMA and relevant EU legislation are in place. Issuers seeking approval of a draft prospectus on or after 21 July 2019 must do so under the new Prospectus Regulation and in line with the PRR. If the UK withdraws from the EU in a no-deal scenario before 21 July 2019, the FCA will not proceed with these proposals.
The FCA has issued a Policy Statement (PS19/15) outlining the near final rules for applying their existing supervisory and enforcement processes to securitisation repositories when the UK leaves the European Union. It also sets out the final rules in respect of additional enforcement powers under the Securitisation Regulations 2018. This Policy Statement follows on from their consultation paper CP19/11 and the earlier consultation paper and policy statement CP18/30 (PDF) and PS18/25. Click here for a PDF copy of the Policy Statement (PS19/15).
On 24 May 2019, the FCA published:
A revised direction for EEA firms with passports and Treaty firms.
A revised direction for EEA alternative investment funds.
The directions amend the previous versions and extend the notification window for firms wishing to enter the temporary permissions regime (TPR) to 30th October 2019. The TPR will come into force when the UK leaves the EU, if there is no transition period.
The FCA has updated its SM&CR page on its website.
On 19 June 2019, the FCA published its perimeter report 2018/19. This initial report from the FCA outlines what the FCA does and does not regulate and aims to provide clarity about the FCA's role and set out its response to particular issues that have arisen in the past year. The FCA acknowledges that the current perimeter is "complicated", which makes it difficult for consumers to understand which of the FCA's protections apply, and when, and their eligibility for compensation.
In his foreword to the report, Andrew Bailey, FCA Chief Executive, comments that, in 2019, the question of the FCA perimeter is particularly important for the following three reasons:
Firms operating on the edges of the perimeter have recently caused serious harm to consumers and are damaging public trust in the regulated financial services sector.
Technology and the use of data are increasing the speed of change in financial services markets and the perimeter is likely to be tested more often.
The FCA perimeter is not a single piece of legislation, but a "patchwork", set at UK and EU level, which creates multi-tiered complex regimes. The perimeter is a critical part of the FCA's work on the future of regulation, to help determine the post-Brexit UK financial services framework.
The FCA will publish the report on an annual basis to highlight issues around the perimeter. In its 2020 report it intends to provide an update on the extent to which the FCA can exercise its functions in relation to all financial services related activities undertaken by an authorised firm, particularly if things go wrong. It will also consider the alignment between the FCA perimeter and the coverage of the Financial Ombudsman Scheme (FOS) and Financial Services Compensation Scheme (FSCS).
TR19/4: The FCA has carried out a themetic review to look at the money-laundering risks and vulnerabilities in capital markets with the intention of developing case studies to help inform the industry. The FCA’s findings are detailed in its report, published June 2019.
On 31 May 2019, the Financial Stability Board (FSB) published a report on cryptoassets, which considers the global work underway on regulatory and supervisory approaches to cryptoassets and potential gaps. The report consists of two sections:
Section 2 looks at updates on the work relating to cryptoassets being carried out by the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures (CPMI), the FSB, the Financial Action Task Force (FATF) and the Organisation for Economic Co-operation and Development (OECD)
Section 3 covers the different regulatory approaches and potential gaps.
The FSB concludes the report by recommending that the G20 keep the topic of regulatory approaches and potential gaps, including the question of whether more co-ordination is needed, under review.
The FSB has also published a report on decentralised financial technologies on 6th June 2019, that focuses on technologies that may reduce or eliminate the need for intermediaries or centralised processes that have traditionally been involved in the provision of financial services.
The PRA (Prudential Regulation Authority) published its annual report on 6 June 2019.
The Law Commission has published a report, entitled Anti-money laundering: the SARs regime on 18 June 2019. The report looks at current flaws in the making of suspicious activity reports (SARs) which are voluminous and often of low quality. The final report makes 19 recommendations, the below are the amongst the most significant:
Establishment of an advisory board with a remit to oversee the drafting of guidance, measurement of the effectiveness of the regime and to advise the Secretary of State on ways to improve it.
Retention of the consent regime, subject to amendments to improve effectiveness.
Statutory guidance on a number of key legislative concepts underpinning the reporting regime to assist with compliance. These to include guidance on: suspicion, appropriate consent and what may amount to a reasonable excuse.
An exemption from the disclosure offences to allow ringfencing of suspected criminal property by a credit or financial institution. This would allow transactions in the course of the business to continue, provided the property is identified and protected and the transaction is carried out with the intention of preserving criminal property. Statutory guidance on the ringfencing provision should also be provided.
A standardised form for the submission of SARs.
The government will next consider this report and decide whether to accept any, some or all of the recommendations.
FCA publishes final report in relation to RBS GRG – the FCA’s final investigation into Royal Bank of Scotland’s (RBS) treatment of small and medium-sized enterprise (SME) customer transferred to its Global Restructuring Group (GRG) has concluded. Andrew Bailey, FCA Chief Executive said: ‘This report provides an extended account of the FCA’s investigative work on GRG. Our investigation has found that GRG clearly fell short of the high standards its clients expected but it was largely unregulated and so our powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited. GRG has been highly damaging for those customers impacted and more widely for the reputation of the banking industry. Combined with other issues that have impacted SME’s it is important for all who work in this sector to regain the public’s trust. The situation has, however, changed since GRG in several important respects. Two stand out: first, the Senior Managers and Certification Regime now defines the responsibilities and accountability of senior managers in authorised firms in a way which applies to all activities they conduct whether they are regulated activities or not. Second, there has been an extension of the scope of the Financial Ombudsman Service in terms of both substantially increasing the coverage to include many more SMEs, and an increase in the amount that can be awarded in such cases by the FOS. These are very important changes. This announcement concludes our work on GRG. However, we continue to closely monitor the sector and the complaints process overseen by Sir William Blackburne to ensure that things are put right’
“Regulatory co-operation between the UK and US: now and in the future” speech by Nausicaa Delfas, Executive Director of International at the BritishAmerican Business Transatlantic Finance Forum in New York City, delivered 11June 2019. Enforcement Actions and Prosecutions The FCA and PRA (Prudential Regulation Authority) have fined R. Raphael & Sons plc, a savings and lending bank with a portfolio of ATMs and a payments division, (“Raphaels”) for failing to manage its outsourcing arrangements properly between April 2014 and December 2016. Raphaels has received separate fines of £775,100 from the FCA and £1,112,152 from the PRA in respect of these breaches (resulting in a combined fine of £1,887,252). According to the FCA, Raphaels failed to provide adequate processes to enable it to understand and assess the business continuity and disaster recovery arrangements for its outsourced service providers – particularly how they would support the continued operation of its card programmes during a disruptive event. The absence of such processes posed a risk to Raphaels’ operational resilience and exposed its customers to a serious risk of harm. These risks crystallised on the 24 December 2015 when a technology incident occurred at a card processor, causing the complete failure of the authorisation and processing services it provided to Raphaels causing widespread disruption to their customers when attempting to use their cards and prepaid cards. Raphaels agreed to resolve this matter and therefore qualified for a 30% reduction in the fines imposed by both regulators. Without this discount, the combined fine imposed by the FCA and PRA would have been £2,709,574. The FCA announced on 21June 2019 that it has fined Bank of Scotland (BOS) £45,500,000 for failures to disclose information about its suspicions that fraud may have occurred at the Reading-based Impaired Assets (IAR) team at Halifax Bank of Scotland. The FCA found that BOS failed to be open and co-operative and failed to disclose information to the then regulator, the Financial Services Authority (FSA). The FSA reported this matter to the National Crime Agency (then the Serious Organised Crime Agency) on 26 of June 2009. In 2017, following an investigation by Thames Valley Police, six individuals were sentenced to their part in the fraud committed through the IAR. BOS agreed to resolve the matter and qualified or a 30% (stage 1) discount, reducing the financial penalty on BOS from the original £65,000,000. Click here for a statement from Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA.
The FCA has prohibited former Martins Brokers (UK) Ltd (‘Martins’) broker Terry Farr from performing any function in relation to any regulated financial activity. It found that he arranged wash trades (risk-free trades, with the same party, that cancel each other out) with the intention of obtaining unwarranted brokerage payments for Martins with no legitimate purpose, and for Mr Farr’s own financial gain.
The FCA has appointed Baroness Zahida Manzoor as a new Chair at the Financial Ombudsman Service. Baroness Manzoor will take up the role on 2nd August 2019, succeeding Sir Nicholas Montagu who is stepping down after more than seven years in post.
UK and Dutch financial regulators have agreed to work more closely together to protect and enhance the integrity and stability of both countries financial system. During a meeting on 3rd June 2019 in London, the Financial Conduct Authority (FCA) and the Dutch Authority for the Financial Markets (AFM) signed a joint agreement to formalise this partnership.
The FT have reported on the FCA’s statement on the “emerging theme” of personal misbehaviour, bullying, sexual discrimination and sexual misconduct in the financial services industry over the past year. Speaking at City and Financial’s Women in Finance Summit 2019 on the 10of June 2019, Nausicaa Delfas, executive director of international at the FCA, pointed to an increase in non-financial misconduct as a threat to the sector’s diversity. In a letter to the Women and Equalities Committee last September, the FCA pledged to take action against sexual harassment in the financial services industry, claiming to have already denied authorisation to “approved persons” based on their non-financial conduct. Please refer to the ‘Speeches’ section, above, for Nausicaa’s full speech. The European Commission published the following reports produced by its technical expert group on sustainable finance (TEG), on 18 June 2019, which include a Technical report on taxonomy, a Second report on an EU green bond standard (GBS) and an interim report.
On 18 June, the FCA published a letter from Andrew Bailey, FCA Chief Executive, to Nicky Morgan MP, House of Commons Treasury Committee Chair, responding to the committee’s request for information relating to the suspension of the LF Woodford Equity Income Fund (WEIF). The letter advises that Link Fund Solutions (Link), WEIF’s fund manager, deemed the suspension necessary due to the risk of, in the event the fund did not suspend, assets would have to be sold at prices below current values and the resulting composition of WEIF’s assets would be more illiquid, but was not deemed to be the in the best interests of remaining investors. The letter has been sent ahead of the FCA’s appearance before the committee on 25 June 2019. New advertisements launched on 17 June are part of the FCA’s last call on consumers to act now as PPI complaints pressure builds. Finance expert Sarah Pennells and 90s celebrity Mr Motivator join ‘Animatronic Arnie’ on FCA’S ‘Pressure’s on Panel’ to help galvanise consumer action. The FCA has also released latest figures on PPI, showing the regulator had more than 3.9 million users access the PPI website and 44,000 calls to their dedicated contact centre. In addition, a total of £334.3m was paid in April 2019 to customers who complained about how they were sold PPI. This takes the amount paid since January 2011 to £35.3bn. Brexit The European Commission had adopted a fifth communication taking stock of preparations for a no-deal Brexit, ahead of the European Council (Article 50) meeting on 20-21 of June, 2019. The Commission believes that a no-deal scenario is still a realistic, although undesirable, outcome. The Communication restates that, in the event of a no-deal scenario, the EU will not start negotiating a future relationship until the UK has addressed three key separation issues: citizens' rights, the UK's financial commitments made as a member state, and preserving the Good Friday Agreement, peace on the island of Ireland and the integrity of the single market. The Commission urges all stakeholders to use the extra time to 31 October 2019 to ensure they have done all that is needed to prepare for the UK's withdrawal. Fraud and Scams According to the Financial Times, a Freedom of Information (FOI) request submitted by think tank Parliament Street to HM Revenue & Customs (HMRC) has found that in the past three years taxpayers submitted 2,602,528 reports to HMRC of phishing via email, phone or other methods to the tax office. Phishing emails based on tax rebates were the most popular, with a total of 1,957,003 reports made about them. This was despite HMRC implementing a verification system in November 2016. However as of 3 June, the HMRC reported that recent steps taken by them to prevent fraudsters copying the tax authority had been effective, leading to a 25 per cent drop in overall scam reports and no new impersonations via this channel. The Financial Times have reported that XPS Pensions has seen a significant increase in the number of potential scams in the past year, due to the misunderstanding and lack of awareness of pension scheme members around fees, the adviser process and the transfer process as a whole, which are seen as scam ‘red flags’. XPS Pensions Group’s principal Wayne Segers said: “Over the last year we have seen a big increase in the number of warning signs being identified for potential scam activity on pension transfers, from one in eight in June 2018 to one in three in June 2019. Fortunately, not all turn out to be scams, but it is good to see increased understanding of the warning signs.” Cifas, the fraud prevention database, has warned of an “inexorable” rise in fraudulent activity across the UK, saying young and elderly victims were being increasingly targeted as new annual figures show a 6 per cent increase. Financial Crime
Financial Stability Board (FSB) publish a progress report on its work on developing effective practices for financial institutions' response to, and recovery from, a cyber incident. Bank of England (BoE), FCA and the Monetary Authority of Singapore (MAS) published a joint press release announcing their intention to work together to strengthen cybersecurity in their financial sectors.
On 18 June 2019, the International Organization of Securities Commissions (IOSCO) published the final report (FR09/2019) of its cyber taskforce. The purpose of the report is to promote sound cyber practices across all IOSCO members.
Pensions & SIPPs FCA statement for clients on GPC SIPP Limited entering administration. FCA to host events for British Steel Pension Scheme Members (BSPS). These are designed to provide information for members concerned about the advice they may have received when they transferred their pension out of the scheme. The first sessions will be held Friday 14 June. On 14 June 2019, the Council of the EU published a press release announcing that it has adopted the regulation on a pan-European personal pension product (PEPP). The Financial Times reports that the Defined Benefit (DB) pensions deficit has increased to £63.5bn in May 2019. Complaints The Financial Ombudsman Service (FOS) has instructed Black Star Wealth Management to pay compensation to a client after it communicated the wrong risk score to a discretionary risk fund manager. The FOS found the adviser had some part to play in the client’s eventual losses. The Complaints Commissioner has highlighted a “lack of effective prompt action” by the FCA in a number of cases where advisers and consumers reported concerns about a firm or fund.
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.