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.
The FCA continues to update firms on Brexit, with the 31 October deadline fast approaching the FCA intend to extend the proposed duration of the directions issued under the temporary transitional power from 30 June 2020 to 31 December 2020. Otherwise as often happens during August, a slight reduction in major or formal papers from the FCA since the July newsletter.
The FCA has published board meeting minutes from June 2019. The meeting minutes for July’s FCA Board meeting can be found here when published.
The ICO’s August newsletter has now been issued and can be found here.
The most recent PRA Digest (July 2019) has been published.
The FCA is launching a series of monthly Q&A roundtable discussions for mortgage intermediaries and lenders across the UK, the first stop will be in Glasgow on 29 October. The FCA do not have a fixed agenda in place for these sessions and the topics for discussion will be decided by the attendees at each individual session. These informal events will end in March 2020, for further details and to register you can visit the FCA’s Live & Local webpage.
The FCA has now published Final Guidance surrounding the cryptoasset activities that will be FCA regulated activities. This publication is in response to the FCA’s consultation published earlier this year – CP19/3.
The cryptoasset market, and the underlying Distributed Ledger Technology (DLT), are developing at a fast pace and the FCA has been working to put guidelines in place as it is vital that participants are clear on the activities they are conducting that fall under the FCA’s regulatory remit and importantly where authorisation is required.
Christopher Woolard, executive director of Strategy and Competition at the FCA commented on the recently published guidance:
“This is a small, complex and evolving market covering a broad range of activities. Today’s guidance will help clarify which cryptoasset activities fall inside our regulatory perimeter”.
This guidance is relevant to a number of areas including, professional advisers, investment managers, firms holding or storing cryptoassets etc.
The FCA has made it clear that consumers should be aware that they will be excluded from certain regulatory protections if/when they purchase unregulated cryptoassets such as, Bitcoin, Ether and XRP. Consumers who do proceed to purchase unregulated cryptoassets have been warned that these cryptoassets are not covered by the Financial Services Compensation Scheme and consumers will not be able to fall back on the Financial Ombudsman Service. The FCA also warned that consumers should tread carefully when investing in such cryptoassets, ensuring that they understand and are aware of the risks that come with assets that have no constitutional value.
The FCA has differentiated what tokens will be regulated and also unregulated in the Final Guidance surrounding cryptoasset activities. Regulated tokens include security tokens and E-money tokens, meaning that firms carrying out activities involving such tokens must ensure that they have the correct permissions and are following the rules and requirements set in place by the FCA. Unregulated tokens include exchange tokens and utility tokens, meaning that firms operating with such tokens fall out with the FCA’s remit.
The Financial Conduct Authority has written to wealth managers to warn of the risk faced by consumers in their sector and have pledged to act against firms that have a “disproportionate impact” on trust in the market.
The FCA has made it clear to wealth management and stockbroking firms that they may undertake further supervisory and regulatory work in key areas of harm that had been identified in the market, including cost and charges disclosure under the Markets in Financial Instruments Directive (MiFID) and platform switching.
The Director of Life Insurance and Financial Advice at the FCA, Debbie Gupta announced that the FCA had “identified and taken action against” a number of firms in recent years which had been found to have abused consumer trust by using client portfolios in investment scams or to conduct market abuse. Ms Gupta urged firms to contact the FCA’s whistleblowing team with any concerns or suspicions that a firm or an individual has been or is involved in any form of wrongdoing. Ms Gupta also set the standard the FCA expect wealth managers to “ensure suitability” in a client’s portfolio and refrain from including high risk investments “inappropriately”.
Ms Gupta said “This remains a priority area for us. We will use a range of data to identify the small number of firms who cause issues, deliberately or not. These firms have a disproportionate impact on trust in the market, creating costs for the industry and for consumers. Once identified, we will take appropriate action with these firms."
It has been confirmed that the FCA has already started work in this area which will progress through until 2020.
The FCA also confirmed it was considering conducting further work to assess how firms are implementing ex-post costs and charges disclosure under MiFID II, following a review of a sample of 50 firms earlier this year. This review showed whilst firms knew about their obligations to disclose costs and charges, rules were interpreted in different ways and companies were "better at disclosing the costs of their own services than at disclosing relevant third-party costs and charges".
Ms Gupta said: "We expect you to review your own costs and charges disclosures to ensure they are satisfying all relevant requirements, including for both ex-ante and ex-post costs and charges disclosures. You should be particularly alert to the need to disclose all transaction and incidental costs and charges to customers. These include implicit transaction costs and performance fees."
Forbes has published an article detailing how the world’s wealthiest obtain ‘golden passports’ to the UK and the EU. Luke Hexter, managing director of Knightsbridge Capital Partners told Forbes that their European Passport program was driving 70% year-on-year growth at the firm. Knightsbridge Capital Partners was embroiled in a Channel 4/Sunday Times joint investigation into how overseas tycoons and the wealthy can exploit the so-called ‘golden visa’ system to obtain the right to live in the UK, despite alleged links to Russian President Vladimir Putin or providing critical components to the Chinese military.
The article goes on to explain how Knightsbridge Capital would give foreign investors and their families the ability to claim the right to travel visa-free to 163 countries, in return for £2.2 million (€2 million) investment into local property or funds. This has brought $7.4 billion (€6.6 billion) to the island of Cyprus. This has caused concern for the European Commission and the Organisation for Economic Co-operation and Development (OECD).
The demand for so-called Golden Passport investment programmes has also derived from economic growth and political instability in emerging markets. Knightsbridge Capital have defended their position when asked if they have a role in this potential exploitation, stating they “wouldn’t touch” as they describe “a politically exposed person or someone where there’s even a question that their wealth can be obtained illegally”. Hexter, of Knightbridge Capital, adds his firm’s client checks (KYC) are “stringent” and the EU’s due diligence are “very, very strict”.
However there have been challenges on how effective the British and European money laundering and background checks are at identifying corrupt business leaders and politicians.
Ben Cowdock, senior research officer at Transparency International tells Forbes: “Our research has found all too often firms and professionals unwittingly or knowingly offering services to high-risk individuals, enabling them to launder both their money and reputations. More often than not, citizenship is being sought because those who benefit from political connections in unstable countries often need ‘to escape and enjoy the proceeds of their corruption should they find themselves out of favour’.”
For further reading, see OECD’s guidance on ‘golden passport’ tax abuse and Transparency International’s report on golden passports.
CP19/24:FCA feedback on the outcome of a consultation that they conducted in March 2019 (CP19/13) regarding the structure of fees for recovering the costs of establishing and running the Office for Professional Body Anti-Money Laundering Supervision (OPBAS).
CP19/25: The FCA is putting measures in place to change how advisers manage and deliver pension transfer advice, with a particular focus on defined benefit to defined contribution transfers.
CP19/26: The consultation sets out the necessary arrangements that the FCA has put in place in the event of a no-deal Brexit to ensure that the securitisation market can continue to work effectively.
PS19/20: Conclusion on the FCA’s rules on extending the SM&CR to FCA solo-regulated firms. It also sets final rules on a new Directory of individuals working in financial services.
PS19/21: The FCA summarises the feedback received from its second consultation on remedies from the Retirement Outcomes Review, setting out final rules regarding investment pathways and other remedies in CP19/5.
FS19/5: The FCA has published its recent work on competition in the non-workplace pensions market. This sets out issues that have been identified and are seeking stakeholder views to help develop their proposals for change.
GC19/3: The FCA has been consulting on guidance for firms regarding the fair treatment of vulnerable customers.
The FCA has published a package of pension related proposals designed to improve the quality of pension transfer advice, and to help consumers get better value from their pension. The package contains a proposed ban on contingent charging for pension transfer advice that is designed to protect customers from the conflicts of interest which arise where a financial adviser only gets paid if a transfer goes forward.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:
'The FCA’s supervisory work has revealed continued problems in the pensions transfer advice market. By making changes to the way advisers are paid for transfer advice and the other changes to transfer advice we are proposing today, we want to ensure people receive suitable advice and drive down the number giving up valuable defined benefit pensions when it is not in their interests to do so.'
In addition to addressing contingent charging, the FCA are also consulting on measures to change how advisers manage and deliver pension transfer advice. These measures include the introduction of abridge advice to allow firms to provide low cost advice to customer who should not transfer. The FCA consultation will run until 30thOctober 2019.
The transfer of defined benefit pension transfers hit £34 billion in 2018/19, making it more than double of the value registered in the previous year, of £14 billion, according to new figures from The Pensions Regulator.
The FCA has agreed a planfor a phased implementation of Strong Customer Authentication. From 14thSeptember 2019 onwards, new European Union rules will come into force. These rules impact the way banks or payment service providers verify their customers identity and validate specific payment instructions. The new rules are called Strong Customer Authentication (SCA) and the purpose of them is to enhance the security of payments and limit fraud throughout the authentication process. Although these rules begin to apply as of 14 September 2019, the FCA has said that it will not take enforcement action against firms if they do not meet the relevant requirements for SCA by this date, if there is evidence to suggest that firms are taking the necessary steps to comply. After 18 months the FCA has set the expectation that firms must have made the necessary changes and undertaken the required testing to apply SCA.
The FCA has published further details surrounding an independent investigation into London Capital and Finance. Dame Elizabeth Gloster has announced how she will conduct the investigation, revealing that she aims to engage with bondholders, professional organisations and other interested parties in an organised and structured fashion to ensure that all issues relevant to her investigation are addressed.
Dame Elizabeth said, “Many people have been badly affected by the failure of London Capital & Finance. There is rightly a great deal of interest in what happened at LC&F and the role of the FCA. I am keen to hear from as many of those affected as possible and am grateful for the information I have already received from bondholders and others. I would encourage anyone who wants to engage with the investigation to get in touch with me at the email address above”.
Upper Tribunal publishes decision on Andrew Tinney, the former COO of Barclays Wealth. It has been found that Mr Tinney has breached his obligation as an approved person to act with integrity. In March 2012, Mr Tinney received a document containing critical findings about the culture within Barclays Wealth’s US Branch, Barclays Wealth Americas. This in turn resulted in the Chairman of Barclays Bank plc, received an anonymous email claiming that “a Wealth cultural audit report” had been suppressed. Mr Tinney assisted in drafting a response to this allegation. The FCA has found that Mr Tinney was careless in giving the impression that such document did not exist. The FCA has also alleged that Mr Tinney also made false or misleading statements to his colleagues in response to the US Federal Reserve Bank of New York in November 2012 regarding the same document however, this allegation was not upheld.
FCA fines Standard Life Assurance Limited (SLAL) just over £30 million for non-advised pension sales failures. SLAL did not dispute the FCA’s findings, making them eligible for a 30% discount. Otherwise, the FCA would have presented SLAL with a financial penalty just shy of £44 million.
The FCA could be given more powers in an attempt to eliminate bad practice. MPs have called the current system “insufficient” and are moving towards the FCA being given formal powers to request changes to the scope of its regulation. The Treasury Committee has issued its warning that the current “informal” system created a “grey area” between regulated and un-regulated activities leaving the risk of exploitation. The FCA’s regulatory margin decides what the watchdog can and cannot regulate and is established by the Treasury however, the FCA has no formal power to request changes to their regulatory margins.
The FCA and Practitioner Panel have published findings from 2019 joint survey. The survey was used to ask firms for feedback surrounding how the FCA are doing in achieving their operational objectives:
Securing an appropriate degree of protection for consumers
Protecting and enhancing the integrity of the UKs financial system
Promoting effective competition in the interests of customers
This year’s survey found that the scores regarding the first two objectives had increased slightly however, the scores surrounding the third objective had decreased from 72% to 70% despite an increase in the confidence of ‘fixed portfolio’ firms ie. those firms with a dedicated FCA supervision contact point. The survey also highlighted areas for improvement, specifically information requests and trust in supervision. Full report.
The FCA has launched a Credit Information Market study. The study highlights the importance that credit information plays in many markets as it can impact consumers’ access to numerous financial services, mortgages, loans and credit cards, even impacting the price they pay for them in some scenarios. With nearly 4 in 5 adults holding at least one credit card or loan product, the credit information market is considered to be significantly relevant and of importance. Going forward, the FCA will begin gathering information from credit reference agencies, data contributors, providers of credit information services, users of credit information and consumer organisations. The preliminary conclusions are expected to be reported in Spring 2020 possibly including a discussion of potential remedies, where appropriate.
The FCA has announced that an extension has been put in place to its use of temporary transitional power.
The intention of the temporary transitional power is to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement in place. Under this power it is not a general requirement for firms to begin preparations now to meet the changes to their UK regulatory obligations that are connected to Brexit. The FCA previously announced, in February 2019, that not all areas would be granted transitional relief and there would be an expectation that firms and other regulated entities in these areas would take appropriate steps to comply with the changes to their regulatory obligations by exit day. These firms or persons are included:
Firms subject to the MiFID II transaction reporting regime, and connected persons (for example approved reporting mechanisms).
Firms subject to reporting obligations under the European Market Infrastructure Regulation (EMIR).
EEA Issuers that have securities traded or admitted to trading on UK markets.
Investment firms subject to the Bank Recovery and Resolution Directive (BRRD) and that have liabilities governed by the law of an EEA State.
EEA firms intending to use the market-making exemption under the Short Selling Regulation.
Firms intending to use credit ratings issued or endorsed by FCA-registered credit ratings agencies after exit day.
UK originators, sponsors, or securitisation special purpose entities (SSPEs) of securitisations they wish to be considered simple, transparent, and standardised (STS) under the Securitisation Regulation.
The FCA has emphasised that firms are expected to use the additional time between now and the end of October to prepare to meet such expectations and if firms are not in a position to fully meet these expectations the FCA will expect to see evidence outlining why this was not possible. Fraud and Scams
The FCA and The Pensions Regulator (TPR) will be joining forces this summer in a bid to warn the public about fraudsters targeting retirement savings. New figures have shown the most persuasive tactics used by fraudsters including, cold calls, exotic investments and early access to cash. This warning has come as a result of a new research suggesting that 42% of pension savers, over five million people across the UK, may could be at risk of falling for at least one of six common tactics used by pension scammers.
The Pensions Regulator has appointed independent trustees to 36 cases during 2018/19 as it sought to protect the members from potential scam, in each of these cases TPR believed that the scheme needed a trustee with the necessary knowledge and skill to be in a position to establish proper use of pension fund assets. Four similar appointments have been made for this year (2019/20).
The Court of Appeal has ruled against claimants who took the Sense Network to court over an alleged secret £12.8 million “Ponzi Scheme” run by one of its appointed representatives. Lord Justice David Richards quashed the claimants’ claim and decided that the network was not responsible for the losses. The claim was made that the appointed representative told clients their funds were invested under a special deposit arrangement with high street banks with which they claimed to have a close relationship, allowing the appointed representative to access “favourable arrangements” and high rates of return. However, there were no special deposit arrangements with the bank and the appointed representative was executing a “dishonest Ponzi scheme”. The FCA intervened in 2014 and found 279 clients whose investments had not been repaid and who were owed £13.6 million. The appointed representative had £379,000 in available funds at this time.
The FCA have published one of the key discussions that emerged from their 2018 AML & Financial Crime TechSprint, the importance of data and knowledge sharing amongst relevant bodies when identifying and impeding complex criminal networks. The FCA held a follow up TechSprint from 29thof July until 2ndof August and described it as a “truly global effort, with international colleagues from the US, Europe, Africa, Asia and the Pacific working together at the FCA offices in London, with a satellite office in Washington. The aim is to develop solutions at the TechSprint that will go on to be tested in the real world through the Sandbox and GFIN network”. The participating organisations included Companies House, Goldman Sachs, Microsoft, HSBC. The full list can be found here.
The Financial Ombudsman urged consumers to get claims in for mis-sold loan insurance ahead of the 29thAugust 2019 deadline. Some banks have criticised the move and say that the majority of claims made were “vexatious”. In the past decade alone, banks have paid out more than £36 billion for mis-selling Payment Protection Insurance (PPI). Lloyds Banking Group are among some of the banks most impacted after paying out more than £20 billion in PPI claims. Additionally, they have set aside £550 million to cover an increase in claims as the deadline approached.
The FCA face criticism over ‘significant delays’ in complaint handling resulting in a number of complaints coming under investigation with the Complaints Commissioner. The Complaints Commissioner published its annual report and accounts on 18thJuly and it highlighted a number of complainants who have become increasingly frustrated with the FCA in relation to missed deadlines and lack of information. Officials from the FCA’s complaints team responded with a claim that they had been experiencing an unexpected increase in the number of complaints that they received. The Commissioner received 169 complaints against the FCA in 2018/19, of which 18 were brought to the watchdog, mainly due to the FCA’s complaint handling delays.
HMRC investigate inheritance tax (IHT) in a quarter of estates, meaning over 5000 IHT investigations are opened annually by HMRC. Figurespublished in May 2019 by HMRC showed that there were roughly 22,000 estates liable for IHT in 2018/19 leading to the investigation of a quarter of these. Gordon Andrews, tax and financial planning expert at Quilter, said the IHT rules were unfair and unnecessarily complex. Mr Andrews said: "Inheritance tax is infamous for being not only disliked, but complex and at times deeply unfair. On top of everything, there is almost a one in four chance HMRC will investigate your estate. Over the past number of years politicians have been keen to show they are cracking down on tax-dodgers and IHT is one of the departments that HMRC has been throwing its resources at." A review of IHT rules is currently underway in order to attempt to simplify the current system.
The introduction of the new Common Reporting Standard (CRS) tax regime has resulted in HMRC being able to collect millions in extra tax. The tax office confirmed that HMRC have been able to collect £122 million in tax on overseas assets in 2018/19 tax year. The new rules allow more than 100 countries’ tax authorities to share tax information amongst themselves. The data from CRS is expected to remarkably improve HMRC’s sight of offshore non-compliance.
The FCA has been working alongside HM Treasury preparing the Commencement Order that is required to allow the FCA to publish the final rules surrounding the extension of the Senior Managers and Certification Regime (SM&CR). The purpose of SM&CR is to reduce consumer harm and improve market integrity by creating a structure that allows firms and regulators to hold individuals to account. From 9 December 2019, SM&CR will be extended to FCA solo-regulated firms including claims management companies (CMCs). The FCA have requested and agreed a later commencement date for benchmark administrators with HM Treasury, as it is a priority to consider sector-specific scenarios. The later commencement date will allow the FCA to carry out an extensive consultation for benchmark administrators prior to finalising the rules for this sector. It has also been set out in the near-final rules that CMCs will not come into account until they have been authorised by the FCA however, this will not affect the commencement timing of any other firms.
Listen to the FCA’s podcast with FCA Executive Director Jonathan Davidson and guest Dame Jayne-Anne Gadhia on the impact of SM&CR and its role in creating a healthy financial services culture.
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.