Issue 56 - May 2019

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.

Other Newsletters and Updates 
Although the terms of the UK’s exit from the EU are no further forward, there have been other developments, including: Theresa May confirming her intention to step down from the role of Prime Minister on 7thJune; and the UK’s participation in European Parliament elections. In addition, the FCA has issued a press release confirming the extension of the deadline for EU companies to notify under the Temporary Permissions Regime until the end of 30th October 2019.

In any case and as before, firms should continue to prepare (and evidence this preparation) for a range of scenarios, including potentially an increasing risk in a hard Brexit.  

The latest edition of the FCA Regulation Round up was issued on 16 May. As March 2019 was the last version to appear on 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 issued on 3rd May and the FCA’s March Board Minutes are now available. 

The ICO has issued its May newsletter and, following the 2019 Data Protection Practitioner’s Conference, released recordings of all the presentations given during the conference. In addition, the latest PRA digest (April 2019) was issued on 1 May.  
1. FCA Evaluation Report: The impact and effectiveness of Innovate
The FCA has published a report detailing the impact and effectiveness of Innovate, a programme launched 5 years ago by the FCA to encourage innovation in the interests of consumers through a set of defined initiatives and services; Regulatory Sandbox (providing support for innovative firms who are ready to test), Direct Support (providing tailored regulatory support for innovative firms) and Advice Unit (providing feedback to firms developing automated advice and guidance models).

The FCA aims to understand the impact of Innovate on the firms it is supporting and how this promotes effective competition in the interests of consumers. It has evaluated its effectiveness and the progress made, and early evidence suggests that the FCA’s work:
  • gives firms the regulatory certainty they need to develop their innovations and deliver them at speed;
  • improves outcomes for consumers; and
  • encourages positive innovation domestically and internationally.
The FCA reports that against the original objectives for its innovation programme, it is seeing innovative firms:
  • getting to market quicker;
  • benefiting consumers at scale; and
  • accessing investment. 
Primarily, the report focuses on the FCA’s work to encourage and support firms to deliver positive innovation to market, and its impact on firm and consumer outcomes.

The FCA believes this represents the basis of an effective framework for evaluating the impact of regulatory interventions in areas that cannot be assessed in a purely quantitative nature.

It is still early days for the FCA in this space and there are limitations to their evaluation analysis. The FCA expects to be able to draw clearer conclusions on Innovate's impact as firms spend more time in the market and the evidence base grows. ​

For further reading, please click here for a link to the FCA’s detailed report on the impact and effectiveness of Innovate and their plans going forward. 
2. Evaluation of the Retail Distribution Review and the Financial Advice Market Review: Call for input
The FCA has published a Call for Input: Evaluation of RDR (Retail Distribution Review) and FAMR (Financial Advice Market Review) on 1 May 2019, with the intention of reviewing its impact on the market to date and assessing how the market may develop in the future.

The RDR was launched by the FCA’s predecessor, the Financial Services Authority (‘FSA’) in 2006, with most of the rules being implemented in 2012. The aim of the RDR was to establish a more resilient, effective and attractive retail investment market that consumers had confidence in and trusted. It made several significant changes to the way investment products are distributed to retail consumers in the UK.

The RDR raised the minimum level of adviser qualifications, changed the way charges and services were disclosed to consumers, and banned the use of commission to pay for advice. In 2014, the FCA published the first phase of the post-implementation review of the RDR (‘PIR’).

The PIR concluded that that there were positive signs that advisers were raising their levels of professionalism, although the impacts of RDR were yet to be fully realised. The FCA also found that product bias and product charges had been reduced and consumers were shopping around more. The PIR found little evidence that the availability of advice had reduced significantly because of the RDR reforms. Advisers were willing and able to take on more clients. While a small group of consumers with less to invest might find it more difficult to find an adviser, there were still advisers in the market willing to serve them. 

The PIR found some early indications that the cost of advice had increased and that the quality of advice was improving. However, the FCA made the decision to allow more time before drawing definitive conclusions.

FAMR was launched jointly with HM Treasury in 2015 and built on the work of the RDR. The objective of FAMR was to identify ways to make the UK’s financial advice market work better for consumers. The review had a wide scope and looked across the entire financial services market to assess the accessibility of advice and guidance to help people with their financial decision-making.

FAMR’s final report in 2016 included a series of recommendations for FCA, HM Treasury and other organisations. In June 2017, the FCA published a baseline set of market indicators that serve as a benchmark against which changes in the advice and guidance market can be tracked over time.

The FCA’s focus will be on consumer engagement in the market and whether the industry delivers what consumers want and need. The FCA also aims to assess future trends that may have an impact on the future need and availability of services to consumers. This Call for Input will be of interest to:
  • consumers and representative consumer bodies
  • firms, professional associations and trade bodies that work in retail financial services
  • businesses which support those firms, including consultants and IT suppliers
The FCA is inviting feedback on the published paper, which is structured into seven chapters; beginning with background information to the RDR and FAMR and ending with the FCA’s planned next steps. The feedback deadline on this paper set by the FCA is 3 June 2019, and the responses received will inform the FCA’s review and additional research to be carried out during 2019. The FCA plans to publish its findings in 2020.
3. Review of principal firms in the investment management sector
The FCA has published its detailed findings of its multi-firm review of principal firms – authorised firms that take regulatory responsibility for the actions and omissions of firms or individuals, which they designate as appointed representatives (‘ARs’) - in the investment management sector.

The review involved a survey of 338 principals, each with between 1 and 80 ARs. 15 of these principals were selected for a more detailed review, including a visit. The FCA also assessed the adequacy of financial resources of 33 principals in the sample.

The FCA assessed principal firms’ understanding and compliance with their regulatory responsibilities, in particular: 
  • Business model risks – whether the impact on their business from ARs had been assessed and whether reasonable steps had been taken to mitigate the risks identified.
  • Oversight and ongoing monitoring of ARs to ensure compliance by ARs with relevant requirements.
  • Financial resources – whether principals are holding sufficient capital and liquidity to mitigate the risks from their ARs.
Some key findings include:
  • Significant weaknesses in the control and oversight of ARs by many principals involved in the review. 
  • Weak or under-developed governance arrangements, including a lack of effective risk frameworks, internal controls and resources.
  • A failure to properly assess risks at on-boarding meant that principals were unable to have adequate oversight of ARs once on-boarding was complete. 
  • At some firms, monitoring involved reliance on high-level attestations from ARs.
  • Principals taking inadequate steps to ensure ARs were complying with relevant requirements, including insufficient file reviews, testing or challenge by principal firms.
  • A lack of product governance arrangements in place.
  • Failure to regularly review ARs’ websites with some containing non-compliant financial promotions. 
  • Maintenance by some principals of long-term dormant/inactive relationships with ARs.
  • Failure by principals to properly assess the adequacy of its financial resources in respect of the risks posed by their ARs.
  • Concerns relating to the Host AIFM model – where a principal is appointed as AIFM (alternative investment fund manager) to an AIF (alternative investment fund). The AR is usually appointed as the adviser to the AIF, with people from the AR possibly being seconded to the principal, in which capacity they can undertake certain non-exempt activities for the principal – e.g. management:
    • ARs claiming to be the AIFM, when legally the role is being undertaken by the principal. 
    • Inherent conflicts of interest not identified or effectively managed.
    • Inadequate risk and control frameworks in respect of the activities of AIFs and seconded personnel.
    • Failure to maintain effective systems and controls to prevent and detect market abuse. 
  • Failure by principals to report ARs’ revenue to the FCA, so principals were under-paying regulatory fees. 
Next Steps:
  • The FCA intervened in relation to a number of principal firms in its sample, including: agreeing the imposition of requirements on regulatory permissions to either remove or to stop on-boarding ARs; asking principal firms to de-register their ARs and commissioning two FSMA section 166 skilled persons reports. 
  • The FCA has written a Dear CEO letter to the chief executive officers of principal firms with appointed representatives in the asset management sector setting out its expectations. The FCA expects the letter to be shared with, and be discussed by, principals’ Boards. 
  • Principals are instructed to assess how they are meeting the relevant Handbook requirements in relation to their ARs and ensure they identify and address any shortcomings in their risk-management frameworks, processes and practices.
  • If principals cannot demonstrate compliance with relevant Handbook requirements or adequately manage the risks associated with their ARs, the FCA suggests that principals consider ending their AR relationships. 
  • The FCA will continue to work with the principal firms included in its detailed review to address the issues identified. It will also do some additional work with some firms in the wider survey sample not previously included.
Other Publications
Discussion Papers
DP19/2: Intergenerational differences - FCA opens debate on intergenerational finance: how industry and regulators should respond to demographic change. In the paper the FCA outlines its understanding of the issues different generations - Baby Boomers, Generation X and Millennials - face and, using stakeholder input, identifies specific action it can take to help the financial services market meet these changing needs. 
Consultation Papers

DP19/17: Consultation on mortgage advice and selling standards, contains proposals for changes to the FCA's mortgage advice and selling standards to address 3 harms identified through the Mortgages Market Study.

Occasional Papers
Occasional Paper 23– Research note:Further evidence on choices of dominated mortgage products, by Zanna Icsenko published, which reports that, amongst other things, almost 30% of customers chose mortgage products that were strictly worse on all price dimensions than another available alternative that had comparable features, and for which they satisfied the eligibility criteria - known as ‘dominated’ choices. 
Minutes of the March FCA Board meeting published in which they comment on the proposal for the FCA to supervise certain cryptoassets businesses for AML purposes. 
Andrew Bailey sets out his vision for future in the FCA’s first 'Inside FCA' podcast.
The UK Regulators Network (‘UKRN’), of which the FCA is a partner, encourages policy makers to use the Power of Attorney guide, which aims to help organisations understand what the law requires of them when dealing with powers of attorney.
FCA statement on the release of industry-ready templates for the disclosure of costs and charges to institutional investors under the Cost Transparency Initiative (CTI). The new templates, which include a private equity cost disclosure template to be completed by asset managers of closed-ended private equity funds, can now be used by institutional investors to access and assess critical information on costs.
The FCA has issued a statement confirming that HMT has announced details of an independent investigation into London Capital & Finance, which is to be commissioned by the FCA. HMT has agreed to the appointment of Dame Elizabeth Gloster by the FCA to conduct the investigation.
Voluntary statement by the FCA on Compliance with the Code of Practice for Statistics for the FCA’s Financial Lives survey.
FCA Procedural Officer Decision 2018/1 for disclosure of certain documents in relation to the FCA’s investigation into alleged anti-competitive conduct in the asset management sector published, alongside Case CMP/01-2016/CA98 - Competition Act 1998: Decisions of the Financial Conduct Authority Anti-competitive conduct in the asset management sector. (Annexes also available.)
FCA Hospitality and Gifts Logs: July to September 2018 and January to March 2019.
FCA Press releases 

FCA announces launch of Financial Services Regulatory Partners Phoenixing Group to tackle the ongoing issue of phoenixing in financial services. 

FCA proposes changes to mortgage advice rules to encourage consumer choice.


Deeds not words: the next stage of the FCA’s innovation journey by FCA’s Executive Director of Strategy and Competition, Christopher Woolard
Embracing Fintech by BoE’s Deputy Governor of Markets and Banking, Dave Ramsden
Financial stability post Brexit: risks from global debt, by Jon Cunliffe, Bank of England’s deputy governor for financial stability
Weighing the value of data – trade-offs, transparency and competition in the digital marketplace” by Robin Finer, Acting Chief Economist at the FCA
Financial conduct regulation in a restless world” by Christopher Woolard, Executive Director of Strategy and Competition at the FCA
Operational resilience – a progress report” by Nick Strange, Director, Supervisory Risk Specialists at the Bank of England
Stylish regulation” by Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer, Prudential Regulation Authority
Leading the way on regulation” by Karina McTeague, the FCA’s Director of General Insurance and Conduct Specialists Supervision
Enforcement Actions and Prosecutions

CEO of Tesla, Elon Musk, has reached a new agreement with the SEC on guidelines about when tweets and other public statements must be approved by Tesla’s lawyers. This follows the original agreement in September, which required Mr Musk to regularly clear tweets containing information significant to shareholders with Tesla’s lawyers. However, it is reported that Mr Musk interpreted the original agreement in such a way that he didn’t seek legal review for any tweets. 

Linear Investments Ltd is fined £409k by the FCA for breach of Principle 3 (which requires firms to organise and control its affairs responsibly and effectively with adequate risk management systems) in relation to the detection and reporting of potential instances of market abuse. 

FCA issues decision notices fining one advice firm, Bank House Investment Management Limited, and 5 individuals more than £1m for acting without integrity in relation to pension advice business and misleading the FCA. Three of the individuals also received prohibition notices and a further two connected firms received public censures. All decision notices have been referred to the Upper Tribunal.

National Crime Agency (‘NCA’) announces that an accountant and two bankers have been jailed for almost 13 years in total for stealing £390k from bank customers and laundering it through multiple fake accounts. The NCA was alerted to the activity when one of the victims reported that £56,000 had been transferred out of their bank account without their consent. That money was then deposited into seven beneficiary accounts opened in different names. All three were charged with fraud by abuse of position and money laundering. 
Former boss of Autonomy, the firm bought by Hewlett Packard (‘HP’) for $11bn in 2011, has been sentenced to 5 years in prison, fined $4m and ordered to pay $6.1m in forfeiture, for inflating the company’s revenues and making false statements to investors about the company ahead of the sale to HP. 
In two settlement decisions the European Commission (‘EC’) fines Barclays, RBS, Citigroup, JPMorgan and MUFG Bank a total of EUR1.07 billion for taking part in two cartels in the foreign exchange spot trading market in relation to 11 currencies (Euro, British Pound, Japanese Yen, Swiss Franc, US, Canadian, New Zealand and Australian Dollars, and Danish, Swedish and Norwegian crowns). UBS also participated in the two cartels but was not fined as it revealed the existence of the cartels to the Commission. The EC's investigation revealed that some individual traders exchanged sensitive information and trading plans, and occasionally coordinated their trading strategies through various online professional chatrooms. All the banks acknowledged their involvement in the cartels and the decisions were reached under the cartel settlement procedure, leading to a reduction of 10% in fines. All the banks fined, except MUFG Bank, also received leniency reductions to reflect the extent of their co-operation with the EC. 

High Court rules that Xcore Capital Limited (Xcore) and Jonathan Chitty had carried on an unauthorised investment scheme. The ruling follows an application to the court from the FCA in relation to a scheme that received at least £1m from investors, who thought their money would be traded on forex and equity markets, but in reality, only a small amount of the investors’ money was used for trading; the majority of the money was instead used to fund an office in Mayfair, brokers’ wages and Mr Chitty’s lifestyle. The ruling requires Xcore and Mr Chitty to pay the FCA over £900k, which is the full value of all outstanding sums owed to investors. The FCA will distribute any funds it is able to recover from Xcore and Mr Chitty to investors. 

It is reported that two claims management companies have apparently been referred to the FCA for contacting firms and asking for personal information without the clients’ consent.  
Industry News

FCA & Regulation 

FCA reports that its notification system for EMIR was offline for a number of days for maintenance.

Following the FCA’s recent takeover of CMC (claims management companies) regulation from the Ministry of Justice, the FCA’s executive director of supervision, retail and authorisations, Jonathan Davidson, said that: “it's often a few bad actors that tarnish the reputation for the many, and our aim as a regulator is come down on them very hard.”CMCs have been required to register for the temporary permissions regime in order to continue trading prior to being assessed for full authorisation. Mr Davidson continued to say that: “Just because they haven't been fully authorised doesn't mean that we aren't supervising them already, and we have started collecting data and intelligence on the firms even before they transferred to us for our supervision. We will be out and we are starting to think which firms we're going to visit in the next days and weeks." 

According to correspondence from the Treasury, the FCA banned 70% more people from operating in the financial services industry in 2018 compared to 2017. 

Complaints Commissioner (‘CC’) publishes final report on complaint relating to flaws in the FCA’s Financial Services Register, which led, in part, to the loss of £13k by an investor who invested in a cloned firm. The CC concluded that “the FCA’s failings with respect to the register are unusually serious and significant [in this case] – the Register is incorrect as a result of two serious errors.” The CC also found that “the registration of passported firms appears to be defective.”However, on the same day, the FCA published its response to the final report stating that it was unable to accept the CC’s conclusion and recommendation that it should pay 50% of the investor’s loss as an ex gratia payment.  

FCA publishes undertaking provided by James Brearley & Sons Ltd, a firm that provides investment management and share dealing services, in relation to the fairness of a termination clause in its contract. The term in question provided the firm with the discretion to terminate the contract without advance written notice. The FCA was concerned that, if this were to happen, consumers may be given insufficient time to make alternative arrangements. As such, the FCA concluded that the term was likely to be considered unfair under section 62(4) of the Consumer Rights Act 2015 and regulation 5(1) of the Unfair Terms in Consumer Contracts Regulations 1999, as it caused a significant imbalance to the detriment of consumers. 

European Court of Justice confirms that activities of a tied agent fall outside of MiFID II. Therefore, a temporary prohibition imposed on the tied agent, Mr Mastromartino, because of criminal proceedings against him, is outside the scope of MiFID. 

Twenty-ninth report of session 2017-19 on consumers' access to financial services published by Treasury Committee.

Freedom of Information Request reveals that 263 financial advice firms have told the FCA that their professional indemnity cover is non-compliant after the compensation limit for the FOS was raised to £350k on 1stApril.

In its Regulation Round-up for May, the FCA confirms that it is carrying out a survey of small firms (those with less than 50 approved persons) to ascertain how regulation impacts them. Kantar Public is carrying out the work and will select a varied sample of firms to participate. All answers will be anonymised. The FCA will use the results to help ensure its cost-benefit analyses and judgements of proportionality take account of the specific circumstances faced by smaller firms.

It is reported that MPs are calling for Andrew Bailey, the FCA’s Chief Executive Officer, to resign in relation to the collapse of FCA-authorised London Capital & Finance, which went into administration in January 2019 owing greater than £230m. The Serious Fraud Office is apparently investigating a number of “highly suspicious transactions” at the firm. 
The FCA reports that over £27m was lost to crypto and forex investment scams in 2018/19, with £14.6k being lost by victims on average. Reports of scams have also tripled since the year before. The FCA and Action Fraud are therefore warning the public about bogus online trading platforms that promote on social media using celebrity endorsements and luxury gifts. The FCA will be running ScamSmart adverts on social media to raise awareness but has also put together some tips to “stay safe when scrolling”. 

The EC has issued a Delegated Regulation supplementing the EuVECA Regulation regarding conflicts of interest. 

Financial Crime 

Counter-terrorism International Sanctions guidance issued.

Government response to Treasury Committee report on economic crime published. 

Government response to House of Lords Bribery Act Committee’s post-legislative review of the Bribery Act 2010 published. 

Transparency International reports that in May, “German newspapers published evidence of former Vice-Chancellor of Austria, Heinz-Christian Strache, and a colleague, allegedly negotiating corrupt deals with the purported niece of a Russian oligarch close to President Vladimir Putin.” 
Data Protection and Security

Cyber-Attacks (Asset-Freezing) Regulations 2019 come into force 11thJune 2019, whichwill allow the EU to impose targeted restrictive measures to deter and respond to cyber-attacks and attempted cyber-attacks. More specifically, the framework allows the EU to impose sanctions on persons or entities that are responsible for cyber-attacks or attempted cyber-attacks, who provide financial, technical or material support for such attacks or who are involved in other ways. Sanctions may also be imposed on persons or entities associated with those responsible.  
Fraud and Scams

Following a surge in the number of Lasting Power of Attorney’s registered in the last 5 years, the Office of the Public Guardian (‘OPG’) has announced a new strategy to protect vulnerable people that have signed over control of their financial affairs, which will include listening to all concerns. A financial advice industry member commented that: “There have been cases where vulnerable individuals have been targeted by scammers seeking to fraudulently take control of their assets.By falsely obtaining power of attorney, unscrupulous individuals have attempted to manufacture the appearance of genuinely looking out for the best interests of an elderly or vulnerable individual, when in fact they have other motives.”

vulnerability with WhatsApp allowed the Israeli digital surveillance firm, NSO Group, 
to install surveillance software on phones. A patch has since been released to resolve the vulnerability.

UK Finance warns businesses against invoice scams. Its research found that the UK’s financial services industry lost almost £93bn in 2018 to invoice scams and the situation apparently worsening. 

It is reported that The Pensions Regulator (“TPR’) is to carry out short-notice inspections of employers suspected of not meeting their auto-enrolment duties. 
Pensions & SIPPs

Pension freedom withdrawals reached £8.18bn in 2017/18.
In a letter to the Work and Pensions Select committee, Guy Opperman, Minister for Pensions and Financial Inclusion, and John Glen, Economic Secretary to the Treasury, stated that the ScamSmart campaign, launched in August ’18 by the FCA and The Pensions Regulator (‘TPR’), has been “highly successful” and has apparently resulted in £33m being “saved from falling into the wrong hands”. 

Personal Finance Society Chief Executive, Keith Richards, is to meet with the Treasury and the FCA to discuss solutions to the issues financial advisers are facing when renewing their professional indemnity insurance (‘PII’) cover, following the increase in the FOS award limit from £150k to £350k. 

Pension Charges Bill 2017-19 received its first reading in the House of Commons. The purpose of the Bill is to require pensions providers to publish standardised information on charges for pension products and to make provision for a cap on charges at the accumulation and decumulation stages. 

It is reported that Economic Secretary, John Glen, revealed in a response letter to MP Blaenau Gwent, that the FCA is currently investigating 30 individuals and firms for poor pension transfer advice and scams. 

The minister for pensions and financial inclusion, Guy Opperman, has warned that: “Trustees who do not consider those [the new environmental, social and governance rules that come into force in October] matters will be breaching their statutory and potentially their fiduciary duties not only to current but future members” and could be subject to sanctions by The Pensions Regulator. Mr Opperman also said that: “Aside from the ethical considerations, there are real financial risks resulting from climate change. With the long-term horizons of pension investing, trustees must now consider that when they set out their investment strategies.”


It is reported that HMRC has arrested 6 people in connection with the loan charge being levied for payments made through disguised remuneration schemes, which enabled them to avoid income tax. Two of the six were apparently arrested for promoting a scheme designed to avoid the charge and the other four were arrested for trying to circumvent the charge and encouraging others to do the same.

The FOS has instructed Skipton Financial Services to compensate a pensioner after the firm offered “unsuitable” investment advice on two separate occasions. 
The FOS instructs Intelligent Pensions to pay just over £33k to a complainant for delays to their defined benefit transfer.
The FOS has over-ruled Clydesdale Bank’s argument that a claim for compensation for unsuitable investment advice was time-barred as it had been referred to the FOS outside the permitted time limits.  
FOS rules that advice firm, Cowley and Miller, should compensate “insistent” client because the FOS concluded that the advice was unsuitable. The FOS determined that rather than being advised to transfer one of their pension plans that was no longer receiving contributions into a Sipp, the client should have been advised to give greater priority to conserving their existing pension fund despite the client being disappointed with its performance. The FOS also highlighted that as well as including warnings and risks associated with the proposed investment, including a total loss, the firm’s suitability report also included positive comments about this type of investment. 
The FOS publishes its Annual Review 2018/19.
The Investment Association (‘IA’) has updated its guidance on charity authorised investment funds (‘CAIFs’). 
Government consults on new proposals to enhance the role of Companies House, increase the transparency of UK corporate entities and help combat economic crime.

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.

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