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 UK media continues to focus on the Coronavirus (Covid-19) pandemic, with talk of booster vaccinations as Autumn approaches, the easing of travel restrictions and the introduction of vaccine passports. 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 latest version of the Regulation Round up is shown here. The FCA Board minutes for 21 & 22 July and 19 August have been published. The FCA issued its latest policy development update on 10 September 2021.
For other regulatory newsletters, the Financial Ombudsman Service (FOS) published its newsletter, editions no. 163 & 164. The PRA has issued the regulatory digest for July, August and September. However, the Information Commissioner's Office (ICO) hasn’t issued a newsletter since March 2021.
Firms are reminded that LIBOR is being withdrawn after 31 December 2021 and where relevant to their business model, firms should be planning accordingly for this change.
Finally, we are also pleased to announce that the revamp of our website has gone live this month, and can be found here. This also includes copies of previous newsletters issued each month. If you have any feedback on the new site, please do not hesitate to let us know
The FCA has published its latest strategy to tackle investment harm. The strategy aims to give consumers confidence to invest, while supported by a high-quality and affordable advice market. The introduction of this strategy should mean that less people are the victim of scams or being persuaded to invest in products that are outwith their risk appetite. Consumers are increasingly responsible for making complex decisions about their financial future, including whether and how they invest. Increased choice has many benefits, but this complexity increases the risk of things going wrong. The Coronavirus (Covid-19) pandemic has accelerated some of these trends, with 6% of adults investing for the first time or increasing their holdings of high-risk investments during the pandemic. The FCA has responded to this by prioritising increased consumer protection within the UK’s investment market, which accounts for £1.6 trillion.
FCA’s short term objectives, to achieve by 2025:
Reducing 20% of the number of consumers who could benefit from investment earnings but are missing out.
Halve the number of consumers who are investing in higher risk products that are not aligned to their needs. 6% of consumers increased their holdings of higher risk investments during the pandemic, with 45% of self-directed investors saying they did not realise the risks.
Reduce the money consumers lose to investment scams perpetrated or facilitated by regulated firms. Consumers lost nearly £570m to investment fraud in 2020/21 – this has tripled since 2018.
Stabilise the £833m compensation bill for the Financial Services Compensation Scheme and target a year-on-year reduction in the Life Distribution and Investment Intermediation (LDII) and investment provision funding classes from 2025 to 2030.
FCA’s long term objectives:
Exploring regulatory changes to make it easier for firms to provide more help to consumers who want to invest in relatively straightforward products.
Launching a new £11m investment harm campaign, to help consumers make better-informed investment decisions and to reduce the number of people investing in inappropriate high-risk investments.
Being more assertive and agile in how the FCA detects, disrupts, and takes action against scammers, thereby reducing investment scams.
Strengthening the Appointed Representatives (AR) regime, with a consultation to be launched later this year, which aims to raise the quality of financial advice.
Strengthening the financial promotions regime in 3 areas; the classification of high-risk investments, further segmenting the high-risk market and strengthening the requirements on firms when they approve financial promotions.
Reviewing the compensation framework to ensure that it remains proportionate and appropriate, particularly where firms fail leaving behind compensation liabilities for the FSCS to address. This will reduce the cost and impact of poor advice.
The FCA has highlighted the fact that tackling harm in the consumer investment market requires a collective effort. Therefore, the FCA aims to work alongside its regulatory partners including the Financial Ombudsman Service, FSCS and MAPs as well as other agencies such as the Home Office, the NECC and law enforcement agencies. This should enable the FCA to identify areas of joint working to tackle harms in the consumer investments market and ensure efficient coordination on key workstreams.
The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) has published its latest report on the progress made in tackling money laundering by professional body supervisors over the past year. The level of compliance with the technical requirements of the Money Laundering Regulations (MLRs) has improved in recent years however, in its latest report OPBAS highlighted that it continues to find differing levels of compliance and some considerable weaknesses. The OPBAS expects Professional Body Supervisors (PBSs) to continue investing in and improving their focus on supervisory efforts to minimise the risk of money laundering, while working with other authorities to make the UK an inhospitable place for criminals.
The FCA commented on the findings of the report, Sarah Pritchard, FCA’s Executive Director of Markets said:
'Ensuring the effectiveness of financial crime controls and reducing financial crime risk is a key priority for the FCA. As this report finds, Professional Body Supervisors of the accountancy and legal sectors have made welcome improvements in compliance with the Money Laundering Regulations in the three years since OPBAS has been in operation, and we need to see continued improvements in the effectiveness of their supervision. OPBAS will continue to collaborate and partner with law enforcement, government and wider stakeholders, domestically and internationally, to raise standards across the regulated sectors.'
The report highlighted examples of effective supervision from some PBSs, however it also flagged key areas for improvement as many PBSs had not implemented a risk-based approach that effectively prioritises their AML supervisory and enforcement. It was noted that PBSs effectively took part in information and intelligence sharing arrangements however, there are gaps and inconsistencies in some PBSs approach which limits their overall effectiveness in this area. The OPBAS will continue to focus on effective intelligence and information sharing as this is a key area of focus needed, among PBSs, law enforcement, statutory supervisors, and other agencies, to address money laundering risk. The report acknowledged that most PBSs had gaps within their enforcement frameworks. Having a robust enforcement framework plays a key role in correcting weaknesses in processes, procedures, systems, or controls and in influencing a culture that contributes to effective risk management and compliance.
The OPBAS will continue to evolve its approach to supervision, using a wide range of methods to build its understanding of risks and drive more effective supervision by PBSs.
Nikhil Rathi, CEO of the FCA, delivered a speech at the Lord Mayor’s City Banquet at Mansion House. Mr Rathi addressed challenges faced by the FCA and the sector during Coronavirus pandemic (Covid-19) and noted that during the pandemic, 5.8 million temporary payment deferrals were granted for credit cards, loans, and mortgages and that with careful planning and collaboration with all stakeholders, these measures have now been phased out without acute customer distress. He also commented on objectives set out in July 2021 and highlighted the following plans for the future:
Ensure market integrity by testing powers to the limit
Anchor and shape international standards
Become a data regulator in addition to a financial regulator
Testing powers to the limit
Mr Rathi acknowledged that the FCA has often been criticised for acting too slowly and with too much risk aversion. However, this is about to change as the FCA will apply a bolder risk appetite in dealing with serious misconduct, including the use of criminal powers in the most serious cases involving financial crime and/or money laundering. He added that the FCA has a good dialogue with the Government and will be publishing its third annual perimeter report next month, sharing its views on how its regulatory framework might evolve.
The FCA considers international standards its anchor and it will remain this way when it considers far reaching reform. The FCA will be changing its listing rules to ensure investor protection and also support new sectors and new forms of capital raising – it expects this will help build on what has been a record year in capital raising in UK markets for UK and global companies of all sizes, particularly the technology sector. Mr Rathi noted that under Andrew Bailey’s leadership, the FCA cooperated with the Financial Stability Board, the International Organisation of Securities Commissions, and other international partners to ensure a global transition to a world without LIBOR. He added that the FCA intends on taking the same approach to its work on the transition to net-zero.
Data and Digital Ambitions
The FCA is working to become a data and digital first regulator and as such Mr Rathi acknowledged that the FCA must increase investments in its own capabilities to achieve this. The FCA will invest £120m over three years to maximise its move to the Cloud, it will also aim to significantly increase the number of data scientists and data analysts it hires. He noted that regulatory reports are estimated to cost between £1.5bn to £4bn per year, with 20,000 rules across 58,000 firms. This has prompted the FCA’s work with the Bank of England on the Transforming Data Collection Initiative (TDCI) – the standardising of data and leveraging new technology at scale. The FCA expects regulatory reporting can be delivered faster and at a lower cost. The CEO confirmed that the FCA joined the Digital Regulators Cooperation Forum, earlier this year, alongside Ofcom, ICO and the Competition and Markets Authority.
The CEO ended his speech by highlighting that there are very few challenges that don’t require a collaborative approach and that challenges such as, the Coronavirus pandemic, Brexit, technological changes, the drive to a greener economy and demographic shifts are transforming financial services and society.
The FCA has issued a statement reminding firms of the potential financial crime risks linked to Afghanistan since the Taliban has taken control. The FCA has warned firms that recent events in Afghanistan may have an impact on patterns of financial activity and this is something firms should consider when assessing risks related to particular customers and flows of funds. The FCA made it clear that it expects firms to establish and maintain systems and controls to counter the risk they may be used to aid financial crime efforts, in addition to complying with their legal obligations under the Proceeds of Crime Act 2002 and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘MLRs’ as amended).
Although Afghanistan is not currently listed as a high-risk jurisdiction in Schedule 3ZA of the MLRs, firms are reminded that they are required to apply risk sensitive enhanced due diligence measures where there is a high risk of money laundering or terrorist financing. The FCA expects firms to consider the impact of recent developments on their anti-money laundering policies and procedures in a risk-based manner, and to take the steps necessary to ensure they continue to meet their legal and regulatory anti-money laundering and reporting obligations.
Ensure that they appropriately monitor and assess transactions to Afghanistan to mitigate the risks of their firm being exploited to launder money or finance terrorism.
Ensure that suspicious activity is reported to the UK Financial Intelligence Unit (UKFIU) at the National Crime Agency (NCA) and that they meet their obligations under Money Laundering Regulations and terrorist financing legislation.
CP21/27: The FCA has released its latest quarterly consultation paper (No. 33). The consultation proposals include amending the Handbook to reflect branding changes made by the Money and Pensions Service, amendments to how legal expenses insurance is reported under its value measures reporting and alterations to the question and guidance notes (SUP 16 Annex 1B) for form FIN-A. Firms should send any feedbacks/comments to the FCA by 27 September for Chapter 2; 4 October for Chapter 3; 11 October for Chapters 4,5,6,7,8 and 9.
CP21/28: The FCA has issued a consultation seeking feedback on proposed changes to its Handbook and Enforcement Guide, these changes will provide guidance on its new power to cancel or vary the statutory permissions of many FCA-authorised firms to carry on FCA-regulated activities. The changes will help to prevent scams and ensure the FS Register presents a clearer picture of the permissions firms hold – firms are required to confirm that the information on the FS Register is accurate on an annual basis. The new powers will shorten the process of removing a firm’s permissions by allowing the FCA to start the cancellation process as soon as it considers permissions are not being used and serving 14 days' notice on a firm. The FCA will then be able to vary or cancel permissions after one month. The consultation will run until 29 October 2021.
The FCA has issued a statement confirming it intends to start a periodic review of pension transfers redress guidance by the end of 2021. The statement also sets out the FCA’s expectations of firms while its review is ongoing. The FCA expects firms to continue to assess complaints about unsuitable advice fairly, consistently and promptly, calculate any redress due in line with the current approach and comply promptly with any offer of redress accepted by the consumer.
In a recently published review, the FCA has suggested that some insurance firms might not be prepared to implement the new product governance rules introduced to ensure insurance provides fair value. The review is part of the FCAs ongoing work to ensure consumers receive fair value, and looked at how firms designed, sold, and reviewed their products to ensure they met the needs of their customers. The review found that some firms had successfully met the FCA’s existing rules and guidance on product governance and value in addition to temporary guidance on product value, issued in response to Covid-19 last year. However, it also found that a significant number of firms are falling short of its existing standards and are unlikely to be prepared to meet the new enhanced rules on product governance. The key weaknesses identified in the review include lack of focus on customers, outcomes, product value (including when considering value in the context of Covid-19) and shortcomings in governance and oversight of products. The FCA’s enhanced product governance rules, which come into force on 1 October 2021, were introduced following its general insurance pricing practices market study which found home and motor insurance markets were not working well for consumers, particularly loyal customers.
Charles Randell, Chair of the FCA and PSR, delivered a speech to the Cambridge International Symposium on Economic Crime. The speech focused on the evolution of the internet and the impact this has had on businesses and consumers. Mr Randell highlighted that online platforms should expect a future where regulation addresses the significant risks they pose in the same was as other businesses do – including rules that protect people from investment fraud and scams. Randell then acknowledged the changes made since he last spoke at the Symposium in 2019, when he highlighted that online platform needed to step up and “stop publishing and profiting from fraudulent contact”. Since his previous speech, Google has committed to stop promoting advertisements for financial products unless a FCA authorised firm has cleared them. The FCA plans to monitor the impact of this change closely and urges other platforms including, Facebook, Microsoft, Twitter and TikTok to consider similar changes. The speech also highlighted crypto scams and risks of celebrity endorsement. The speech ended by acknowledging the digital world will continue to pose threats however, with the cooperation of partners across the industry, good financial regulation supports innovation, productivity and economic growth.
Director of Market Oversight at the FCA, Clare Cole, delivered a speech to the City & Financial’s ‘The Modernisation of the Listing Regime’ event. Her speech started by highlighting the challenges faced by the market throughout the years including, 9/11, the 2008/2009 financial crisis, the impact of EU regulations, Brexit and more recently the Coronavirus (Covid-19) pandemic. In addition to such challenges, there has also been the advancement of technology, fintech, cryptocurrencies and the changing awareness of the importance of environmental, social and governance (ESG). Throughout these challenges and changes, capital markets remain crucial yet they haven’t adapted at the same speed as their influential external factors. Ms Cole explained that the FCA had reacted quickly to address immediate issues where their rules were hindering innovation in primary markets such as, special purpose acquisition companies (SPACs) however, this is just the beginning as the FCA is committed to develop a more agile, flexible regime. The FCA has considered other international regimes while designing a regime that will work well for UK capital markets. New proposals will see the minimum market cap, necessary for companies to list on the main market, raised. The FCA has put forward four extreme models of what listing in the UK could look like, to illustrate what could be and ask what the market values. The FCA’s consultation paper on the Primary Markets Effectiveness Review closed on 14 September and the HMT’s consultation on the Prospectus Regime Review closed on 24 September – following on from these consultation responses and the decision of the FCA’s Board, it will aim to move swiftly to make final rules before the end of the year with a focus on the following areas, dual class share structures, free float, minimum market capitalisation.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, delivered a speech at the Investment Association – A regulatory perspective: measuring and assessing culture, now and in the future, the role of purpose and the importance of D&I. Mr Mills discussed how the FCA measures and assesses culture against its ‘four drivers of culture’ - purpose, people, leadership and governance. He noted that the FCA is not prescriptive about culture as it is unique to firms and sectors, and that while all four drivers of culture are equal, he wanted to focus on purpose and people. He added that purpose is central to a healthy culture as it directly influences workplace culture and people. Mr Mills highlighted how people are incentivised is another key driver and this is an area that the FCA pay close attention to when assessing firms. He also highlighted the importance of culture in terms of the pandemic, and the prevalence of hybrid working, including some benefits of staff wellbeing, productivity and in the right circumstances, it can promote better inclusion. He also acknowledged that it comes with challenges including, isolation, fewer avenues to speak up, lack of control and oversight – the FCA will begin a trial period of hybrid working from November. The focus shifted to diversity and inclusion; businesses need to adapt to the changing expectations of customers, employees, shareholders, and other stakeholders as diverse firms deliver better outcomes. Mills added that diversity does not just mean race, gender and social background – it should also consider disability, sexual orientation and other dimensions of diversity.
Richard Faithfull has been sentenced to over five years imprisonment for money laundering. Faithfull laundered £2.5million as part of a trans-national organised crime group for longer than 12 months, laundering the proceeds of at least seven professionally run overseas investment frauds. Faithfull had previously worked in the regulated sector as an investment advisor and used his knowledge to execute these criminal acts. In order to avoid detection, he relocated to Ukraine where he lived a life of luxury. Faithfull previously pleaded guilty to his offence on 16 April 2021 however, put forward a basis of plea that sought to minimise his role in the offending. The FCA did not accept his basis of plea and after a four-day hearing, His Honour Judge Tomlinson, rejected the submissions made by Richard Faithfull’s team and accepted the FCA’s statement of the case. The FCA will now pursue confiscation proceedings against him to try and seize his illegal gains.
The FCA has banned Jon Frensham (formally known as Jonathan James Hunt) from performing any regulated activity. Mr Frensham was an independent financial adviser and the sole director at Frensham Wealth Limited, who was convicted of attempting to meet a child following sexual grooming. He committed the offence whilst he was an approved person, and whilst on bail for a similar offence – he was sentenced to 22 months’ prisionment, suspended for 18 months. The FCA found that Mr Frensham lacked the integrity to work in financial services and he failed his obligation to be open and transparent with the FCA in failing to inform the FCA about his arrest, being remanded in custody in respect of the offence which led to his conviction, and his failure to inform the FCA of the decision by the Chartered Insurance Institute (CII) not to renew his Statement of Professional Standing and to expel him from membership. Whilst the conviction was not in relation to a financial offence, the FCA considered that the above associated conduct evidenced that he was not a fit and proper person to perform any function in relation to any regulated activity carried on by any authorised or exempt persons or exempt professional persons because he lacks integrity and good reputation.
Stephen Allen has been sentenced to 28 months' imprisonment for forging a trust deed, in an attempt to help his client minimise restitution payments owed to victims – a director disqualification order of eight years was also imposed. The charge relates to events that followed proceedings brought by the FCA against Mr Renwick Haddow for operating several unauthorised collective investment schemes, which culminated in a successful judgement against Mr Haddow and others in 2018 – Mr Haddow and others were ordered by the High Court to pay £16.9 million in restitution. Mr Haddow had an interest in a London property which should have been available to the FCA for part satisfaction of this restitution order however, Mr Allen forged a trust deed that hid Mr Haddow’s interest in the property. The property has since been sold and proceeds distributed to the affected investors earlier this year. Mr Allen pleaded guilty to the offence of forgery on 13 July 2021.
The FCA has prohibited an IFA and mortgage adviser for fitness and propriety failings. Anthony George was found to lack honesty and integrity after the FCA found that between 14 January 2015 and 15 May 2019, Mr George deliberately submitted false information to HMRC by understating the income in his self-assessment tax returns over a five-year period. He also used other undeclared earnings to overinflate income as part of a personal mortgage application. He then demonstrated a further lack of honesty and integrity when he concealed this from the FCA, providing them with information which he knew to be false during a compelled interview.
The FCA and HM Treasury has responded to the Treasury Committee report on FCA regulation of LC&F. On 13 September 2021, the House of Commons Treasury Committee published a report containing the responses of the FCA and HM Treasury to the Committee’s Fourth Report of Session 2021-22. The Fourth Report was published in June 2021, following the Committee’s inquiry into the FCA’s regulation of London Capital and Finance plc (LC&F). Key points of interest in the response include the following:
HM Treasury considers that the existing arrangement for examining and, where relevant, amending the regulatory perimeter are effective and therefore considers it unnecessary to provide the FCA with a formal power to recommend changes to the regulatory perimeter.
HM Treasury is continuing to explore additional legislative and non-legislative solutions to tackle fraud and notes that the Home Office is developing an ambitious Fraud Action Plan, which will be published after the 2021 spending review.
The FCA remains on course to complete the measures required to meet the report’s recommendations by the end of 2021. It published an update on its progress in implementing the Committee’s recommendations to date in July 2021.
The FCA will continue to consider whether further rule changes are required to prevent consumers from getting a misleading impression about the regulatory protections from which they benefit. This will be informed by the responses it receives to the questions about risk warnings in DP21/1, which was published in April 2021.
The FCA is currently working with stakeholders to understand how it can best address regulatory barriers to help the market develop services that can better meet consumers’ need for support when making financial decisions, including more tailored guidance services, and guide consumers towards making better investment decisions.
The FCA has issued several warnings urging consumers to beware of ‘clone firms’ – these firms will use a variation of false details and correct details of the authorised firm it is impersonating. If you have reason to suspect your authorised firm has been cloned, you should contact the FCA’s firm helpline on 0300 500 0597. The following firms are some examples of recently cloned firms:
The FCA and The Pensions Regulator (TPR) have published a joint discussion paper (DP21/3) on developing a common framework for measuring value for money (VFM) in Defined Contribution (DC) pension schemes. The two regulators aim to drive a long-term focus on VFM across the pensions sector. Defined Contribution savers can only maximise their retirement income if their scheme delivers value for money – for regulators this means well-run schemes delivering good investment performance that is not eroded by high costs and charges. The proposal is for a common framework for disclosing information on the key elements which make up VFM: investment performance, scheme oversight – including data quality and communications, and costs and charges. The new framework will allow trustees and independent governance committees to compare their scheme’s costs and charges, investment performance and service standards with similar offerings from other providers. The FCA and TPR are welcoming comments on the discussion paper by 10 December 2021 and will publish a feedback statement setting out next steps in 2022.
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.