Issue 58 - July 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
•           Main Features:
      1. FCA Confirms recognition of the FX Global and UK Money Markets Codes
      2. UK Finance Report in AI in financial services
      3. FCA confirms permanent restrictions on the sale of CFDs and CFD-like options to retail consumers
•           Other Publications, FCA Speeches, Other Speeches
•           Enforcement Actions and Prosecutions
•           Industry News: 
•           FCA & Regulation 
•           Brexit 
•           Financial Crime
•           Pensions & SIPPs
•           HMRC & Tax
•           Senior Certification & Managers Regime

Other Newsletters & Updates 
Boris Johnson has been elected leader of the Conservative party and has become prime minister of the United Kingdom on 24 July 2019. This appears to have increased the existing risk of a ‘no-deal’ Brexit. However regardless, in advance of 31 October, all firms are encouraged to continue to review and evidence Brexit contingency planning until any certainty on outcome is achieved.
The latest edition of the FCA Regulation Round up was issued on 18 July 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 1 July 2019 and you can find the FCA’s May Board Minutes here.
The ICO’s July newsletter has been issued. In addition, the latest PRA digest (June 2019) was published on 1 July 2019.

We have also introduced a new section in the newsletter covering developments on the Senior Managers & Certification Regime, which will provide useful updates in preparation for its launch and implementation in December 2019.


1. FCA confirms recognition of the FX Global and UK Money Markets codes 

Following consultation feedback (FS19/3) the Financial Conduct Authority (FCA) has confirmed on 26 June 2019 that it is recognising the following voluntary market codes of best practice under its codes recognition scheme:
  • FX Global Code – maintained and updated by the Global Foreign Exchange Committee, this Code sets global principles of good practice standards in the foreign exchange (FX) market, promoting the integrity and effective functioning of the wholesale FX market.
  • UK Money Markets Code (MM) – maintained and updated by the Money Markets Committee, this sets standards and best practice expected from participants in the deposit, repo and securities lending markets in the United Kingdom.
Both these codes have been written and are owned by the industry and reflect their views of best practice.

The FCA established its codes recognition scheme last year for recognising industry codes for unregulated financial markets and activities. The FX and MM Codes are the first codes to be recognised by the FCA.  

The FCA requests that individuals subject to the Senior Managers and Certification Regime (SM&CR) need to meet the requirements for market conduct, for both regulated and unregulated activities.  Behaviour that is in line with an FCA recognised code, such as the FX and MM Codes, will tend to indicate a person subject to the SM&CR is meeting their obligation to observe ‘proper standards of market conduct’.

The FCA consulted on recognition of the codes in December 2018. The consultation responses all agreed that they met the recognition criteria and that the FCA should recognise both.

The FCA’s SM&CR rules have not changed as a result of its code recognition scheme, nor has its powers or the circumstances in which it supervises or enforces its SM&CR rules. Firms and their Senior Managers, under the SM&CR, are expected to train, monitor and where necessary, discipline their staff in relation to the Individual Conduct Rules. 

Following recognition, the FCA will not supervise firms or individuals directly against these codes in unregulated markets. The FCA’s role is to make sure that firms meet their governance and systems and control obligations, including under the SM&CR.

The FCA expects firms and individuals to consider both the spirit and letter of code provisions to make sure they fully meet ‘proper standards of market conduct’. 

For more information on the codes recognition process, please refer to the FCA’s recognised industry codes pages.

2. UK Finance Report on AI in financial services

On 27 June 2019, UK Finance published a report (prepared in conjunction with Microsoft) on artificial intelligence (AI) in financial services.

The report explores what is meant by AI, noting it is clear AI will be a key feature in how financial services firms operate and deliver services. The aim of the report is to introduce a number of issues to consider in seeking to benefit from AI. However, how a firm identifies the use cases for AI, and seeks to implement the data strategies, cultural and governance arrangements to take advantage of it, will be firm-specific.

The report notes that firms often look at AI simply as a tool and do not consider the wider cultural and organisational changes necessary to become a mature AI business. Part One of the report discusses this first pitfall. It explains how, as they start to embed AI into core systems, firms need to consider the implications of AI that go beyond the technical, including the wider impact on culture, behaviour and governance. This part of the report also provides a framework for responsible AI and gives details of what this could mean in practice.

Another difficulty for firms is that they struggle to know how to implement AI, or to scale AI from innovation centres to enterprise-wide solutions. Part Two of the report is intended to help firms determine where AI is the right solution, and how to identify the high-value use cases, looking more deeply at analysing the business case. 

As AI technologies persist and support ever more business processes, as well as assessing each individual AI project, it is critical for firms to consider the wider implications of their AI reliance. This will involve assessing the shift of responsibility of decision making from humans to machines across business process and confirming this is not introducing significant "rolled-up" business risk. Firms must consider how to supplement existing governance frameworks, or create new ones, to ensure that the ethics, appropriateness and risk of AI is in balance with the benefits it promises and the firm's corporate standpoint.

AI systems deal in probabilities and most require continuous maintenance, training, monitoring and evaluation to ensure they remain true to their original intent, to avoid decay and unintended bias. Firms need to be aware and structured to support this, thinking horizontally across business functions, from product development, risk and audit, to finance and technology.

3. FCA Confirms permanent restrictions on the sale CFDs and CFD-like options to retail consumers

The Financial Conduct Authority has confirmed new rules that will restrict the sale, marketing and distributing of CFDs and CFD-like options to retail customers as a result of recent feedback, as outlined in its Policy Statement first published on 1 July 2019 (PS19/18). The rules protect retail consumers by making the European Securities and Market Authority’s (ESMA’s) temporary restrictions of Contracts for Difference (CFDs) sold to retail clients, permanent. The rules apply from 1 August 2019 for CFDs and 1 September 2019 for CFD-like options.

 For CFDs and CFD-like options sold to retail clients, firms will be required to: 
  • Limit leverage to between 30:1 and 2:1.
  • Close out a customer’s position when their funds fall to 50% of the margin needed to maintain their open positions on their CFD account.
  • Provide protections that guarantee a client cannot lose more than the total funds in their CFD account.
  • Stop offering monetary and non-monetary inducements to encourage trading.
  • Provide a standardised risk warning, which requires firms to tell potential customers the percentage of their retail client accounts that make losses.
Including CFD-like options will ensure that firms do not try to avoid measures put in place by the FCA, offering substitutable products, which the FCA believes would pose the same risk to consumers.

In response to feedback, the FCA has clarified the scope of CFD-like option restrictions to achieve the intended policy outcome by:
  • Excluding firms that sell CFD-like options in other jurisdictions, where the product is sold through an intermediary outside the UK. 
  • Excluding the sales and distribution activities of EEA firms outside the UK. These firms are still prohibited from actively marketing unrestricted CFD-like options to UK retail consumers.
If intermediaries sell, market, or distribute CFD-like options in or from the UK, they will be subject to FCA rules, meaning UK consumers will be protected.

Christopher Woolard, Executive Director of Strategy & Competition at the FCA, said:
'Our intervention follows evidence of firms aggressively marketing CFDs to the general public, meaning retail consumers are buying a product that isn’t appropriate for them. We saw firms offering CFDs with increasingly higher leverage, resulting in high proportions of consumers losing money. EU rules are temporary. The new rules maintain and strengthen protections for consumers.'

Please click here for further information on PS19/18.

Other Publications 

Consultation Papers

CP19/20 - The consultation explains the purpose of, and the FCA’s approach to the assessment of, adequate financial resources.

CP19/21 - FCA consulting on changes to Decision Making and Penalties Manual (DEPP) and Enforcement Guide (EG) in relation to proxy advisers.   

CP19/22 - Restricting the sale to retail client of investment products that reference cryptoassets.

CP19/23 – Consultation setting out proposals to help consumers with pre-existing medical conditions.

Policy Statements    

PS19/19 - FCA regulated fees and levies 2019/20: Including feedback on CP19 and ‘made rules’.

Other FCA Publications
On 28 June 2019, the FCA published Handbook Notice 67 which sets out changes made to the FCA Handbook under instruments made by the FCA board on 30 May 2019 and 27 June 2019.

FCA Press Releases
FCA launches review of the Credit Information Market.

Changes to the Board of the Financial Conduct Authority announced by the FCA.

FCA publishes annual report and accounts for 2018/2019.
The FCA has also issued the following annual reports:

Retail Banking: Business Continuity Planning
Anti-money laundering – annual report 2018/19
Diversity – annual report 2018/19
Competition – annual report 2018/19
Modern Slavery and Human Trafficking Statement for the year ending 31 March 2019

The High Court has consented to an order to pay funds held by Digital Wealth Limited and Outsourcing Express Limited, as unauthorised firms, to the FCA for distribution to investors from funds raised by unauthorised investments schemes operated by them.

FCA Press Release regarding HSBC agreeing to extend redress scheme for customers impacted by historical debt collection practices 
FCA Statements

FCA’s response to European Banking Authority’s Opinion on Strong Customer Authentication.

FCA statement on the Joint Declaration with the Prudential Regulation Authority (PRA) and The Pensions Regulator (TPR) on climate change. 

The FCA has published an updated MoU (Memorandum of Understanding) between the FCA and Bank of England.

Andrew Bailey opening speech at the FCA Conference on Intergenerational Differences delivered at the Royal College of Physicians in London, on 2 July 2019.
A changing landscape: the FCA strategic priorities for the pensions sector” speech by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, delivered at Pensions and Benefits UK 2019 on 25 June 2019.
Regulating financial innovation – going behind the scenes” speech by Christopher Woolard, Executive Director of Strategy and Competition at the FCA, delivered at the Cambridge Centre for Alternative Finance annual conference, Judge Business School on 2 July 2019. 

Chancellor announces review of UK regulatory framework and payments landscape in 2019 

"LIBOR: Preparing for the end" speech delivered by Andrew Bailey, Chief Executive of the FCA, at the Securities Industry and Financial Markets Association’s (SIFMA) LIBOR Transition Briefing in New York, USA on 15 July 2019.

“The future of regulation: AI for consumer good” speech by Christopher Woolard, Executive Director of Strategy and Competition at the FCA, delivered at The Alan Turing Institute’s AI ethics in financial sector conference on 16 July 2019.

Speech by Andrew Bailey, Chief Executive of the FCA, delivered at the FCA’s 2019 Annual Public Meeting on 17 July 2019.

Enforcement Actions and Prosecutions

The FCA issues a final notice referring to Carz2Go’s failure to satisfy the suitability threshold condition (COND) and to be open and co-operative with the Authority (PRIN 11) in the consumer credit sector. FCA imposed a cancellation.
The FCA has published its Enforcement annual performance report for 2018/19, which provides an overview of the FCA's enforcement activities during this period, focusing on its essential enforcement developments and achievements. The FCA issued 265 final notices (243 against firms and individuals trading as firms, and 22 against individuals), secured 288 outcomes using its enforcement powers (276 regulatory and civil, and 12 criminal) and imposed 16 financial penalties totalling £227.3 million. The FCA cancelled 226 firms' permissions to conduct regulated business and prohibited seven individuals from carrying on a financial services regulated activity and at 31 March 2019, the FCA has 650 open cases. The FCA states that it has considered the themes raised and is working to implement the lessons learnt.

The FCA reports Richard Baldwin conviction for money laundering revealed after reporting restrictions lifted.
Fabiana Abdel-Malek and Walid Choucair sentenced to 3 years’ imprisonment in respect of five offences of insider dealing.
“Two jailed in £6.2m boiler room fraud” article by the Financial Times, published 24 June 2019.
Industry News:

FCA & Regulation
The FCA’s response to the Complaints Commissioner’s Annual Report 2018/9.
The FCA is to start work on a new platform to replace GABRIEL system with the aim to improve data collection from firms, while seeking input from users through a feedback survey and from running a programme of events to capture customer response and to test the platform. The FCA plans to publish feedback on the survey later in the year.

On 25 June 2019, the FCA published a report of the Global Financial Innovation Network (GFIN), entitled “GFIN-one year on”, in which it reflects on its work in the year since it was established. The report explains that since inception, the GFIN's membership has grown to 35 financial services regulators with full membership status and has seven observers, including the International Monetary Fund (IMF) and the World Bank. The GFIN explains that it expects future challenges to include understanding and working with data privacy and data sharing requirements across many jurisdictions and regulators.

On 25 June 2019, the Financial Stability Board (FSB) published a summary progress report on implementing the G20 financial regulatory reforms, together with a covering letter (dated 24 June 2019) from Randal Quarles, FSB Chair, to the G20. The report summarises the progress made by FSB member jurisdictions in implementing regulatory reforms to fix the issues that led to the financial crisis. Among other things, it includes an updated colour-coded table showing the implementation status of member jurisdictions (as at June 2019) in the core reform areas: building resilient financial institutions, ending too-big-to-fail, making derivatives markets safer and enhancing the resilience of non-bank financial intermediation (NBFI). The next full progress report on implementation and the effects of reform will be delivered to the G20 and published in October 2019.

On 25 June 2019, HM Treasury published a letter (dated 24 June) from John Glen, Economic Secretary to the Treasury, to Nicky Morgan, House of Commons Treasury Select Committee Chair, which provides an update on its review of policy on non-transferable debt securities issued by companies to consumers (also referred to as mini-bonds). The review is part of the government's response to the collapse of investment firm London Capital & Finance (LCF) and the FCA's supervision of LCF. HM Treasury announced the formal launch of an investigation into the circumstances surrounding LCF's failure in May 2019.

The letter provides more details on the scope of the review, which will consider:

·       The regulatory arrangements currently in place for the issuance of mini-bonds. This will include an examination of the size and economic value of the UK market, the nature of investors active in the market, investor access routes to the market (including financial promotions and other material) and the nature of the companies that access the market to raise capital (including why they choose to use mini-bonds and how they use the capital raised).
·       Whether the current regulatory regime is appropriate. This will include looking at the current regime for mini-bonds whether they are issued by authorised or non-authorised firms, existing consumer protections in place (including the financial promotion rules) and other relevant investor protection measures. 

The letter explains that the review will take account of the investigations into LCF's failure that are already underway.

FCA faces ‘significant delays’ in complaint handling article published by the Financial Times on 22 July 2019.

The European Central Bank (ECB) has added new FAQs on 5 July 2019, relating to the extension of the Article 50 period to 31 October 2019. It warns that a hard Brexit is a very real possibility and comments that, even if the Withdrawal Agreement is ratified, the end date of the transition period will remain unchanged at 31 December 2020. The ECB expects banks to use the coming months to ensure that they are fully prepared. They should not slow down the implementation of their plans and they should focus their efforts on fully implementing their target operating models. The ECB also states that it will assess on a case-by-case basis the status of decisions it took in March 2019, authorising banks to establish or retain a UK branch when it becomes a third country, once the date on which the UK will become a third country becomes clear. The ECB will consider whether these decisions should be withdrawn or amended.

On 25 June 2019, the European Securities Markets Authority published a letter (dated 17 June 2019 on the annual review required by Article 17 of Commission Delegated Regulation (EU) on transparency requirements for non-equity instruments. The letter follows up a previous letter (dated 16 January 2019) sent to the Commission relating to the review reports on the MiFID II Directive and the Markets in Financial Instruments Regulation (MiFIR). In that letter, ESMA raised the issue of carrying out the annual review of the operation of certain transparency requirements for bonds and derivates, as required by Article 17 of RTS 2. A positive assessment by ESMA can lead to a legislative change subjecting more bonds, and larger trade sizes in bonds and derivatives, to real-time transparency.

ESMA considers that the outstanding uncertainties on the time and conditions of Brexit do not allow for an adequate assessment at this time. Including or excluding UK data from the assessment would have a fundamental impact on the results, and any decision whether to include UK data would depend on whether the UK is still a member of the EU at the time any legislative change would take effect. In addition, Brexit will likely affect liquidity in bond and derivative markets and the value of the assessment will be limited if it is carried out before these effects have materialised. As a result, ESMA does not consider that it is the right time to perform the assessment, or to potentially tighten the transparency requirements in RTS 2. The letter has been copied to the European Parliament and the Council of the EU.

“Bailey says Brexit is draining FCA resources”  article by the Financial Times, published 25 June 2019.

Financial Crime

On 25 June 2019, HM Treasury issued an advisory notice identifying countries where enhanced due diligence for anti-money laundering and terrorist financing controls should be applied. The notice contains three categories of higher risk jurisdictions:

·       Consider as high risk and apply counter measures and enhanced due diligence measures in accordance with the risks (Democratic People’s Republic of Korea). 
·       Consider as high risk and apply enhanced due diligence measures in accordance with the risks, and any other measures as specified by the Financial Action Task Force (FATF) that have a similar effect in mitigating risks (Iran).
·       Take appropriate actions to minimise the associated risks, which may include enhanced due diligence measures in high risk situations (The Bahamas, Botswana, Cambodia, Ethiopia, Ghana, Pakistan, Panama, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, Yemen).
The Financial Action Task Force (FATF) held a plenary in Orlando from 19 to 21 June 2019. The issues discussed included:
  • Mitigating risks from virtual asset activities, including a public statement and risk-approach guidance on virtual assets and virtual asset service providers.
  • Launching a Strategic Review to analyse the progress made on effective implementation of AML/CFT measures.
  • FATF’s current action to combat terrorist financing, including a statement on FATF Actions to identify ISIL, Al-Qaeda and Affiliates Financing and the adoption of guidance for jurisdictions on assessing terrorist financing risk.
  • FATF’s efforts to strengthen its standards on Countering the Financing of Proliferation.
Also discussed was:
  • The mutual evaluation reports of Greece and Hong Kong, China and a statement on Brazil’s progress in addressing the deficiencies identified in its mutual evaluation report.
  • Monitoring Iran’s actions to address deficiencies in its AML/CFT system. 
  • Welcoming the Kingdom of Saudi Arabia as a new member to the FATF. 
  • The FATF priorities under the Chinese Presidency.

Pensions & SIPPs

According to Willis Owen, which polled 1,070 UK adults, its survey showed that of the women without a pension, 41 per cent had no intention of starting one, compared to 34 per cent of men. Some 17 per cent of those women don’t intend to pay into a pension until they are at least 40 and nearly one in ten (9 per cent) don’t intend to pay into one until age 50. One in three people (35 per cent) claimed to have stopped paying into a pension scheme over the past 12 months, with the main reason cited as they could no longer afford it.

“Pension age change boosts employment figures” – article published by the Financial Times on 17 July 2019.

The FOS (Financial Ombudsman Service) launched its new website.
The FOS has published a consultation on their future funding model on 2 July 2019.
The FOS publishes its Annual Report and Accounts 2018/2019.
The FOS has reported that Complaints to the ombudsman involving banking fraud and scams have risen by around 40% year-on-year. Alongside its annual review, and shortly before the launch of a new voluntary code relating to “authorised push payment” fraud, the FOS published refreshed content and case studies illustrating its approach to resolving these cases fairly.
HMRC & Tax 
Finance Bill 2019/20: government publishes draft legislation implementing tax policies announced in recent fiscal events, in line with the government’s commitment to a competitive and fair tax system.
Senior Managers and Certification Regime
From 9 December 2019, the FCA are extending the Senior Managers and Certification Regime (SM&CR) to solo-regulated firms with the aim to reduce harm to consumers and strengthen market integrity.
The FCA have been working closely with HM Treasury on preparation of the Commencement Order needed to enable the FCA to publish final rules on the extension of the Senior Managers and Certifications Regime (SM&CR).
“Advisers warned they are ‘wildly underestimating’ SM&CR”  article by the Financial Times, published 20 June 2019.

On 18 July 2019, the Bank of England and Financial Services Act 2016 (Commencement No 6 and Transitional Provisions) Regulations 2019 (SI 2019/1136) were published on The Regulations were made on 17 July 2019. They are the sixth commencement regulations made under the Bank of England and Financial Services Act 2016 (Act).

The Regulations confirm that (with certain exceptions) the amendments to Part 5 of the Financial Services and Markets Act 2000 (FSMA) made by section 21 of the Act concerning the extension of the senior managers and certification regime (SM&CR) to all authorised persons that are not solo-regulated by the FCA will come into force on 9 August 2019. The provisions will come into force for FCA solo-regulated firms on 9 December 2019, except for benchmark firms. Benchmark firms will be subject to the SM&CR from 7 December 2020. The amendments come into force on 18 July 2019, for the purpose of the making of rules, the giving of directions, the imposition of requirements and the issuing of policy statements by the FCA.

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.

Copyright © 2019, Gem Compliance Consulting Limited, All rights reserved.

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