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Issue 48 - September 2018

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.


Contents: 

Other Newsletters & Updates 

FCA Regulation Round up
 
FCA Policy Development Update

ICO Newsletter

Main features
Director of SFO, Lisa Osofsky, speech at Cambridge Economic Crime symposium: Making the UK a high risk country for fraud, bribery and corruption 

Key points from speech:
  • Criminals are said to thrive on and exploit volatility. 
  • The SFO’s core funding has increased and it reports that it is making good use of technology.
  • The global use of Deferred Prosecution Agreements (DPAs) is spreading.
  • The SFO sees a natural ally in Revenue and Customs and could result in the building of very strong cases.
  • Some of its cases are reported to be the most complex and data-heavy criminal investigations in any jurisdiction. For example, there were 30 million documents in its investigation into Rolls Royce, which was its largest case at the time. The SFO now has one with over 65 million, and there’s another in the pipeline which will have more than 100 million. To provide some context, the Panama Papers leak was 10.5 million, which is considered an average sized investigation for the SFO.
  • In 2016 the SFO deployed an AI robot to help check for legal professional privileged material in the Rolls Royce case, which led to savings of 80% in the area that it was used. 
  • The SFO reports that its new eDiscovery platform will soon bring a range of machine learning and AI based technology assisted review features to its investigations. These technologies, which are apparently more commonly used in civil cases, are expected to create greater efficiencies, and potentially help the SFO reach charging decisions sooner, and shorten the time it takes to progress to trial. 
  • The SFO is also exploring technology in intelligence and encryption. 
  • The recovery of criminal proceeds will continue to be prioritised. 
  • Significant challenges for the SFO include assets located overseas; competing claims from third parties; the misuse of trusts; and assets hidden behind opaque structures around the world. 
  • When considering resolutions other than trial, such as DPAs, the SFO analyses whether: 
    • the company has a credible defence under Section 7 (Adequate Procedures); 
    • the company has engaged in proactive efforts to clean up and reform;
    • the company has instilled the right controls;
    • the company’s controls are backed by demonstrable commitment at the appropriate level; and 
    • sufficient assurance is provided that the company is doing everything they can to ensure the crimes of the past won’t be repeated long after the watchful eye of the prosecutor moves on to another target.
  • The speech was concluded with reference to the SFO’s goal of making sure the UK is a high-risk place for the world’s most sophisticated criminals to operate.
Other speeches from the SFO. 

Ten years after Lehman: how accountants can make finance safer. 

Speech by Charles Randall, FCA Chair 

Key points from speech:
  • Most if not all of the firms which failed during the financial crisis had been reporting relatively robust financial positions right up to the point when they did fail, with financial statements signed off by their boards and large audit firms. Which led to the question: what are financial statements for? Ten years on from the peak of the financial crisis, Charles Randall reflects on whether that question has been answered and how accountants can make finance safer.
  • 4 reasons accounting is relevant to the FCA:
    1. The FCA is the prudential regulator for over 18k firms. Good quality financial statements are a key building block of effective prudential regulation of these firms.
    2. Metrics from financial statements drive incentives, and therefore conduct, of management and shareholders. The crisis was a crisis of misconduct and not just a prudential crisis. By 2017, the global banking industry alone had paid out over $320bn in fines worldwide for misconduct, and the amount continues to grow.
    3. Firms should be financially resilient. However, in a competitive market some firms will still fail, and when they do, the loss and disruption caused by their failure must be minimised.
    4. To work well, markets need good quality disclosure, including financial disclosure.
  • Accountants can support the FCA’s objectives in 4 areas:
    1. Financial statements:
      • For any financial firms, accounting standard setters and regulators effectively require three sets of legitimately prepared books: a) the financial statements based on current market circumstances, which  follow the neutrality principle; b) a set of regulatory capital numbers to capitalise the entity on the basis of assumed levels of risk in assets and operations, with the aim of reflecting a more prudent view of the risk of future losses; and c) a further set of numbers prepared based on severe but plausible stress scenarios, e.g. for some solo-regulated firms, the Internal Capital Adequacy Assessment Process (ICAAP).
      • The regulatory capital requirements of some categories of firms, including the additional capital they need to meet stress scenarios, is not transparent to the market. The FCA feels this position should be kept under review.
    2. Business Model analysis:
      • Good quality corporate reporting and auditing needs to start with the firm’s business model: how the firm generates economic value. To create economic value sustainably, firms need a clear understanding of their purpose and how they ensure they achieve good outcomes for their customers.Since the financial crisis, regulators analyse firms’ business models when deciding on supervisory strategies.
      • Firms should link their remuneration policies to performance indicators and risks, and the accounting policies should be appropriate to the business model.
      • Quoted companies have had to disclose their business model since 2013 and include long-term viability statements in their corporate reporting. These reforms are considered to provide companies with an opportunity to set out how, why and for whom they create value, and the longer-term threats to their models. The FCA reports that firms to which these requirements do not apply have not all recognised the benefits of voluntarily adopting them as best practice. The accounting profession can help to guide firms to put business model analysis and consideration of long-term viability at the heart of their corporate reporting. 
    3. Client asset record-keeping: 
      • Auditor reporting on client assets has improved significantly over the last five years. However, the FCA remains concerned that some audit firms have not invested sufficiently in building their knowledge and understanding of the Client Asset Sourcebook (CASS) Rules and the FRC Standard. The FCA continues to see Client Assets reports that are just not good enough.
      • The FCA will continue to monitor this area and has issued a warning: it has a very low tolerance for CASS failings because of the significant customer detriment these can cause, and it expects auditors to identify CASS failings when they report them.
    4.  The relationship between accountants and regulators:
      • The FCA’s Finalised Guidance 13/3, a Code of Practice for the relationship between the external auditor and the supervisor sets out the FCA’s expectations for its relationship with the accountancy profession.
      • The FCA Chair welcomes feedback, good or bad, on the functioning of the regulator/auditor relationship and suggestions to improve it. 
      • Firm culture is highlighted as a particularly important discussion point, as it is considered one of the most important drivers of conduct outcomes for firms. Auditors are seen to have a clear view of the cultures of the firms they audit, based on the extent to which senior and junior management accept challenge, allow discussion and give straight answers. 
      • The effectiveness of the relationship between the executive and the board, and in particular the relationship with the audit committee, is considered a good indicator of culture within a firm, as is the extent to which a firm empowers and takes heed of their risk and internal audit functions.

HMT Paper - Introduction of regulation of crypto-assets and associated activities 

The Treasury Committee (“Committee”) launched its Digital Currencies inquiry on 22/02/18 with three aims:
  1. Understand the role digital currencies have in the UK,
  2. Consider the potential impact of distributed ledger technology (aka Blockchain) on the financial services industry; and 
  3. Evaluate the UK’s response to digital currencies and how regulation could be balanced to protect consumers but not stifle innovation. 
The Committee held the following three sessions with key stakeholders in 2018: ‘the application of blockchain’; ‘the development of crypto-assets andthe current crypto-asset landscape; and ‘the regulation of crypto-assets’. The Committee also received 53 submissions written evidence. 
 
The Committee reports that the UK Government and financial services regulators appear to be deciding on whether to allow the “wild west” nature of the crypto-assets market to continue or whether to introduce regulation but this ambiguity is said to be unsustainable. The Committee states that the Government and regulators need to assess the risks associated with crypto-assets and decide whether or not to encourage their growth in the UK.  
 
The Report strongly indicates that regulation of crypto-assets and associated services in the UK, and many other jurisdictions, appears inevitable and has, to a degree already begun in the UK with the inclusion of virtual currencies in the 5thMoney Laundering Directive (5MLD). The Committee has confirmed that if the UK leaves the EU without a transition period, the Government should seek to replicate the provisions of the 5MLD into UK law as quickly as possible.
 
The report covers the evidence submitted by, and discussions held with, key stakeholders in a number of areas. Noteworthy points from each of these areas is included below:
  • The crypto-asset landscape:
    • Well-functioning cryptocurrencies currently exist as a theoretical concept, as they do not yet serve all the general functions of functioning currencies. The characteristics and current main uses of Bitcoin and other ‘altcoins’ mean the term crypto-assets is considered more appropriate than crypto-currencies in describing Bitcoin, etc.
    • The total stock of crypto-assets is small relative to the global financial system. At their recent peak the total worldwide value of crypto-assets was less than 1% of global GDP. By comparison at the peak of the dot-com bubble in March 2000, the combined market capitalisation of US technology stocks was close to a third of world GDP and prior to the financial crisis the notional value of credit default swaps was 100% of world GDP. 
  • Advantages and limitations of blockchain and crypto-assets: 
    • Crypto-assets are not widely accepted by merchants and the blockchain technology that underpins the transactions cannot handle the payment volumes required; every day more than 30m electronic payments are made through Bacs and Faster Payments, whereas Bitcoin’s global capacity is around 0.6m transactions per day. 
    • The slow, costly and energy intensive – Bitcoin’s proof of work system uses 0.1% of the world’s total electricity consumption (an amount comparable to the Republic of Ireland) – verification process is a fundamental feature of public, decentralised blockchains. This may therefore limit the extent to which crypto-assets and blockchain can replace conventional payment systems. 
    • Financial inclusion would be best addressed by reducing the number of people without access to bank accounts rather than increasing the number of people with access to crypto-assets. 
    • The Committee recognises that blockchain technology may have the potential to solve problems caused by a lack of trust in data integrity and may be more efficient in managing certain types of data in the longer term, offering higher levels of security than centralised databases. 
    • However, the Committee has not been provided with evidence that universal applications of the technology are currently operationally reliable. Ultimately, as with any system, garbage in means garbage out. This also applies at the user level.   
  • Risks: The main risks to investors from crypto-assets are seen as:
    • High price volatility.
    • Risk that crypto-asset exchanges are hacked – all reported attacks to date have been against custodial exchanges, as far as is known there has been no successful hack of the blockchain itself. 
    • Investors no longer able to access their crypto-asset investments because they have lost their passwords/keys or the password/keys have been compromised. 
    • No redress or compensation currently available and insurance market for both investors and service providers is not sufficiently developed to mitigate these risks.
    • Crypto-assets are vulnerable to manipulation and fall outside the scope of the market abuse rules. The Committee has therefore asked the FCA to outline the approach it would take to market manipulation if these markets were to fall within its remit.     
    • Although the UK’s National Risk Assessment 2017 assessed the risk of crypto-asset use for money laundering to be relatively low, the FCA reports that information it used to assess the risk, which postdates the intelligence used by the NCA in arriving at this conclusion, shows wider-scale criminal use of crypto-assets and the potential harm in this space to be greater than initially thought. 
  • Regulatory response:
    • Crypto-assets do not meet the criteria to be considered a specified investment under the Regulated Activities Order (RAO), nor would they qualify as funds or e-money under the PSD2 and E-Money Regulations. 
    • Whether an initial coin offering (ICO) is regulated in the UK depends on how it is structured. For example, where tokens represent a transferable security the ICO would fall within the regulatory perimeter and the issuer would therefore be subject to FCA rules and principles. However, when tokens represent a claim on prospective products/services, they fall outside the UK’s regulatory perimeter. Therefore, The FCA’s Director of Policy conceded that the FCA’s warning on ICOs may “have gone a little outside of our [the FCA’s] remit”. 
    • The US SEC’s view of ICOs and utility tokens is different: tokens and offerings that incorporate features and marketing efforts that emphasize the potential for profits based on the entrepreneurial or managerial efforts of others are said to contain the hallmarks of a security under US law. 
    • It is the Committee’s view that the development of ICOs has exposed a regulatory loophole that is being exploited and the RAO should be updated to bring ICOs within the regulatory perimeter as a matter of urgency, and bring investor protections into line with those in the US.
    • The 5thMoney Laundering Directive (5MLD), which came into force in July 2018 and must be transposed by all member states by July 2020, will extend AML and CTF rules to virtual currencies. Industry body, Crypto UK, argued that the lack of regulation where money is converted into crypto-assets and vice versa are points potentially vulnerable to criminal activity. In light of the evidence received, the Committee urges the Government to expedite the consultation process for the 5MLD, which is currently not planned to finish until the end of 2019. 
    • The Committee believes the FCA should be the relevant regulator for supervising the anti-money laundering of those operating in the virtual currencies space. 
    • Regulation of crypto-assets could help the market shift to a more mature business model that improves consumer outcomes and enables it to grow sustainably. It may also encourage large institutions to get involved, which would increase liquidity and could reduce some of the inherent risks that currently exist. Regulation of this sector could also have wider benefits for the competitiveness of the UK’s financial services industry. 
  • Implementation of regulation:
    • There are two ways in which regulation of crypto-assets could be introduced: 1) extension of the RAO, such as with the introduction of P2P lending as a regulated activity; or 2) designing a new framework of regulation. The Committee recommends extension of the RAO, as this would be the quickest way to achieve protection for consumers and market integrity. 
    • Regulation should include the issuance of ICOs and the provision of crypto exchange services at a minimum. 
  • International approach to regulation:
    • In the US, the regulation of crypto-asset activity currently differs from state to state. However, Reuters reports that US lawmakers are “moving to consider new rules that could impose stricter oversight on the emerging asset class”.
    • Since recognising Bitcoin as a legal tender, Japan has approved 11 companies as operators of crypto-asset exchanges. Japanese regulation requires exchanges to, inter alia, operate robust IT systems, segregate customer accounts, and verify its customers. 
    • China, however, has banned ICOs, shut down local crypto-asset exchanges and limited data mining. It also plans to block domestic access to platforms that enable centralised trading and authorities will target firms that provide services associated with centralised trading of these assets. 
    • Gibraltar introduced a Distributed Ledger Technology (DLT) Framework and from January 2018, firms that use DLT for storing or transmitting value belonging to others need to be authorised by the GFSC as a DLT Provider and must comply with a set of principles rather than hard rules. Industry participants have commended Gibraltar on its forward-thinking approach to regulation. 
    • The position of the French regulators is similar to the UK; crypto-assets are outside the scope of regulation but warnings have been issued to consumers. 
    • Germany has in general classified crypto-assets as a financial instrument, so commercial trading of crypto-assets requires authorisation from BaFIN. However, BaFIN stated in a document published in March 2018 that it would decide on a case by case basis whether a token would constitute a security or a capital investment.   
    • The Committee recognises the importance of international co-operation of crypto-assets and associated activities and encourages UK regulators to engage internationally to ensure best practice from other jurisdictions is learned and applied to the UK context. 

Other Speeches

Introductory speech on multilateralism and global coordination: A case for balancing autonomy and co-operation in the interests of financial markets by Andrew Bailey, CEO of the FCA
 
AGM speeches:
  1. Charles Randall, FCA Chair
  2. Andrew Bailey, FCA CEO
Pensions: A view from the FCA, by Andrew Bailey, Chief Executive of the FCA
 
Speech to the CBI Cyber Security: Business Insight Conference by ICO Deputy Commissioner (Operations) James Dipple-Johnstone

Other FCA publications 

CP18/25: Approach to final Regulatory Technical Standards and EBA guidelines under the revised Payment Services Directive (PSD2). PSD2 was implemented in the UK in the form of the Payment Services Regulations 2017 (PSRs 2017). Most requirements of the PSD2 applied from 13 January 2018, additional rules come into effect on 14 September 2019.
 
FCA ‘Dear CEO’ LIBOR letter to the CEO’s of Banks and Insurers.
 
CP18/26: Claims management companies: applying the Senior Managers and Certification Regime to claims management companies

Enforcement Actions & Prosecutions

FCA publishes final notice against Arif Hussein, a former derivatives trader at UBS, prohibiting him from performing any function relating to a regulated activity for acting recklessly and without integrity in relation to LIBOR submissions made on behalf of UBS. 
 
FCA publishes final notices against One Call Insurance Services Limited and its CEO John Radford for failing to adequately protect client money. One Call has been fined £684k and restricted from charging renewal fees to customers for 90 days. Mr Radford has been fined £468k and prohibited from having responsibility for client/insurer money in relation to any regulated activity. 
 
The FCA’s Operation Tidworth has resulted in the FCA’s second largest criminal prosecution ever with five individuals being sentenced to a total of 17.5 years in prison for a boiler room fraud that led to investors losing over £2.8m. Various prohibitions have also been handed out. A sixth defendant, whom the FCA described as the controlling mind, instigator and the main beneficiary of the fraud, was sentenced on 14thSeptember. The defendants were charged with offences of: conspiracy to defraud; fraud; money laundering; perverting the course of justice; and breaches of FSMA.
 
Lee Denton who founded TB Options Limited has been jailed for 4.5 years after being found guilty of defrauding 42 victims out of almost £500k. Mr Denton posed as a London derivatives trader and claimed to be able to offer clients returns of up to 20%. However, Mr Denton banked some of his clients’ money in personal accounts to help fund his lavish lifestyle and reinvested the rest in his company. 
 
FCA bans former Deutsche Bank trader, Christian Bittar from performing any function in relation to any regulated activity. Mr Bittar pleaded guilty to EURIBOR manipulation and was sentenced in July 2018 to almost 5.5 years in prison and ordered to pay £2.5m by way of confiscation order. 
 
Michael Nascimento has been sentenced to 11 years in prison for a share fraud, which used a series of boiler room companies and led to the loss of £2.8m of investors’ money. Between July 2010 and April 2014, members of the public, many of whom were elderly/vulnerable, were cold-called and subjected to high pressure sales tactics to persuade them to purchase shares in a company that owned land on the island of Madeira. The trial Judge commented that Mr Nascimento, who had shown “utter cynicism and contempt” for some of the victims, was “very adept at getting others to do his dirty work for [him]” and that many of his actions were “specifically designed to frustrate the task of the FCA and to prevent apprehension” but “the FCA had built a formidable case” against him. Mr Nascimento also received an additional sentence of 2 years for further criminality in respect of a separate prosecution by the Crown Prosecution Service and the City of London Police. 
 
The ICO has handed out its first formal notice under the new GDPR to the Canadian analytics company, AggregateIQ. The firm is accused of processing personal data “for purposes which they [data subjects] would not expect” but has appealed against the notice. The Vote Leave campaign paid the firm to target ads at prospective voters during the Brexit referendum campaign. It was also used by BeLeave, the pro-Brexit youth group. Vote Leave has been fined £61k by the ICO and referred to the police after an Electoral Commission probe said it broke electoral law by exceeding its spending limit by funnelling money through BeLeave. Although the data was gathered before 25thMay, the ICO was concerned about the “continued retention and processing” of that data after that date. 
 
ICO fines Equifax £500k, the maximum fine permitted under Data Protection Act 1998, for failing to protect the personal information of up to 15 million UK citizens during a cyber-attack in the US in 2017, which affected 146 million customers globally. The ICO's investigation, carried out in parallel with the FCA, revealed multiple, systemic and serious inadequacies resulting in data being retained for longer than necessary and vulnerable to unauthorised access. The UK arm of the company failed to take appropriate steps to ensure its US parent company, Equifax Inc, which was processing the data on its behalf, was protecting the information.
 
The head of Danske Bank, Thomas Borgen, has resigned after admitting £178bn of funds flowing illegally out of Russia, the UK and the BVI were laundered by its Estonia branch. The bank has revealed that an independent investigation found “a series of major deficiencies” in its control to prevent money laundering and that more than half of the branch’s customers were suspicious. The investigation also found that several dozen employees may have colluded with customers to get around security checks. It is speculated that the firm could be facing a record fine in Denmark of $630m (£481m as at 21/09/18) if it is found guilty for its role in one of Europe’s biggest money laundering scandals. Rasmus Jarlov, Denmark’s business minister and the man in charge of overseeing financial legislation in Danske’s home market, said the $630 million estimate assumes that the bank’s profits from transactions tainted by laundering amount to about 1.5 billion kroner (approx. £181m as at 21/09/18).

Industry News

A light-hearted readThe pets behind 10 wealth managers

FCA & Regulation 

Complaints Commissioner (CC) rules in favour of FCA in complaint regarding FS register inaccuracies. The original complaint dates back to 2005 and concerns misleading register entries in respect of directors of an AR and its Principal. The Principal was censured in 2005 and the two directors believe the register gave the impression they had been directors of the Principal. In 2017 the CC found in favour of the directors and told the FCA to investigate the inflexibility of its register. The cost to address the issue would be £100k so it is understood some explanatory text was added instead, which the directors feel makes things “as misleading as ever” and so complained to the CC again. However, the CC has ruled that the issues have already been looked at and so there is no reason to reopen the complaint. Since that ruling it is reported that the complaint has now been referred to the ICO on the basis that the FS register is inaccurate.  
 
ECB (European Central Bank) issues opinion on the EC’s new framework for the prudential regulation of investment firms. 
 
Wonga Group Limited have decided to go into administration and Insolvency Practitioners from Grant Thornton are in the process of being appointed. Customers are advised that they must continue to make payments, as all existing agreements remain in place and are not affected by the administration.  
 
Complaints Commissioner (CC) confirms the FCA were wrong to exclude a complaint about the professionalism of its senior staff for wearing badges produced by the FCA with the motto “Bring it on!” The complainant apparently felt the motto was short-hand for "bring on your challenges" fostering a culture of institutional defensiveness and sought to discourage legitimate debate and challenge. The FCA said the issue of the badges were an employment matter and therefore outside the scope of the complaints scheme but the CC’s view is that the complaint relates to the appropriateness of staff and should not be excluded. The FCA has agreed to write to the complainant addressing the concerns raised.
 
Complaints Commissioner (CC) rules a complainant should pay overdue fees even though they thought the emails from the FCA instructing them to pay the fees were spam. The individual cancelled their authorisation in September 2017 but the FCA fees for the full year would still need to be paid because they had not cancelled by the earlier 31stMarch deadline ie. before the start of the next FCA financial year.  The individual didn’t believe they owed anything and thought the emails from the FCA were suspicious. However, the CC said: “It is correct that you should not respond to suspicious emails giving out your banking and personal details, but you could and should have contacted the FCA to find out if the fee notifications and demands originated from them”.
 
Dial-A-Cab Credit Union and Harp Credit Union Limited enter administration. 
 
FCA appoints Sheldon Mills as its new director of competition to replace Mary Starks who is becoming a director of Ofgem. Mr Mills is reported to be a qualified solicitor and, before joining the Office of Fair Trading in 2010, practiced competition and anti-trust law at a number of City law firms. 
 
The FCA and Chartered Insurance Institute (CII) have launched a reassessment test for financial advisers. The test will be voluntary unless the FCA decides to use it as part of supervision. Although the RDR required advisers to pass the level 4 Diploma qualification and undertake 35 hours of CPD each year the FCA is concerned that “not all firms test their advisers…with many advisers never retesting”. The test will be available from 17/09/18 from the CII’s websiteand costs £150 for non-members. 
 
Government announces the launch date of Single Financial Guidance Body will be January 2019 and its CEO will be John Govett.
 
At the FCA’s AGM, Jonathan Davidson, executive director of supervision – retail and authorisations, confirmed the roll out of a trial of the new search function for the FCA register. The update will reportedly make the register “more useable and…more searchable”enabling users to “check firms exists and that they are who they say they are.”
 
FCA’s Live and Local 2018/19 programme started in September. 
      
FCA confirms closure of the final four investigations into firms for their treatment of long-standing customers in the life insurance sector. 
 
A Financial Reporting Council investigation into KPMG, which was initiated following a referral from the FCA, has seen KPMG admit misconduct in its reporting of up to £1 trillion of client assets held by BNY Mellon. KPMG is reported to have not adequately considered the level of compliance of BNY Mellon’s records and therefore, KPMG’s auditing was insufficient in supporting its opinions in a client assets report to the FCA in 2011. No clients are thought to have lost any money.

Brexit 

HMT has published a webpage setting out a draft version of the Capital Requirements (Amendments) (EU Exit) Regulations 2018 along with explanatory information. HM Treasury plans to lay the draft Regulations before Parliament in autumn 2018 and the draft Regulations will mostly come into force on exit day.
 
Shadow Brexit Secretary, Sir Keir Starmer, indicates a second Brexit referendum could be “on the table” if Parliament rejects the deal proposed by the Government. 
 
CityUK issues joint report with DLA Piper on the report on a UK-EU association agreement and future UK free trade agreements.

MiFID II

ESMA announces that it is to renew the prohibition on binary options for a further three months. 
 
A survey conducted by financial technology firm Iress reveals 58% of advisers surveyed were not aware of the product governance rules that were introduced by MiFID II (PROD in the FCA rulebook).  

PRIIPs

The Association of Investment Companies (AIC) has called for Key Information Documents (KIDs) to be suspended and for the Treasury to launch an enquiry. 

Complaints and Compensation 
 
FOS publishes complaints data for the first half of 2018 and shows that Bank of Scotland received the largest number of complaints, over 23k. Barclays received the most amount of investment related complaints.  
 
FSCS CEO, Mark Neal, is supportive of a risk-based levy structure whereby those who recommend riskier products and services contribute more towards the FSCS. 
 
At the FCA’s AGM, Christopher Woolard, the FCA's director of strategy and competition, said he empathised with advisers but the regulators stance on the 15-year longstop limit for complaints has not changed since the FCA last looked at the issue, as part of the Financial Advice Market Review (FAMR). As part of the review the FCA concluded that it would not implement a longstop, as it would be inappropriate to do so from a public interest perspective. 
 
A Barclays whistleblower, who claims he was victimised after reporting a series of transactions that he thought amounted to tax evasion to the firm’s chief executive, chief financial officer and treasurer of Barclays Bank UK, copying in the compliance and whistle-blowing department, has lost his claim for damages. The individual believed the bank’s Luxembourg Collateral Management division was shifting ‘significant income’ from the bank to entities where no corporate tax is paid. However, an internal investigation assisted by external experts did not reveal any wrongdoing by the Luxembourg division. In addition, the Tribunal found that the bank had complied with the whistleblowing rules and there was no evidence that any manager did anything to disadvantage the individual.  

Scams, Fraud & Warnings 

Caroline Wayman, chief ombudsman and chief executive of the Financial Ombudsman Service, has warned banks that it’s “not fair” to blame customers for money lost through scams given the “sophisticated way criminals exploit banks’ security systems.” Ms Wayman said the level of proof required to demonstrate that a customer had been "grossly negligent" was “very high” and if a bank is unable to meet this “it's likely we'll tell them to cover the money their customer has lost."
 
Insolvency Service to be given new powers to investigate and penalise directors who ‘phoenix’ their companies. Phoenixing, which is not illegal, is where an old firm is declared insolvent or closed down by the owner, only for them to set up another business with a new name. Business minister Kelly Tolhurst said: "While the vast majority of UK companies are run responsibly, some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This can’t continue."
 
The Association of British Insurers has issued a warning that members of the public arebeing cold called by a claims management firm pretending to be from the trade body. 
 
A report from the government’s National Fraud Initiative (NFI) reveals it has prevented £144.8m in pension fraud and overpayments (where people continue to claim after the pension holder has died) over the past two years. The report also states that overall, the NFI has saved more than £300m in UK taxpayers’ money between April ’16 and March ’18 from fraud, overpayments and errors identified and prevented.
 
The FCA has warned that fraudsters have been contacting former clients of Active Wealth (UK) Limited claiming to be from the FCA. The FCA reports that the fraudsters offer to assist individuals in claiming compensation for mis-sold pensions and investments.
 
HMT/OFSI issues spam email warning. Apparently, emails with the subject “Her Majesty Financial Sanction”, purporting to be from robert.jenrick@hmtreasury.com, have an asset freeze and sanctions link embedded but are not genuine HMT emails. (No link available, alert came through email alerts)

Technology/Innovation 

Law Commission publishes consultation to seek views on the provisional conclusions of its project to identify and address legal uncertainties concerning electronic signatures. The consultation sets out the Law Commission's provisional view that the combination of eIDAS (an EU Regulation that sets out rules for electronic identification and trust services), domestic legislation and case law means that an electronic signature is capable of meeting a statutory requirement for a signature if an authenticating intention can be demonstrated. The paper notes the absence in England and Wales of a clear legislative statement to avoid any doubt on electronic signatures, such as in: Australia; Estonia; Hong Kong; New York; Scotland; and Singapore. However, the Law Commission states it is not persuaded that this is necessary at present because of its provisional view that the current law already accommodates electronic signatures.
 
Cryptoassets, Robo advice and platforms

BBC feature on cryptocurrencies: “Bitcoin buster? The search for a more stable cryptocurrency”.
 
Social trading network eToro is reported to have signed marketing deals with a number of Premier League clubs and payments will be made to the clubs in Bitcoin. 
 
Joint report from the European Supervisory Authorities on the results of its second monitoring exercise on the automation of financial advice.
 
HMRC & Tax

The latest in the long-running legal battle between HMRC and Ingenious Film Partnership sees HMRC issue an order to Ingenious for almost £50m in back taxes.  
 
Manchester United manager, Jose Mourinho, receives one-year suspended prison sentence and is fined £1.8m by Spanish authorities for tax evasion relating to image rights held in an offshore company between 2011 and 2012.
 
Film partnership tax scheme, Invicta 43, is to be dissolved leaving investors with hefty tax bills.

Financial Crime 

Adopted delegated regulation published by European Commission (EC), which adds Pakistan to the list of high-risk third countries. 
 
Unpicking the cyber-crime economy – report by the BBC. 
 
EC publishes a communication on strengthening the framework for prudential and AML supervision for financial institutions. The Commission is proposing to concentrate anti-money laundering powers related to the financial sector into the European Banking Authority (EBA). It also proposes to strengthen the EBA’s mandate to ensure that all relevant authorities effectively and consistently supervise the risks of money-laundering and that they cooperate and share information.
 
Transparency International publishes ‘Progress Report 2018: Assessing Enforcement of the OECD Anti-Bribery Convention’. 
 
US imposes sanctions on Chinese military for purchasing military supplies from Russia in contravention of existing US sanctions on Russia.

Data Protection/Security

Law firmPinsent Masons, reports that the number of data protection complaints to the ICO has doubled since the GDPR came into force. 
 
The Telegraph reports a group of broadcasters including the BBC and Sky have written a letter to the Sunday Telegraph calling for a social media watchdog. The group said: “We do not think it is realistic or appropriate to expect internet and social media companies to make all the judgment calls about what content is and is not acceptable, without any independent oversight.”
 
Lloyds TSB’s CEO, Paul Pester, to step down following IT failings that left almost 2m people without access to online banking services. 
 
ICO issues call for evidence regarding the creation of a regulatory sandbox. 
 
BA suffers malicious data attack impacting 380,000 transactions. Apparently, the attackers were also able to intercept the 3-digit security codes on the back of payment cards. 
 
Apple takes down apps (Dr Cleaner, Dr Antivirus and App Uninstall) from well-known cyber security firm, Trend Micro, after they were found to export users’ browser histories to a server in China. Trend Micro strongly denies allegations of stealing data but has confirmed that a function common to all three apps that led to a small amount of data being collected and uploaded at installation has been removed.
 
The Departmentfor Digital, Culture, Media & Sport has published a technical note on how the collection and use of personal data would change in a no-deal Brexit scenario. Although there would be no immediate change because the Data Protection Act 2018 and EU Withdrawal Act 2018 would be in place meaning the GDPR would continue to apply, the EU has said that an adequacy decision cannot be made until the UK is a third country.
  
The Monetary Authority of Singapore (MAS) is said to be considering making a set of six cyber-security measures, originally introduced as a voluntary baseline standard, legally binding on financial institutions. The 6 measures are:
  1. addressing system security flaws in a timely manner
  2. establishing and implementing robust security for systems
  3. deploying security devices to secure system connections
  4. installing anti-virus software to mitigate the risk of malware infection
  5. restricting the use of system administrator accounts that can modify system configurations, and
  6. strengthening user authentication for system administrator accounts on critical systems.
Section 35 of the Financial Guidance and Claims Act 2018, which inserts a new regulation (21A) into the Privacy and Electronic Communications Regulations 2003 prohibiting live unsolicited calls for the purposes of direct marketing relating to claims management services, came into force on 8thSeptember. 
 
Banking and Lending
 
Goldman Sachs launches retail bank, Marcus (after founder Marcus Goldman) in UK. The bank is initially open to Goldman staff only but access will expand in the coming weeks. 
 
Bank of England Governor Mark Carney is to remain in his position until beyond 2020 to facilitate a smooth Brexit. 
 
10years after the financial crisis, BoE Governor, Mark Carney, warns against complacency by outlining 4 risks to the UK’s financial sector: 
  1. High levels of household debt
  2. No-deal Brexit
  3. High levels of debt supporting the Chinese economy and questions over whether it is sustainable.
  4. A catastrophic cyber-attack that would render a major bank unable to operate. 
The Creditworthiness Assessment Bill 2017-19, which if enacted will insert a new section (64A(1A) into FSMA requiring the FCA to ensure relevant firms take rental payment history and council tax payment history into account when assessing a borrower’s creditworthiness, has had its first reading in the House of Commons. 
 
MPs accuse RBS CEO of giving misleading evidence during the investigation into RBS’s Global Restructuring Group (GRG) treatment of SME customers. Ross McEwen told the Treasury select committee in January 2018 that he was not aware of any criminal activity against the bank. However, it has since emerged that officers were investigating a former GRG employee. Mr McEwen apparently rejects the idea the allegation that he misled the committee. 

Pensions & Sipps

The Pensions Regulator is to restructure the way it processes cases in order to cut investigation times. 
 
The Pensions Regulator (TPR) has written to trustees of troubled pension scheme asking them to consider cutting the transfer values of defined benefit schemes on offer to their members. The TPR is also asking trustees to provide details on a monthly basis of the transfer activity in their schemes including the names of the firms providing the transfer advice and to contact the FCA where they have specific concerns. 
 
Former FCA technical specialist, Rory Percival, warns advisers that file reviews alone might not be a sufficient safeguard against the risks associated with defined benefit transfers. 
 
European Parliament’s Committee on Economic and Monetary Affairs has voted to adopt the draft report on the European Commission’s Regulation for a pan-European personal pension product (PEPP).
 
Pensions minister confirms the government will launch a formal consultation on collective defined contribution (CDC) schemes in autumn. 
 
FCA’s director of market intelligence, data and analysis, Jo Hill, is to leave the FCA and become an executive director of strategy and risk at The Pensions Regulator in November. 
 
FOS orders firm to pay £100 compensation for unclear letter but rejects the part of the complaint relating to pension transfer advice given in 1989. 
 
The Pensions Regulator is to target smaller defined benefit schemes because of concerns over the ability of smaller schemes to meet the principles of its funding code, particularly around taking and managing risk.
 
FSCS is reviewing 130 claims made against Sipp provider CPPT Services Ltd after the firm entered a company voluntary arrangement in August 2017. It is reported that the firm is not yet in default, which is when the scheme would be able to pay out on claims.   
 
FOS instructs firm to compensate insistent client for giving unsuitable pension transfer advice. The firm advised against the transfer but the client still wanted to go ahead and signed the firm’s ‘insistent customer form’ to enable the firm to execute the transfer. It was the ombudsman’s opinion that the adviser didn’t discuss the customer’s reasons for rejecting the recommendations and wanting to go ahead with the transfer, the adviser only explained that the client’s choice was not a “financially sensible decision”. The ombudsman therefore concluded that the client would not have “insisted on the transfer if the adviser had discussed his reasons for insisting on it, explained his options in full and still recommended against it.”
 
The Pensions Regulator introduces one-to-one supervision for the 25 biggest defined contribution, defined benefit and public service pension schemes. 
 
The Pensions Regulator introduces 5 categories of fixed compensation amounts for those who suffer distress during the complaints process, known as non-financial injustice redress. The amounts range from nominal/no award to £2,000+ for exceptional levels of distress and inconvenience.

Insurance
 
CMA has launched a limited review of the PPI Market Investigation Order 2011.
 
FCA updates its webpage on general insurance value measures and announces collection of a third set of value measures across three data points: claims frequency; claims acceptance rates; and average claims pay-out.
 
Markets
 
A poll of 30 housing market experts predicts a continued fall in London house prices and a 29% chance of a “significant correction” in house prices in the capital before 2019.
 
ESAs publish joint report on the risks and vulnerabilities in the EU financial system. 
 
BoE Governor, Mark Carney, warns of potential house price crash following a no-deal Brexit scenario. 

Joint statement issued by the US-UK financial regulatory working group following its first meeting in which it discussed:
  • Outlook of regulatory reforms and possible areas of deeper regulatory co-operation;
  • Impact of Brexit on financial stability; and 
  • US-UK regulatory issues resulting from Brexit. 

 

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 © 2018, Gem Compliance Consulting Limited, All rights reserved.

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