UK Regulatory

FCA's consultation paper on industry codes of conduct and discussion paper on FCA Principle 5

The FCA released a consultation paper (CP17/37) [03.11.17] on Industry Codes of Conduct and Discussion Paper on FCA Principle 5. The FCA are consulting because their "expectations of authorised firms" for markets and activities outside the scope of their principles and rules, can be less clear than their expectations for firms and individuals that carry on regulated activities. Failure by authorised firms and their staff to meet satisfactory standards of conduct in unregulated markets poses a threat to broader confidence in financial markets and the FCA notes their statutory objective to ensure 'relevant markets' function well would include both regulated and unregulated activities within financial markets.

 The CP raises a number of questions on their proposals for:

  • a 'General Approach' to their supervision and enforcement of the SM&CR rules in respect of unregulated markets and activities including those covered by industry-written codes of conduct; and
  • public recognition of codes which, in the FCA's view, contain proper standards of market conduct for unregulated markets and activities ('Recognition') - without giving them standing equivalent to binding regulation and without reducing other efforts to "raise or refresh standards". 

The discussion paper chapter of the CP seeks to start discussion on whether the FCA should apply Principle for Businesses 5 (A firm must observe proper standards of market conduct) to unregulated activities. 

 The FCA asks for comments on the CP by 5th February 2018 with the expectation that the PS will follow in Q2 2018. The FCA intends to publish a Policy Statement outlining any changes to their Handbook in 2018. The FCA intends to adopt the General Approach "immediately after publication of a post-consultation policy statement" and, if they proceed with their new approach for recognising industry codes, would begin accepting applications for codes to be considered for recognition after publishing the PS. 

FCA issues alert to principals on appointed representatives

 The alert [03.11.2017] warns principals of the risks of inappropriate introducer influence, incorrect use by appointed representatives (ARs) of their firm reference number (FRN), and insufficient due diligence and monitoring. Introducers can have an inappropriate influence on the business carried out by the principal and its ARs "where the referral from the introducer is made with a clear investment desire expressed by the customer and documentation already completed". This risk and others in respect of unauthorised introducers was also flagged up by the FCA in an earlier update [02.08.2016].

In addition, the FCA warns of ARs using their FRN to carry out business outside their agreement with the principal. The FCA advises that "a principal should be aware of all the activities carried out by its ARs" and consider whether appointing an AR is necessary in the first place, for example where the ARs only business is generating investment introductions to an authorised person who will provide the advice. 

Insufficient due diligence by principals may result in their failure to detect "underlying investments controlled by or closely linked to introducers or ARs", as well as "badly run" investments and "outright scams". The FCA has found that principals are "not always monitoring the type, volume and source of business" submitted by their ARs, and requires principals to have "a well-structured monitoring process in place to identify business trends which could result in risk to customers including poor investment outcomes". There is also an expectation by the FCA that principals consider why an AR, "who has not submitted any business or generated introductions for some time", should remain registered. The FCA cautions that principals who fail "to identify all persons with significant control or senior management responsibilities/functions" may not be aware of the possibility of inappropriate influence by third parties. Principals should ensure that appointments at the AR requiring prior FCA approval are not made without such approval. To read more click here. 

FAMR policy statement to be published in December 2017

The FCA Policy Development Update [03.11.17] shows the policy statement following CP17/28 in relation to the Financial Advice Market Review (FAMR) is to be published in December 2017. Read more about CP17/28 in our earlier update.

FCA Mission – Our Future Approach to Consumers

The FCA Mission – Our Future Approach to Consumers is the first of a series of documents announced in the FCA's Mission 2017 (see our earlier update here) to explain the FCA's approach to regulation in more detail. The FCA is required to ensure relevant markets function well which depends on consumers being treated fairly. The products and services consumers need should also be marketed and sold in such a way that consumers are able to make informed choices. To understand experiences across a range of consumers, the FCA has drawn on its Financial Lives survey (see our earlier update here). Ideas explored in the Approach to Consumers relate to consumer and firm responsibility; regulating for vulnerable consumers; keeping pace with a changing environment; having regard to and tackling exclusion; and delivering better outcomes for all consumers. The FCA asks for feedback on eight questions on these topics. The consultation closes on 5 February 2018 and the FCA will publish its final Approach to Consumers in 2018. The FCA will consult on the proposal for a new a duty of care for firms after the UK withdraws from the European Union.

FCA publishes Handbook Notice 49 including its MiFID II Guide

Following a meeting of the Board of the FCA on 9 November 2017, the FCA published Handbook Notice No. 49. Changes include that the FCA has made a new Regulatory Guide: The MiFID 2 Guide (M2G), which has effect from 3 January 2018. This M2G will appear on the FCA's Handbook website although it is not part of the Handbook. The M2G contains information to help users of the FCA's Handbook "navigate the complexities of MiFID 2".  

FCA updates its MiFID II notifications obligation page

The FCA has updated its page on MiFID II notifications obligation for firms [6.11.17]. The page provides further information on the Ancillary activity exemption; General Clearing Members; Systematic Internalisers; DEA providers and Algorithmic Trading; and Trading Venue Notifications.

FCA's MLR Individual Form and guidance notes

The FCA's page on Money laundering registration has been updated [08.11.17]. It sets out information on the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (Regulations). The page lists services that, if firms provide them means they are required to register with the FCA as an Annex I financial institution. The page includes the registration form, guidance notes and the MLR individual form and guidance notes. Persons required to complete the MLR Individual Form include a partner, a director, the Senior Manager responsible for compliance with the Regulations, the nominated officer for reporting Suspicious Activity Reports to the National Crime Agency, certain controllers - and others. The form "is critically important to our [FCA's] assessment of the fitness and propriety of the MLR Individual".

Financial Services Trade and Investment Board's annual report 2016-2017

In its 2016 - 2017 Annual Report [02.11.2017], the Financial Services Trade and Investment Board (FSTIB) has seven work streams for the 2016 to 2017 period, including investment management and Fintech. The FSTIB is a government/industry partnership reporting to the Chancellor of the Exchequer and chaired by HM Treasury. Highlights over the past year include the introduction of the Private Fund Limited Partnership (see our past update here); industry-led and government-supported international business delegations to promote the UK asset management industry; setting up a practitioner-led Trade and Investment Committee (led by the Investment Association); continuing the overseas marketing campaign including through the UK-South Korea Asset Management Roundtable, the UK-China Financial Forum, the Brazil Roundtable, and Fund Forum International; continuing work on the One Stop Shop "concierge service" for overseas asset managers seeking to locate in the UK; strengthening, in the UK-China Economic and Financial Dialogue in 2016 "communication between the FCA and the China Securities Regulatory Commission to facilitate mutual understanding on asset management and the regulatory regimes of the two countries"; and developing, with the asset management industry, the UK's agenda for green finance and sustainable investment.

Goals for the coming year include using the new Asset Management Taskforce to improve dialogue between government, industry and the FCA; "developing strong government engagement with key industry events"; and establishing partnerships with non-EU jurisdictions. This section contains public sector information licensed under the Open Government Licence v3.0.

EU Regulatory 

European Parliament and Council extend the designations EuVECA and EuSEF

Regulation (EU) 2017/1991 of the European Parliament and of the Council of 25 October 2017 amending Regulation (EU) No 345/2013 on European venture capital funds and Regulation (EU) No 346/2013 on European social entrepreneurship funds has been published in the Official Journal of the EU [10.11.2017]. The Regulation extends the designation of EuVECA and EuSEF to managers of collective investment undertakings authorised under the Alternative Investment Fund Managers Directive. The definition of qualifying portfolio undertakings is extended, to increase the range of undertakings in which qualifying venture capital funds can invest. The range of eligible undertakings in which qualifying social entrepreneurship funds can invest is also expanded by extending the positive social impact definition. Qualifying venture capital funds will be permitted to make follow-on investments in order to participate in the funding ladder for unlisted SMEs, unlisted small mid-caps and SMEs listed on SME growth markets with a view to increasing their prospects of returns from investment in high-growth companies. Read more here.

ESMA updates its Benchmarks Regulation Q&A on third country issues

ESMA has updated its Q&A on the Benchmarks Regulation (BMR) [08.11.17] to include new answers on the scope of the BMR outside the EU and on transitional provisions:

  • Scope: ESMA considers provision of and contributing input data to benchmarks used exclusively outside the EU falls outside the BMRs as a benchmark administrator providing a benchmark exclusively to users outside the Union would have to comply with the applicable third country requirements. While it is the BMR's objective to ensure the proper functioning of the European market and protect consumers and investors in relation to benchmarks at Union level, the BMR is not intended for the wider protection of benchmark users, which could also conflict with the relevant third country regimes. ESMA sets out its understanding of transitional provisions in Article 51(3) BMR on this basis (A4.3); and
  • Transitional provisions applicable to third country benchmarks: ESMA clarifies the phrase "where the benchmark is already used in the Union" in Article 51(5) means "where the benchmark is already used in the Union on or before 1 January 2020." (A6.3)

ESMA updates Q&A on MiFID II and MIFIR on Investor Protection

ESMA has added four new questions and answers to its Q&A on MiFID II and MiFIR investor protection and intermediaries topics [10.11.2017]. The new entries concern record keeping, post-sale reporting and inducements.

  • Record keeping: the new entry concerns whether securities financing transactions (SFTs) are in scope of the MiFID II requirements for order record keeping – yes they are.
  • Post-sale reporting: the new entry asks whether the obligation to report on the overall value of a client's portfolio depreciating by a 10% threshold on a particular business day applies only to retail clients – no, it relates to retail and professional clients.
  • Inducements: the first new entry concerns whether Article 24(9) of MiFID II also applies to payments made by investment firms to a third party in relation to the provision of the investment service of investment advice provided on an independent basis or of portfolio management – in short yes.
  • Also on inducements: the second new entry asks "what is [...] the legal status of a fee, commission or monetary benefit, after it has been received by an investment firm from a third party or a person acting on behalf of a third party as an inducement, and prior to it being transferred in full by the investment firm to the client?" The response to which is that "once it is received by an investment firm from a third party or a person acting on behalf of a third party, and prior to the transfer to the client, the fee, commission or monetary benefit should be considered a liability of the investment firm, which is subject to the obligation in Article 12(1) of the MiFID II Delegated Directive to return the money to the client "as soon as reasonably possible after receipt". The investment firm's terms of business and/or contractual arrangements should set out how the investment firm treats inducements and include how the firm discharges its obligation to transfer such monies to their client and the "status of fees, commissions or monetary benefits" in the event of insolvency. Investment firms must have systems and controls to transfer such monies to the client "as soon as reasonably possible after receipt" and must not off set the inducement from fees the client owes the firm.

ESMA releases Q&A on trading obligation for shares under MiFID II.

ESMA has published [13.11.17] a Q&A on the scope of the trading obligation where there is a chain of transmission of orders. The response clarifies that "Article 23(1) of MiFIR determines the scope of the trading obligation for shares admitted to trading on a regulated market or traded on a trading venue by requiring investment firms to ensure that trades they undertake in shares take place on a regulated market, MTF, systematic internaliser or equivalent third country venue." Where there is a "chain of transmission of orders" for such shares then all the EU investment firms in the chain – whether initiating the orders or brokers – are to make sure the "ultimate execution" accords with Article 23(1). For example where an EU investment firm in the chain passes such an order to a non-EEA firm, the EU firm must ensure the trade is carried out on a regulated market, MTF, systematic internaliser or equivalent third country venue. ESMA notes there are difficulties for firms in the absence of equivalence decisions which the Commission and ESMA are working to address and note the absence of an equivalence decision for a particular third country's trading venues "indicates that the Commission has currently no evidence that the EU trading in shares admitted to trading in that third country's regulated markets can be considered as systematic, regular and frequent."

Fintech

FCA's approach to robo advice

In a speech regarding the FCA's approach to robo advice given by Bob Ferguson, Head of Department, Strategy & Competition Division at the FCA to delegates at the Westminster and City 2017 Annual Conference on Robo Advice and Investing [11.10.17], Ferguson concludes robo advice could help consumers who are "unserved" or "underserved" by the traditional advice models and stimulate competition. He identifies "two big reasons" why he considers robo advice "presents a big opportunity" as a way to:

  • stimulate competition and disruption: which can produce "economy and efficiency" and reach "underserved consumers". Competition is often best driven by the market – by start-ups taking on existing players or "large incumbents" working with innovators. Ferguson identifies the FCA's competition mandate as unusual for a financial services regulator, saying they have this objective because of the benefits of competition to consumers, firms, and the economy; and
  • address issues found by the Financial Advice Market Review (FAMR): which identified the need to: "make the provision of advice and guidance to the mass market more cost-effective"; improve lack of consumer confidence in financial decision taking; and address the gap in the advice market. FAMR recognised technology could have a role in reducing the cost of advice and in "enabling firms to engage with consumers more effectively".

Ferguson spoke about the FCA's Advice Unit saying it aims to provide regulatory feedback to firms developing automated models and be a source of tools for all firms providing advice to consumers. The FCA consulted on guidance based on the Advice Unit's experiences and Ferguson mentioned some areas on which firms asked for feedback. The Advice Unit now accepts applications at any time instead of in fixed windows and expanded its range from investments, pension and protection to include mortgages, insurance and debt counselling with Ferguson saying "technology suppliers not necessarily seeking authorisation are now eligible". 

The Advice Unit will "provide regulatory feedback to discretionary investment managers who are developing automated models" and Ferguson encourages firms to log onto the FCA's Advice Unit webpages. 

Looking back to a 3 day robo advice forum in 2015, certain themes remain:

  • the question raised then – whether a "typical model" might emerge and if that would be a "hybrid of human plus automation"? – remains unanswered;
  • that consumers don't search specifically for 'guidance' or 'financial advice' - they search for the product such as pension or ISA for example - an important consideration for the customer journey;
  •  Robo's international context: "you can never just drag and drop" Ferguson said. Imported advice models may not comply with the UK regulatory requirements however an application to the FCA Advice Unit may be beneficial for such "bought-in models".

Ferguson reminds firms that the FCA's rules are "technology neutral". So firms need to bear in mind suitability regardless of how a product is distributed and the differing risks inherent in different advice models need to be managed appropriately. This is the responsibility of the firm and its senior management – and is not reduced because third parties supply the technology. In terms of supervision, the FCA is "focused on outcomes, it is above all about what the model generates". 

Brexit

EU Financial Affairs Sub-Committee hears evidence from FinTech specialists, banks and insurers

The EU Financial Affairs Sub-Committee (the Committee) heard evidence from FinTech specialists, banks and insurers [15.11.2017]. The evidence is likely to cover issues including the worst- and best-case scenarios for the financial services industry if a transition period is not agreed before 2018, whether Brexit creates scope for regulatory and supervisory innovation, the importance of mutual EU and UK market access and opportunities for business outside of Europe Brexit provides for the UK's financial services industry. A transcript of the hearing is likely to be uploaded to the website in the coming days. The Committee has also uploaded a transcript of evidence heard from the Bank of England and the PRA on 1 November 2017 [7.11.17]. For more on the activities of the Committee see our previous update here. This section contains Parliamentary information licensed under the Open Parliament Licence v3.0.

Recent Pinsent Masons publications

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