UK: FCA's Sector Views 2017 (Investment Management Brief: 4 May 2017)

Updates from the Financial Regulation team at Pinsent Masons.
Last Updated: 4 May 2017
Article by David Heffron, Elizabeth Budd, Michael Lewis and Ian Warner

Originally published 4th May 2017


FCA's Sector Views 2017

The FCA has, for the first time, published its Sector Views 2017 [18.04.17] with its Business Plan.  They contain an "overall FCA view" of the performance of seven sectors, including Investment Management.    They were presented to the Board between June 2015 and November 2016 and were up to date at that point.  In future FCA says they will be published on their website within 3 months of being presented to the Board.  The Sector Views are a retrospective snapshot at a given time of what the FCA already knows and highlighting where they need to know more, based on then available information.  Once approved by the FCA's Board the Sector View is used by the FCA in setting its sector priorities for which the FCA uses an intervention framework to identify causes of harm.  The Business Plan contains the areas the FCA is prioritising for the coming period and their plans to address them, in the context of the FCA's Mission – its decision-making  framework.

The FCA looks at each sector through "13 lenses" within four groups:

  • Consumer Journey 4 lenses: Taking actions on decisions, Assessing product/service information, Accessing product/service information, and Assessing own needs;
  • Market wide drivers 3 lenses: Barriers to entry or expansion, Consequences of regulatory or government intervention, and Side effects on other parties;
  • Firms' intent and behaviour 2 lenses: Firm specific incentives and Firm specific behaviours; and
  • Conflicts of interest and competition 4 lenses: Conflicts of interest, Market power, Suppliers coordinating, and Restrictive agreements in the supply chain.

The Investment Management Sector View was presented to the FCA's Board in May 2016 when the Market Study into Asset Management in the UK was underway. It comprises the findings in the Interim Report for the Asset Management Market Study along with:

  • Third-party products and services (investment and portfolio management systems, stock lending, research and execution, and benchmarking data); and
  • Administrative or ancillary services (custody banks, fund administration and risk management).

FCA's Mission 2017

The FCA published Our Mission 2017 [18.04.17] explaining its regulatory priorities and the basis for them. It is a high-level document containing the FCA's decision making framework, the FCA's reasoning behind their work and the way they identify the best tools to use. It is intended to provide information on how and why FCA prioritises, protects and intervenes in the markets it regulates.  There are chapters on:

  • public value,
  • how the FCA makes regulatory decisions,
  • the FCA's remit,
  • assessing the FCA's impact and performance,
  • considering user needs,
  • what consumers and firms can expect, and
  • next steps. 

The chapter on what firms can expect includes: consistent messages from the FCA, giving firms confidence to be proactive, proportionality and the FCA's rules (including the FCA's commitment to review their Handbook –scoping has begun but work cannot start in earnest until the outcome on EU withdrawal is clear) and the FCA's work on leaving the EU. The Mission Press Conference [18.04.17] contains further details: here.

FCA publishes PS and final PRIIPs rules

The FCA has published [02.05.17] its Policy Statement (PS 17/6**) and final rules   on the application of the packaged retail and insurance-based investment products (PRIIPs) Regulation. The PRIIPs Regulation requires persons within scope to prepare, publish and provide a key information document (KID) for each PRIIP. The PS will be relevant to most firms that provide, advise on or sell investments or investment services to the UK retail market. From 1 January 2018, UK firms will need to comply with the PRIIPs Regulation and applicable FCA Handbook disclosure provisions and separate EU or domestic legislation as applicable.  The PRIIPs Regulation and its related RTS contain the new disclosure requirements and the format and methodology for firms to use in producing KIDs.  The PRIIPs Regulation is directly applicable in the UK and the FCA set out its proposals for amending its disclosure rules in its Handbook in its July 2016 consultation paper. The instrument accompanying the PS amends, deletes or dis-applies rules in the FCA's Handbook that are superseded by or incompatible with the PRIIPs Regulation and to clarify for firms that disclosure requirements under the PRIIPs Regulation may apply  and, where relevant, amended FCA Handbook provisions on disclosure as well.  To assist firms with their plans for the new disclosure framework, the FCA includes some high-level comment on their current view of how the PRIIPs Regulation applies to some (but not all) issues respondents raised on the July 2016 consultation, subject to any future clarification from the European Commission and/or European Supervisory Authorities.   The July 2016 CP contained comment from the FCA on the relationship between the PRIIPs Regulation and MiFID II and the FCA is not proposing to comment further. It will consult separately on changes to the Enforcement Guide (EG) and the Decision Procedure and Penalties manual (DEPP) in respect of FCA's approach to investigations under the PRIIPs Regulation. When the UK leaves the EU the FCA anticipates the PRIIPs Regulation will be converted into UK law. Read more here.

FCA data on new complaints rules

The FCA published data on its new rules on complaints [26.04.17] that have been in force since 30 June 2016.  The new data shows a wider product breakdown than previously and places complaint numbers in the context of the size of a firm's business.  The data the FCA has published is for the second half of 2016 (from firm returns with a half year period ending between 1 July to 31 December 2016) (H2).  Categories of data now fall into 5 product groups subdivided into 50 new product or service categories. In respect of Investments, the group now has more product categories than before, and shows for H2 2016 the following approximate numbers of complaints:

  • ISAs 14,600 complaints,
  • investment bonds 9,300 complaints,
  • unit trusts or OEICs around 6,000 complaints, and
  • platform services 5,300. 

In total 92% of complaints in relation to this product group were closed within eight weeks, with 35% closed in 3 days.  The percentage of upheld investment product complaints was 51% and approximately £58m redress was paid.

FCA speech on cyber security

Nausicaa Delfas, Executive Director at the FCA and acting COO, gave a speech [24.04.17] at the Financial Information Security Network in Luton on cyber security. She described the changing "threat landscape" particularly the "internet of things" and Distributed Denial of Service (DDoS) attacks; and what can be done to manage the threats.  She urges firms to carry out robust risk assessment of the impact a DDoS attack would have on them and move from staff "policy" as the basis for training staff on security issues to empowering staff "to make secure decisions themselves".  She talked about changing mind sets and "taking staff on a journey and working with them to help them become security focused individuals" using exercises such as fake phishing scams and noted that the FCA was impressed by the number of firms that had begun to use such approaches.

Getting the basics right is critical. Doing so could prevent 85% of the successful breaches analysed in the 2016 Verizon Data Breach Investigations Report Delfas cites. Of the ten vulnerabilities the 2016 Verizon Report found that resulted in 85% of successful breaches, most were well known and had fixes available at the time of the attack.  So, rigorous patch management is fundamental. But firms still struggle with the basics.

FCA is looking at the potential measurement of "security culture".  Cyber security is becoming an "investor led conversation" with institutional investors questioning boards on managing such risks and the FCA will consider how investors can be equipped better to ask the right questions.  The FCA is also seeking to share "learning and threat information" having seen little information sharing outside systemically important institutions. So it established Cyber Coordination Groups (CCGs) and are collecting, making anonymous and aggregating risk data from around 175 firms in each area of the financial sector, to find out more about cyber risks - whether these are generic across all sectors or whether there are unique threats to particular sectors.  The FCA will share their findings.  At the CCGs the FCA are sharing threat information within the group but as CCGs are not public, Delfas encourages firms to seek solutions collectively and build trusted networks to share ideas and knowledge.

Criminal Finances Bill receives Royal Assent and contains two new offences for businesses

The Criminal Finances Bill received Royal Assent [27.04.17] becoming an Act of Parliament. Among other things it creates two new criminal offences for bodies corporate and partnerships. The first is their failure to prevent facilitation of UK tax evasion offences by employees, agents or any other persons performing services on their behalf, when acting as such (associated persons). The second offence applies to bodies corporate or partnerships with a UK connection that fail to prevent facilitation of foreign tax evasion offences by associated persons.   A business has a defence if it can prove it put in place reasonable procedures to prevent the facilitation of tax evasion (or it was not reasonable in the circumstances to expect there to be such procedures in place). To read more: Failure to Prevent offences on course for September as legislation clears Parliament; General Election should not delay failure to prevent offences says expert; Companies should prepare now for new UK offences of failing to prevent the facilitation of tax evasion; Survey finds low levels of awareness of new offences.

EU Regulatory

PRIIPs corrigendum

The European Commission published a corrigendum [12.04.17] to the Commission Delegated Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs) amending a footnote and Annex IV (Performance Scenarios).

European Parliament and the Council publish draft Regulation on MMFs

The proposal for a Regulation on Money Market Funds (MMFs) was published by the European Parliament and the Council [26.04.17]. MMFs provide short-term finance to financial institutions, corporations and government often are used for short term cash investments.  As MMFs may be vulnerable when there are difficulties in financial markets they could spread risk through the financial system if the value falls of the underlying assets the MMF invested in so the MMF cannot honour its commitment to redeem immediately and/or to preserve the value of its shares/units.  If there are large redemption requests, MMFs may be forced into asset sales in a falling market, potentially contributing to a liquidity crisis. A Regulation on the operation of MMFs particularly with regard to their portfolio contents is proposed, building on rules for establishing, managing and marketing UCITS and AIFs.

RTS on MAR corrigendum published in the Official Journal of the European Union

A corrigendum has been published in the Official Journal [27.04.17] to Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing the Market Abuse Regulation (EU) No 596/2014 on regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest.

EIOPA review of consumer protection issues in the unit-linked market

The European Insurance and Occupational Pensions Authority (EIOPA) published a Thematic Review [26.04.17] on sources of potential detriment for consumers of unit-linked products (insurance contracts providing both a life insurance and investment element, where the policy holder bears the investment risk). The Review looks at how the unit-linked market is evolving; where risks lie for consumers, their causes, scale and consumer impact. Information from 218 insurance undertakings in 28 Member States across the EEA was used. The sample of insurance undertakings participating represents approximately 70% of the unit-linked market based on assets under management.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances,

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