Senior managers regime, certification regime and conduct rules
Crucially, this period has seen the start of implementation of the new regime for individual accountability, although it will take a further year for it to become fully effective. We have set out below the further rule changes that have taken place over the last six months, together with related publications.
Consultation on changes required as a result of removal of notification requirements
FCA CP16/1, PRA CP1/16 and SS28/15, January 2016
In these consultation papers, the FCA and the PRA consulted on the rule changes that would be necessary in light of HM Treasury's announcement last autumn that it would not implement a provision of FSMA that was to require firms to notify the appropriate regulator of all known or suspected breaches of the conduct rules.
The PRA also updated its Supervisory Statement 28/15.
Overall responsibility for the legal function under the SMR
FCA's supervisory statement, 27 January 2016
In this statement, the FCA acknowledged that there was significant uncertainty as to whether the individual with overall responsibility for the legal function within a firm needed to be approved under the SMR. The FCA stated that it would consult on this issue in due course, but that firms need not depart in the interim from decisions already reached on this point in good faith.
Extension to certification regime and FCA's interim rules on regulatory references
FCA PS16/3, February 2016
The FCA announced the outcome of its consultation in relation to extension of the certification regime. The key changes are to extend the territorial scope of the regime (for UK firms) so that there is no territorial limitation as regards the application of certification requirements to those classified as material risk takers. The FCA has also introduced two new certifications, referred to as the "client-dealing function" and the "algorithmic trading function".
The FCA also announced that it would not be implementing its full set of new rules on regulatory references at the same time as implementation of the SMR. Instead, its existing rules in relation to requesting references for approved persons would continue to apply until new rules were finalised.
PRA's interim reference rules and rules on insurers and Swiss insurers
PRA PS5/16 and FCA PS16/5, February 2016
Much of this publication related to rules on insurers, but the PRA also announced that it would delay adopting a full set of new rules on regulatory references. Instead, it too has opted to continue its current requirements until new rules are finalised. The PRA has also retained the requirement it originally imposed as part of the SMR that firms seek five years' worth of references in relation to applicants to perform senior management functions.
PRA finalises Supervisory Statement in relation to corporate governance and board responsibilities
PRA PS13/16 and Supervisory Statement 5/16, March 2016
The PRA has published the final version of its Supervisory Statement in relation to corporate governance and board responsibilities, on which it consulted in May 2015. The Supervisory Statement applies to all PRA-regulated firms, not only those affected by the SMR. It does not provide a complete code as to the issues it covers, but it does contain a number of points of useful guidance as to the PRA's expectations. Such guidance includes issues such as board composition, the responsibilities and role of non-executive directors, appropriate management information, strategy setting, and specific considerations in relation to the boards of significant subsidiaries (which has been recast somewhat from the version on which the PRA consulted).
Developments in relation to enforcement
Proposed implementation of the Enforcement Review and the Green Report
FCA CP16/10 and PRA CP14/16
The FCA and the PRA have published a joint consultation paper on implementing the reforms to enforcement processes recommended in a review by HM Treasury in December 2014, and the Green Report into the FSA's enforcement action following the collapse of HBOS. The Consultation Paper does not contain the PRA's full proposals in relation to enforcement, and its response in relation to settlement and contested decision-making in particular is still awaited.
Even in terms of the FCA's approach, the contents of the Consultation Paper are not universally clear or comprehensive. It is apparent in places that the FCA has shied away (no doubt understandably in many instances) from tying its own hands too much in terms of the conduct of enforcement cases.
The Consultation Paper looks at referral decision-making, co-operation between the regulators, and subjects' understanding and representations in joint enforcement investigations. In relation to joint investigations, the FCA and the PRA say that they will issue further guidance as to their conduct, but do not do so at present. Perhaps the most significant aspects of the Consultation Paper are the chapters (specific to the FCA) dealing with settlement and contested decision-making. In relation to the latter, there is to be an expedited process for referrals to the Upper Tribunal, effectively bypassing the Regulatory Decisions Committee (RDC). In relation to settlement, it is proposed that the discounts for early settlement at stages two and three should be scrapped, and there is a question within the consultation as to whether the discount system adequately incentivises early admissions. Further, there is a proposal for the subjects of investigations to be able to agree the FCA's conclusion on facts and (effectively) liability, but refer to the RDC on the limited question of the consequences that should follow. The FCA has also raised the possibility of other types of limited settlement agreement, removing the current "all or nothing" approach, but has not advanced any decided view of its own as to whether this would be desirable.
Changes to DEPP and the Enforcement Guide (EG) for implementation of the Market Abuse Regulation (2014/596/EU) (MAR)
Consultation Paper 16/13
This consultation follows the FCA's consultation (in November 2015) in relation to other changes to be made to its Handbook in order to implement MAR. The changes proposed in relation to DEPP and EG include (to reflect statutory changes) the creation of a new power to prohibit an individual from carrying on management functions or dealing in financial instruments on his or her own account. The FCA will also be required to produce a warning notice and a decision notice in relation to any decision to refuse an application to vary or revoke a prohibition, but HM Treasury is (it appears) reconsidering this requirement.
The FCA's power to make and enforce the disclosure rules is to be removed, and replaced with a power to enforce breaches of MAR (and related legislation). It will, however, continue to apply its existing policy in relation to sanctions. Similarly, the FCA will have the power to impose suspensions, restrictions, conditions or limitations on authorised persons for contravention of MAR, and on employees of authorised persons and approved persons for being knowingly concerned in contraventions, but the FCA will continue to apply its current policy when doing so. The FCA will also apply the same policy to its power to make certain prohibitions in relation to individuals. There is further guidance in relation to such prohibitions, and the FCA has confirmed (unsurprisingly) that it does not expect to apply its settlement discount regime to permanent prohibitions it decides to impose.
PRA imposes fines in relation to Co-op Bank
Barry Tootell and Keith Alderson, 14 January 2016
The PRA fined Mr Tootell £173,802 and Mr Alderson £88,890 for breaches of Statement of Principle 6 for Approved Persons (requiring them to act with due skill, care and diligence in managing the business of the firm for which they are responsible in their controlled functions), and being knowingly concerned in the breach by Co-op Bank of Principle 3 (requiring a firm to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems). Both individuals were also prohibited from carrying on any significant influence function in relation to a regulated activity carried on by a PRA-regulated firm, on the grounds of lack of fitness and propriety.
Mr Tootell performed director and CEO controlled functions at the firm (having previously been CFO). Mr Alderson was responsible for management of the firm's corporate banking division, and performed director and significant influence controlled functions. The final notices refer to Co-op Bank's acquisition of Britannia, and the difficulties caused by impairments to Britannia's commercial real estate portfolio. It also refers to Co-op Bank's breaches of Principle 3, as a result of its failures to have in place an adequate control framework or risk management framework policies, and the poor quality of available management information.
The final notices identify specific failures on the part of Mr Tootell and Mr Alderson. These include (on Mr Tootell's part): a failure to ensure that the bank's second line of defence (specifically risk) was providing appropriate independent challenge, rather than being overly-involved in first line business matters; participating in a culture that prioritised the short-term financial position at the expense of the longer-term capital position of the bank, and making decisions that were not in line with the bank's (stated) cautious risk appetite; failure to oversee the exercise of adopting a clear and effective strategy in relation to an identified significant risk relating to the corporate loan book; and not briefing the bank's board adequately. In Mr Alderson's case, the PRA identified: his failure to take reasonable steps to ensure that Co-op Bank took adequate steps to assess the risks arising from the Britannia corporate loan book; the fact that he did not escalate risks or implement strategy appropriately; failure to ensure that his division exercised its role as first line of defence properly; participation in a culture that encouraged overreliance on previous impairment forecasts; and failure to provide adequate management information.
Enforcement action in relation to solicitors' professional indemnity insurance
Shay Reches, 1 February 2016
The FCA and the PRA issued final notices recording the enforcement action they had taken in relation to failures in entities providing solicitors' professional indemnity insurance (PII), in respect of which cover failed in the three consecutive years from 2011 to 2014. The failures identified led to the inability of various of the insurance companies involved to pay claims, and the FSCS needing to pay a total of some £9.1 million by July 2015 in respect of two companies in default.
Of the various final notices produced, the one that is perhaps most central to these events is that issued by the FCA to Shay Reches, recording a fine imposed on him of £1,050,000, plus any unpaid portion of a sum of £13,130,000 that Mr Reches had agreed to pay to various of the companies involved. Mr Reches was also prohibited from performing any function in relation to any regulated activities carried on by an authorised or exempt person, or exempt professional firm. The FCA found that he had shown a lack of integrity, and was not a fit and proper person.
In addition, the FCA's enforcement action was based on section 63A of FSMA, which allows it to impose a penalty of such amount as it considers appropriate on a person who has performed a controlled function without approval, and who knew (or could reasonably be expected to have known) that he or she was doing so. In this case, the FCA held that Mr Reches, who was never an approved person, had carried out a number of functions for the relevant companies, including performing the director controlled function, and influencing and directing the companies and their management. In particular, Mr Reches had been responsible for directing the payment of insurance premiums by solicitors to companies he controlled, rather than to the insurers and reinsurers who would ultimately be liable to meet any claims under the insurance. This led to such insurers being unable to discharge those liabilities.
It is interesting to note that, in its penalty analysis, the FCA states that the entire penalty imposed upon Mr Reches was predicated on Step 4 (deterrence), Steps 1 to 3 having produced a nil figure. Both the PRA and the FCA took action against other firms and individuals in relation to these events.
FCA imposes fine on an individual in connection with the London Whale affair
Achilles Macris, 9 February 2016
The decision of the Supreme Court as to whether the FCA identified Mr Macris in a final notice to JP Morgan dated 18 September 2013 (the JPM final notice) is still awaited. In the meantime, however, the FCA has published its final notice to Mr Macris, fining him some £792,900 for breach of Statement of Principle 4 for Approved Persons. Statement of Principle 4 requires that an approved person deal with the FCA in an open and cooperative way, and disclose appropriately any information of which the FCA would reasonably expect notice.
The losses that JP Morgan incurred in relation to the London Whale trades related to trading in a particular portfolio, carried out by a London-based team. Mr Macris did not have day-to-day oversight of that portfolio, but he was responsible for the activities of the relevant division outside the US. He was approved to perform the CF29 (significant management) and CF30 (customer) functions. The final notice contains an account of Mr Macris' role as events in relation to the London Whale trades unfolded, but the point of focus for the FCA was on Mr Macris' actions once concern at JP Morgan about the portfolio escalated. The criticism made of Mr Macris was that, at each of a meeting and a call with the FCA during the crucial period in 2012, he provided insufficient disclosure to the FCA of the extent of the difficulties that the relevant trading portfolio was experiencing. The final notice sets out a list of matters known to Mr Macris that he did not relate to the FCA. More generally, the final notice states that had he given a greater indication that there was cause for concern, the FCA could have followed up on it. The FCA also found that leadership from Mr Macris in this regard would have encouraged more junior employees to take an open approach to discussions with the FCA. The implication is that Mr Macris delivered the message that the firm had agreed should be delivered publicly in relation to the trades, without regard to the different considerations that apply to dealing with a regulator.
The final notice does not find, as the JPM final notice did, that the FCA was deliberately misled by the actions of Mr Macris (albeit that Mr Macris was not named in the JPM final notice). Instead, the failings identified are that Mr Macris was not open and cooperative, and failed to meet the standard expected of an approved person. The section of the final notice dealing with sanction states in terms that his breach was negligent. It therefore seems that the FCA consciously abandoned the allegation that Mr Macris was deliberately misleading. This inference is supported by the settlement discount applied. Ordinarily, settling at stage 2 (as Mr Macris did) would attract a 20 per cent discount. The FCA may, however, accept in an exceptional case that there has been a substantial change in the nature or seriousness of the action taken, and that settlement at an earlier stage would have been possible had the action commenced on a different footing. On that basis, the FCA applied a 30 per cent discount to the fine it would otherwise have imposed. The final notice does not specify the "exceptional circumstances" of this case, but it seems likely that they may include the fact that there appears originally to have been an allegation of deliberate concealment by Mr Macris, which he could reasonably have been expected to take seriously.
Fine and restriction for failures relating to market abuse
WH Ireland, 22 February 2016
WH Ireland (WHI) was fined £1,200,000 and restricted for a period of 72 days from taking new clients into its Corporate Broking Division. These penalties were imposed in relation to failings identified over a six-month period at the start of 2013. The FCA considered such failings to be in breach of various specific rules in SYSC, and Principle 3 (requiring a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems). The FCA found that WHI had failed to take reasonable care to organise and control effective systems and controls to protect against the risk of market abuse occurring during the relevant period. There is no indication from the final notice that any market abuse actually took place.
The failings identified by the FCA included weak controls to detect and mitigate against the risk of market abuse arising from the way in which inside information was handled, personal account dealing and conflicts of interest. The FCA said that the risks inherent within WHI's business made it particularly vulnerable to potential market abuse. Such risks involved the dual existence of "private side" lines of business through which inside information was acquired, and "public side" business such as market making, stockbroking and investment research. The FCA identified three particular types of trading which should have attracted different compliance treatment: market making; non-employee dealing (including issues relating to individuals crossing Chinese walls in order to access inside information); and employees trading on their own account.
The FCA also identified deficient compliance oversight, and was critical of the fact that WHI's compliance function was based solely in London and Manchester, while the business had offices in many more locations. There were also failures in governance, including (as the FCA noted on a number of occasions) in relation to the preparation of appropriate management information. Market abuse was not a standing item at meetings of the Compliance and Risk Committee, and there was "little documented discussion of market abuse matters" at board meetings. The FCA noted that while various potentially serious issues were raised with the board in relation to market abuse, there was no evidence of a plan being put in place as a result. WHI's training of its staff (both in relation to market abuse, and of its compliance staff generally), and the recording of it, was also found to be inadequate.
Failure to apply capital regime
QIB (UK) Plc, 8 April 2016
The PRA has fined QIB (UK) Plc £1,384,950 for breaches of Principle 2 (requiring a firm to conduct its business with due skill, care and diligence), and Principle 3 (requiring a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems). The relevant period for these purposes is 30 June 2011 to 21 December 2012, and it is not clear from the final notice why the matter has only now been concluded.
The firm failed, in summary, to identify that it needed to comply with what is defined in the final notice as the "overall Pillar 2 rule" (at GENPRU 1.2.30R of the FSA's Handbook at the relevant time), and therefore failed to conduct any of the necessary capital assessments it involved. In addition, the firm failed to identify and report large exposures to a group of connected clients. That group defaulted on its obligations, requiring the firm's parent to inject a substantial amount of capital to deal with the resulting under-capitalisation.
Regulators publish guidance on approach to ring-fencing transfer schemes
PRA's PS10/16 and Statement of Policy, and FCA's FG16/1
The PRA and the FCA have published documents confirming their approach to ring-fencing transfer schemes. Significantly, this includes commentary on the role of the skilled person who will prepare a report in relation to the scheme, and matters relating to the skilled person's appointment. It is likely that there will be areas that are challenging both for banks and the skilled person, in light of the requirements of FSMA and the regulators' interpretation of them. In particular, the scheme report will need to cover a wide range of issues, and the interests of a number of different parties. Both the PRA and the FCA also consider the role of the regulators (including how they will work together), and matters relating to process. The FCA's guidance also deals with notification requirements. It is likely that the process of obtaining approval for individual ring-fencing transfer schemes from the court will be complex and time-consuming, not least given the broad spectrum of people who will be entitled to make representations as part of that process.
Disclosures to consumers by non-ring-fenced bodies
These rules made by the FCA apply to non-ring-fenced bodies (NFRBs), i.e. non-ring-fenced deposit takers that are within the same group as a ring-fenced deposit taker (subject to certain other criteria). The FCA has confirmed that the disclosure requirements will not be applied to deposit takers to whom the ring-fencing regime does not apply at all. It has also confirmed, in general terms, that NFRBs will have to communicate some contextual material, in terms of the purpose of ring-fencing, and the risks to which a depositor in an NFRB might be exposed, including an explanation of any activities carried on by the NFRB that would not be permitted were it to be a ring-fenced body. There has, however, been no clarification by the FCA as to the precise constituency of consumers to whom the relevant disclosure must be made. The FCA has noted queries by respondents as to the scope of NFRBs' obligations in this regard, and has stated that this is an issue for the Treasury. The Policy Statement also confirms the FCA's approach in relation to the timing and form of disclosures. The relevant rule changes are largely contained in BCOBS 4.3.
Fair, reasonable and non-discriminatory access to regulated benchmarks
Policy Statement 16/4
The FCA has confirmed its final rules (contained in MAR 8.3) in relation to fair, reasonable and non-discriminatory (FRAND) access to regulated benchmarks. The new rules apply only to regulated benchmarks, and protect users of them who are central counterparties, regulated markets or multilateral trading facilities.
The FCA has not deviated to any great extent from the proposals on which it consulted. Such proposals arose out of feedback it received following its inclusion of an additional seven regulated benchmarks, as recommended by the Fair and Effective Markets Review. Such feedback indicated concerns on the part of benchmark users that benchmark administrators had an unconstrained ability to set prices for access to benchmarks. The FCA has now created rules designed to ensure FRAND access to licences to use the relevant benchmark, and relevant information in relation to the benchmark. The FCA has made it clear that while price is one element of FRAND access, it is not the only one. The FCA has specified, however, that access must be granted at a reasonable commercial price, and there is some guidance for firms in the final rules (and the Policy Statement) on what this, and other FRAND considerations, involves.
The new rules will affect new and existing pricing and licensing arrangements, although it will not affect the terms of any arrangement (including price) on the basis of which services have already been provided.
ESMA produces Consultation Paper on Benchmarks Regulation
ESMA Discussion Paper 15 February 2016 and ESMA Consultation Paper 27 May 2016
The European Parliament is to vote on a compromise text for the Benchmarks Regulation, originally proposed in September 2013. ESMA provided a Discussion Paper on 15 February 2016, following which a list of responses to the Discussion Paper was also published. On 27 May 2016 ESMA then published its Consultation Paper on this topic. The deadline for comments on the Consultation Paper was 30 June 2016.
The Consultation Paper covers 5 key areas in relation to which the European Commission has requested advice, and reflects the complexity of the issues to be determined, not least the difficulties in agreeing the relevant definition of "benchmark" and in identifying when an index is made available to the public (as discussed in Chapter 2 of the Consultation Paper). There are clear overlaps between these definitions in the Benchmarks Regulation and the IOSCO definition currently relied on by the FCA, for example, but they are not identically worded.
Interestingly, among the topics covered in the Discussion Paper but not addressed in the Consultation Paper is the creation of codes of conduct by the administrators of benchmarks. There are issues as to the extent to which individual codes can and should be tailored to specific benchmarks. ESMA also notes, in its Discussion Paper, that a balance must be struck between the creation of a sufficiently detailed code, and deterring possible contributors with overly demanding requirements. There are certain matters set out in the Discussion Paper as required areas for codes of conduct to cover, including contributor systems and controls. Many such matters are, unsurprisingly, resonant of some of the failures in this area that contributed to benchmark manipulation.
However, whilst these points are not covered in the Consultation Paper, it may be worth noting that ESMA intends to publish a second consultation paper regarding the Benchmarks Regulation in the second half of 2016.
FCA publishes Business Plan for 2016-2017
Announcement of key priorities
FCA's Business Plan
The FCA has produced its Business Plan for the coming year, setting out its priorities. The Business Plan identifies culture and conflicts of interest as being among the key factors driving risk within firms operating in the market. The FCA lists its priorities as: pensions; financial crime and AML; wholesale financial markets; advice; innovation and technology; culture and governance; and treatment of existing customers. Many of these priorities represent a continuation of current work, some of which is referred to elsewhere in this Update. In relation to financial crime and AML, there are already signs of pressure on the FCA in terms of its response to the Panama papers, and whether it should be doing more to prevent, rather than simply punish, poor practice.
The FCA does not appear, this year, to have published a full list of the material it expects to produce. There is an appendix providing an update on current market-based activity, but it does not appear to include all the FCA's likely work over the coming year (such as the further publications expected in relation to the SMR).
Financial Advice Market Review (FAMR)
Final report published
Final report, March 2016
The final report of FAMR provoked considerable interest. Its introduction notes that consumers are now required to take an ever-growing number of decisions in relation to their finances, that they are generally distrustful of the sector, and that there are barriers to the provision of affordable and accessible financial advice.
FAMR's recommendations are divided among three broad headings:
- Affordability – the report notes that good quality advice is available to those with substantial assets. It also acknowledges, however, the high cost of providing face-to-face advice. It also notes that not all consumers want or need a full personal recommendation for every investment decision, and that firms are not confident of the boundary between provision of regulated advice and more general forms of guidance. The report recommends building on existing changes in order to give firms more confidence in providing "streamlined" advice, including by the use of technology. It may be worth noting that the FCA published Finalised Guidance 15/1 in January 2015 in order to clarify what amounted to regulated advice, and in relation to simplified and basic advice. The Call for Input from FAMR began in October 2015, so it would appear that simply providing guidance in the form of FG15/1 did not have the effect of increasing firms' confidence. The report makes nine recommendations in this context, one of which is the amendment of the definition of "regulated advice", so that it corresponds to the provision of a personal recommendation within the meaning of MiFID.
- Accessibility – as background to its further nine recommendations in this area, the report pointed to low demand for advice, perceived to be for a number of reasons, including mistrust, and the perceived lack of benefit of paying a relatively larger amount for advice in relation to investing a smaller sum. FAMR suggests that the workplace might be the best forum in which to reach people not currently engaging with financial advisory services, and there is clearly some connection in this context between the recommendation (which involves working with employers) and the increasing need for people to take charge of their own pension arrangements in particular.
- Liability and access to redress – the report accepts that there is a tension between the need to ensure appropriate consumer protection (particularly in light of the mistrust mentioned elsewhere in the report), and firms' hesitation in providing advice, in view of concerns about future liabilities. FAMR recommends reviewing the FSCS funding model in order to reduce the risks of variable and unpredictable costs to advisory firms, and exploring the availability of PII cover for smaller advisory firms. It rejects the idea of a longstop date for complaints to the FOS, but says that it has worked with the FOS in order to improve transparency for firms, and reduce uncertainty. The specific points of discussion with the FOS are included among FAMR's recommendations in this context.
Investment and Corporate Banking Market Study
MS15/1.2 - interim report
The FCA has published an interim report as part of its investment and corporate banking market study. The final report is expected to be published in the summer.
In general terms, the FCA's findings in relation to primary market activities (equity capital markets, debt capital markets and mergers and acquisitions) are not dramatic. The areas in which it has positively recommended changes include: the removal of contractual provisions purporting to limit clients' choice of a firm to act for them (although a right to pitch seems likely to remain permissible); changes in the way in which firms are to present league table information to clients; timing of provision of IPO information; and allocation issues in relation to IPOs, which are to be followed up with specific firms.
The FCA identified a number of other areas that had the potential to cause concern, including reciprocity, firms divesting themselves of smaller (less profitable) clients, and costs. It did not, however, recommend that any positive changes be made, and found that clients generally did not have problems with access.
UK Debt Market Forum – practical measures to improve the effectiveness of UK listed primary debt markets
The FCA convened the UK Debt Market Forum in November 2015 in order to look into the functioning of the UK's primary listed debt markets. The FCA's report notes indications that the UK's share of the debt listing market may be declining.
Part of the focus of the report is on the operation of the UKLA itself, and the report indicates that improvements will be made in order to ensure a prompt, consistent response from the UKLA. The FCA will extend its current Wholesale Debt Approach to more debt documents, and indicates that it will substantially extend its current same-day review of supplementary debt disclosures to include more documents. The law firms with which the UKLA deals most often will be assigned a dedicated point of contact, and easier access to advice will also be established for other firms, as well as an early engagement team to discuss the UK listing process. These changes generally had an anticipated implementation date at the end of May 2016.
It appears that there were also concerns that the UKLA interprets aspects of the Prospectus Rules differently to regulators in other EU member states, but only one concrete example of this was apparently found (on which the FCA will consult). There was also discussion as to whether other jurisdictions benefited from operating multilateral trading facilities (MTFs) that are not subject to the same disclosure requirements, and whether there would therefore be a benefit to the UK in having a major MTF platform. This is an issue that the FCA says it will consider in more detail.
FCA's determination of an individual's fitness and propriety held to be incorrect
Abi Fol Consulting Limited v. The Financial Conduct Authority  UKUT 49 (TCC)
Abi Fol Consulting Limited (Abi Fol) applied to the FCA for permission to carry on a range of regulated activities. Its sole director and shareholder was Mr Abi Ladele. Mr Ladele was a former employee of HSBC. In 2010, Mr Ladele accessed HSBC's IT system in order to obtain the details of two of its customers. Evidence showed that the information he accessed was used in order to perpetrate frauds on both customers. Following an internal investigation (which the Upper Tribunal criticised in a number of respects), blame was cast on Mr Ladele.
Mr Ladele was prosecuted for fraud by abuse of position but, for various reasons, the Crown Prosecution Service offered no evidence against him. Mr Ladele was acquitted of the charges against him in 2012. When Abi Fol came to make its application to the FCA, however, the FCA concluded on the balance of probabilities that Mr Ladele had been involved in the frauds. It therefore determined that it was not satisfied that Mr Ladele could be expected to act with probity and, on that basis, Abi Fol would not be a fit and proper person. Mr Ladele referred the FCA's decision to the Upper Tribunal.
The Upper Tribunal approached the issue by looking at the consistency of Mr Ladele's evidence (both internal and when compared with other evidence), and at the inherent probabilities of the case. It concluded that there was: no suggestion of a credible motive for Mr Ladele to have participated in the frauds; no evidence of either a connection with the fraudsters or the receipt of a direct benefit from the fraud; and nothing unsatisfactory in Mr Ladele's evidence. On that basis, the Upper Tribunal found that Mr Ladele was a person of honesty and integrity who had been subject to an unjustified accusation. It remitted Abi Fol's application to the FCA for reconsideration in light of the Upper Tribunal's findings.
Whether interim permission to carry on consumer credit activities ceases automatically when FCA issues decision notice refusing permission
Firm A v. The Financial Conduct Authority  UKUT 18 (TCC)
This judgment concerns an aspect of the transition of regulation of consumer credit activities to the FCA. As part of that transition, amendments were made to the Regulated Activities Order 2001. Consumer credit firms were given interim permission to carry on their regulated activities, but they had to make an application for permission to the FCA within a specified timeframe. The applicant in this case, which was a firm undertaking debt-management activities, applied to the FCA for permission and received a decision notice stating that permission would be refused. The wording of the relevant statutory instrument suggested (and the FCA took the view) that, once a decision notice to this effect was provided, the interim permission automatically ceased to have effect. The firm challenged this, on the basis that its ability to carry on business would then cease pending the outcome of its reference to the Upper Tribunal, which did not accord with the practice where decision notices were issued by the FCA in relation to other matters.
The court held that the firm's analysis of the nature and function of a decision notice was inaccurate. While the outcome was harsh, in that it was at odds with other areas of financial services law, it was clearly the intention in the statutory instrument that interim permissions would cease to have effect once the decision notice was issued. This could not be described as an "action" by the FCA, it was an effect that arose by the operation of law. The judge agreed that there was an effective remedy elsewhere in the regulation in order to hold the ring pending the outcome of any reference to the Upper Tribunal, but that such remedy was not obvious to any but experienced practitioners. On that basis, he recommended that the FCA draw the relevant provisions specifically to the firms' attention where it refused an application for permission.
The judgment was initially handed down in anonymised form, but it became clear sometime later that the applicant firm was PDHL Limited. The FCA announced on 10 March 2016 that it was contacting 16,000 customers of the firm to inform them that the firm could no longer carry on debt management activities.
Assessing suitability: research and due diligence of products and services
FCA TR16/1, February 2016
The FCA conducted a thematic review of the research and due diligence processes carried out by advisory firms recommending products and services to clients. In general terms, the FCA found that firms were trying to do a good job, although there was some room for improvement. The FCA's review considered firms that research the market, rather than those which are vertically integrated such that the range of products they recommend are determined by their group structure.
The FCA noted that a culture of challenge was a key driver in this area, and that firms that did not challenge adequately their own bias, or conflicts of interest, were not at the better end of the range of firms assessed. The FCA also emphasised the need for good systems and controls, and for appropriate structure to ensure that clear criteria were used in order to assess suitability.
Following the review, three firms were required to provide attestations as to the work they undertook, and one was required to undertake a past business review.
FCA and PRA announcement on compliance with EBA's remuneration guidelines
FCA announcement and PRA's announcement 29 February 2016
The FCA and the PRA have announced that they will implement all aspects of the European Banking Authority's (EBA's) Guidelines on Sound Remuneration Policies except one. That exception, however, represents a substantial divergence of approach between the EBA and the UK regulators. The PRA and the FCA have stated that the ability of national authorities to take a proportionate approach to implementation of the Capital Requirements Directive (under article 92(2)) means, in their view, that they can decide not to apply a requirement to a particular type of firm at all. The FCA and the PRA also cite concerns about increases in fixed pay since the introduction of bonus caps. On that basis, the regulators say that they will not extend the bonus cap (which continues to apply to large and systemically important firms) to all CRD firms.
Identification of individuals in final notices: Ashton and Vogt
Ashton v. Financial Conduct Authority  UKUT 5 (TCC) and Vogt v. Financial Conduct Authority  UKUT 103 (TCC)
There has been considerable focus on the issue of whether the FCA has, historically, identified individual employees in notices addressed to their firms, including by referring to them as, for example, "Trader A" or "Submitter B". The relevance of this is that where the FCA prejudicially identifies an individual in a warning notice not addressed to him or her, the individual has the right (in essence) to see what the FCA proposes to say and make representations to it. The same consideration applies to individuals prejudicially identified in decision notices, save that their entitlement is to a copy of the notice, and to refer any failure in this regard, as well as the content of the notice itself, to the Upper Tribunal. Decisions of the Upper Tribunal in this regard increased in number after the decision of the Court of Appeal in the Macris case (referred to above, and summarised in the January - May 2015 edition of this update) indicated that the FCA's approach to the question of identification was incorrect.
Since then, a number of bankers have successfully argued that the FCA identified them in notices addressed to the firms for which they worked. Not all, however, have been successful, and the last six months have seen two failures, in the form of Christopher Ashton (formerly of Barclays) and Joerg Vogt (formerly of Deutsche Bank).
Mr Ashton claimed he had been identified in two notices relating to FX manipulation, to Barclays and to UBS. The UBS final notice quoted specific exchanges between traders at UBS and their counterparts at other banks, including Barclays. While the exchanges were not attributed to a specific individual at Barclays (referred to as Firm A), Mr Ashton said that information in the public domain identified them as being from him. The Barclays notice also attributed to Barclays specific communications that were, in fact, sent from Mr Ashton. The Upper Tribunal held (unsurprisingly) that the decision to quote from specific communications meant that the notices identified an individual (rather than the firm corporately) in connection with the criticisms made. It also considered, however, the press reports available at the relevant time and concluded that taking the final notices in conjunction with them, Mr Ashton was not identified, as the relevant reader would have had to make a number of assumptions about the specific group of individuals as between whom particular exchanges were sent.
Mr Vogt alleged that he was identified in a notice relating to LIBOR manipulation, addressed to Deutsche Bank. The drafting of the notice, and the way in which it used defined terms, was considered in a successful argument before the Upper Tribunal that the notice identified Christian Bittar as "Trader B". Mr Vogt alleged that the notice contained extracts from exchanges attributed to "Submitter C" which were in fact drawn from communications between him and Mr Bittar, and that he was identifiable to a relevant reader of the notice, including by reference to materials in the public domain at the time of its publication. The Upper Tribunal made various criticisms in relation to the way in which both Mr Ashton and Mr Vogt had presented their evidence, including the lack of a witness statement from either man. In the Vogt case, the Upper Tribunal also (essentially) found that the material in the public domain about Mr Vogt was too diffuse for a relevant reader to identify him from the notice. Such reader would have had to read the notice in conjunction with equivalent material published in the US in relation to Deutsche Bank, assume that the same submitter was referred to, and then locate and review a judgment in employment proceedings in Frankfurt some months before in order to identify Mr Vogt. The Upper Tribunal did not accept that the relevant reader would do this. Mr Vogt is seeking permission to appeal against that decision and his application in that regard has been stayed pending the Supreme Court's judgment in the Macris case.
These judgments show that what was starting to appear as something of a free-for-all has its limits, and it may be that the fact these individuals have now quite effectively identified themselves will act as a deterrent to others making similar arguments.
It has also recently been announced that Andrew Green QC will be leading a team preparing a report to the Treasury Select Committee in relation to the issue of Maxwellisation, and it will be interesting to see whether and how his report deals with the statutory provisions relevant to the FCA's obligations in this regard.
Regulatory barriers to innovation in digital and mobile solutions
This Feedback Statement represents another instalment in the FCA's "Project Innovate", dealing specifically with the responses it received in relation to barriers to the increasing use of technology to respond to customer expectations. It is clear from the Feedback Statement that uncertainties over future developments in regulation (and indeed technology) are contributing to firms' hesitation in this area, and the FCA has not been able to resolve these uncertainties completely, for obvious reasons.
In particular, the FCA says that it will provide further specific feedback in relation to consumer communications, in response to a separate discussion paper published in June 2015. The FCA states that it intends to work with all relevant parties in relation to future developments in AML requirements, with a view to encouraging the use of digital CDD measures. Similarly, the FCA can do little more than keep firms' concerns to the forefront in implementing Payment Services Directive II. It will also publish finalised guidance on the use of cloud data storage in the summer, while advice issues that might hinder innovation are to be explored through the Financial Advice Market Review.
No such thing as a free lunch
Key findings of FCA's 2015 thematic review in relation to conflicts of interest and inducements, 18 April 2016
The FCA has not published a full report of its thematic review in relation to conflicts of interest and inducements at firms carrying out MiFID business, and those carrying on regulated activities in relation to a regulated product. Instead, it has published a page on its website summarising its key findings, with further coverage of these issues to come in the FCA's MiFID II consultation paper.
The key findings are chiefly directed at corporate hospitality, with the FCA largely disapproving of events not designed to improve the quality of service to clients. Such events included sporting events, and social events such as dinners, even where such events follow training sessions for example. The FCA further stated that where advisory firms "facilitate" training or educational material supplied by product providers, such firms should not make a profit from doing so, but should only be paid their costs. There were also complaints about hospitality logs, and the adequacy of disclosures to clients.
FCA succeeds in proving land investment to have been Collective Investment Scheme
Asset Land Investment plc v. The Financial Conduct Authority  UKSC 17
Asset Land sold investors individual plots at six development sites, representing to them that it was responsible for seeking the rezoning of the sites and their sale to a developer. The FCA agreed with Asset Land that it would cease to make such representations and, in 2008, Asset Land's solicitors informed the FCA that Asset Land had offered existing investors a choice between repurchasing the plots sold, and exchanging them for allegedly "enhanced" plots, in respect of which the investors could apply for planning permission themselves. The FCA became concerned about the situation once more in 2011, obtained a worldwide freezing order against Asset Land and its principal, Mr Banner-Eve, in 2012, and obtained judgment in 2013. That judgment found Asset Land to have been operating a Collective Investment Scheme (CIS) without authorisation, in breach of FSMA. Restitutionary orders were made under section 382 of FSMA for a total of £20 million. The findings were upheld on appeal. Asset Land and Mr Banner-Eve appealed to the Supreme Court on the question of whether Asset Land was operating a CIS within the meaning of section 235 of FSMA.
Section 235 provides (in summary) that a CIS means any arrangement in respect of property the purpose of which is to allow a person taking part to participate or share in income. The arrangements must be such that the participants do not have day-to-day control over the management of the property.
In a speech by Lord Carnwath, the Supreme Court noted the evolution of land investment offerings in order to ensure that they were not treated as CIS. It noted that the FCA's position was that the wording of brochures, contracts and marketing material now simply ignored the reality that the intention behind the investments offered was for investors to benefit from the collectivised increase in value of the plots sold, to be brought about by the operator without any real involvement from the individual investors.
It was accepted by Asset Land that it had made what could be termed "arrangements" for the purposes of section 235, but it did not accept that the court should place weight on investors' perception of those arrangements, only on (in effect) their contractual form, which contradicted what investors were given to understand in places. The Supreme Court found this approach artificial, holding that investors' common understanding of the arrangements could conform to the first instance judge's findings of fact as to what Asset Land intended the arrangements to be.
The Supreme Court also agreed with the trial judge's conclusion that the relevant "property" for these purposes was each of the sites taken as a whole, not (as Asset Land submitted) the aggregate of the individual plots. Again, the Supreme Court held that this distinction was not one of substance. It was necessary to consider the mechanisms by which control over the property was exercised, and such mechanisms might not be contractual. The fact that individual participants had the right to make the final decision as to whether to participate in a sale did not mean that they had day-to-day control over its management in the meantime. It was necessary to look at the reality of the arrangements.
Lord Sumption gave a separate speech, although largely agreeing with Lord Carnwath, and agreeing with his conclusion. Lord Sumption's speech is helpful to consider, in that it deals more directly with the difficult boundary between what is a CIS within the meaning of section 235 and what is not. One of the key points to take away from the Supreme Court's decision as a whole, however, is that it agreed that it was necessary to consider the substance of an alleged scheme, not only at the terms on which it was documented.
FSCS – changes to the COMP sourcebook
FCA Policy Statement 16/14
The FCA has set out changes that will be made to the elements of COMP that relate to the FSCS. It is worth bearing in mind that the FCA intends to consult on other matters relating to FSCS funding later in the year. The broad list of changes introduced pursuant to this Policy Statement is:
- increase in the compensation limit for some types of non-investment insurance mediation (pure protection, PII and some general insurance claims);
- changes in the rules relating to eligibility of trustees of pension schemes;
- perhaps most significantly, bringing claims against a successor firm in respect of the acts or omissions of a predecessor firm within the scope of the FSCS (although a claimant cannot claim against both the original and the successor firm in respect of the same loss);
- introduction of some flexibility for the FSCS as to whether it follows a claimant's instruction to pay the claimant's compensation to a person other than the claimant;
- allowing the FSCS to pay compensation for a shortfall in client assets to a firm that takes over the business of a failed firm;
- rules relating to the assignment of claims electronically;
- an express requirement that firms deal with the FSCS in an open, co-operative and timely way.
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