SMR, certification regime and conduct rules

The second half of 2015 has seen the PRA and the FCA finalise many elements of the SMR, certification regime and conduct rules in advance of the start of implementation, on 7 March 2016. Firms still face a significant challenge in being ready for that date, in part because of the scale of the task they need to undertake, but also because some aspects of the new rules are not yet final, and others have only recently been finalised. We set out below a summary of the individual accountability documents published since our last update, including those linked to, but not strictly part of, the SMR.

Strengthening accountability in banking: final rules (including feedback on CP14/31 and CP15/5) and consultation on extending the certification regime to wholesale market activities

FCA CP15/22, July 2015

The FCA appended its final rules in relation to the SMR, certification regime and conduct rules for UK relevant authorised firms to this consultation paper. In addition, the FCA consulted on extending the certification regime. While the title of that consultation related to wholesale activity, the proposed new rules themselves were not limited in that way, and created new certification functions relating to client-dealing and algorithmic trading. The new draft rules also proposed extending the definition of "client" for these purposes.

Strengthening individual accountability in banking: responses to CP14/14, CP28/14 and CP7/15

PRA PS16/15 and PRA Supervisory Statement 28/15, July 2015 (Supervisory Statement updated in December 2015)

The PRA used this policy statement in order to set out its remaining final rules in relation to UK relevant authorised firms (many of its rules having been published in the first half of the year). Such rules included transitional provisions, forms, and requirements relating to non-executive directors.

The PRA also appended its Supervisory Statement in relation to the SMR, certification regime and conduct rules. That Supervisory Statement has since been updated to reflect the PRA's guidance in relation to UK branches of non-EEA firms.

Conditions, time limits and variations of approval

PRA Statement of Policy, July 2015

In this publication, the PRA set out its policy in relation to its powers under the SMR to grant conditional approvals in relation to applicants seeking to perform Senior Management Functions (SMFs). It is worth noting that this policy document will need to be amended, as the original SMR did not include a power to vary time-limited approvals, only other conditions placed on them. The Treasury announcement referred to below indicated that this omission in the SMR would be corrected, but the timing for this change is not clear.

Strengthening accountability in banking: UK branches of foreign banks – feedback on FCA CP15/10

FCA FS15/03, August 2015

The FCA used this feedback statement in order to append near-final rules in relation to the UK branches of overseas banks. Its rules were not made final, pending HM Treasury making the necessary order, but the FCA indicated that it did not anticipate them changing substantially. The rules are divided between the UK branches of EEA authorised banks and the UK branches of banks authorised in other jurisdictions. The rules relating to both are complicated. In general terms, there are more requirements applicable to non-EEA banks, but EEA banks will have to negotiate the difficult issues of which matters are, and are not, reserved to their home state regulator. Final rules were produced by the FCA in December 2015 (as to which see below).

Strengthening individual accountability in banking: UK branches of non-EEA banks

PRA PS20/15, August 2015

The PRA's summer publication in relation to UK branches of overseas banks differed from the FCA's in two key respects: one of scope and one of approach. The PRA's rules do not affect the UK branches of EEA banks, which will therefore only need to consider the FCA's rules. In terms of approach, the PRA opted to make a number of its rules as final rules in the summer, leaving as near-final only those that it believed it could not make without the necessary Treasury order. As to the PRA's subsequent revision of its rules, see below.

Strengthening accountability in banking and insurance: regulatory references

FCA CP15/31 and PRA CP36/15, October 2015

In this joint consultation paper, the PRA and the FCA consulted on how best to implement the recommendations of the Fair and Effective Markets Review (as to which see below) on the provision of regulatory references, to prevent "rolling bad apples". The regulators' final rules are still awaited, but the key proposals include requiring firms to request regulatory references going back six years from former employers of candidates applying for SMFs and certification functions, and requiring that disclosures in response to such requests be provided in a standard format by certain firms. References provided over the previous six years would have to be updated were the referee firm to become aware of matters that would cause it to draft the reference differently.

Whistleblowing in deposit-takers, PRA-designated investment firms and insurers

FCA PS15/24 and PRA PS24/15, October 2015

The FCA and the PRA have separately published final rules in relation to whistleblowing. Insofar as they relate to deposit-takers, the new rules will only apply to those UK firms that are within the scope of the SMR, and the changes are, in some respects, connected with the SMR. The rules will not apply to the UK branches of overseas banks initially, although the FCA says that it will consult in relation to them. The new rules require that a non-executive director who performs an SMF be allocated the prescribed responsibilities of the "whistleblowers' champion", which are (in essence) to ensure and oversee the integrity, independence and effectiveness of the firm's policies and procedures on whistleblowing, including those intended to protect whistleblowers from being victimised. There are rules in relation to the content of settlement agreements, and rules in relation to the training and information that must be provided to employees. The rules also require certain records to be maintained and information to be provided to regulators.

Senior Managers and Certification Regime: extension to all FSMA authorised persons

HM Treasury paper, October 2015

HM Treasury used this paper to announce the extension of the SMR and certification regime to all firms authorised under FSMA. This change is expected to happen during 2018, but there is clearly a substantial amount of ground that will have to be covered before then.

Of more immediate interest were the changes announced to the rules that banks are in the process of trying to implement. Such changes came within four main categories:

  • the presumption of responsibility (whereby senior managers would be presumed to be responsible for breaches within their area of responsibility, unless they could show that they had taken reasonable steps to prevent them) was to be removed, and replaced by a duty of responsibility. This amendment was the subject of an unsuccessful objection by some members of the House of Lords, and it is said that final rules in this area will be made in time for implementation of the SMR;
  • there will be rules allowing regulators to make conduct rules applicable to so-called notified non-executive directors;
  • the rules requiring all breaches of conduct rules to be notified to regulators will be amended in time for implementation; and
  • the drafting lacuna that meant the FCA and the PRA had the power to vary conditions placed on approvals, but not time limits, will be corrected.

Strengthening individual accountability in banking: UK branches of non-EEA banks

PRA PS29/15, October 2015

As set out above, the PRA made most of its rules in relation to the UK branches of overseas banks based outside the EEA in final form. There were some provisions, however, which were not published in final form until December 2015. The only significant change as a result of the finalisation of all the PRA's rules was to the table of functions into which individuals could be grandfathered.

Strengthening accountability in banking: UK branches of foreign banks

FCA PS15/30, December 2015

The FCA appended to this policy statement its final form rules for the UK branches of overseas banks, based both in and outside the EEA. The FCA has flagged only two significant issues following feedback in relation to its near-final rules. First, in relation to non-EEA branches, the FCA accepted that the inclusion within the scope of its certification regime and conduct rules of individuals "dealing with UK clients", as well as individuals based in the UK, potentially caught a wide range of employees. It has therefore removed that criterion, temporarily, as a basis for inclusion of individuals within those regimes. Second, the FCA has confirmed that the inclusion as relevant authorised persons of EEA firms which accept deposits in the UK on the basis of a services passport, but which have an establishment passport in relation to other activities, is a requirement under FSMA.

Final notices and judgments

Co-op Bank avoided fine but subject to censure

The Co-operative Bank plc - FCA's final notice and PRA's final notice, 10 August 2015

The FCA and (more unusually) the PRA issued a public censure of the Co-operative Bank (Co-op Bank) for breaches of Listing Rule 1.3.3R (misleading information not to be published) and Principle 11 (dealing with regulators in an open and co-operative way). Interestingly, they did not impose a financial penalty, notwithstanding that one was merited, as Co-op Bank was engaged in a turnaround plan to ensure it had adequate capital, and a financial penalty would endanger this. Co-op Bank had incorrectly recorded in its published annual accounts that it had adequate capital in the most severe stress scenarios. Co-op Bank also failed to notify intended changes to two senior positions and the reasons behind those changes.


(1) Timothy Alan Roberts; (2) Andrew Wilkins v. FCA [2015] UKUT 408 TCC; Upper Tribunal's additional reasons, 18 September 2015

In August 2013, the FCA issued decision notices in relation to Timothy Roberts and Andrew Wilkins. Mr Roberts and Mr Wilkins were directors (and Mr Roberts was CEO) of Catalyst Investment Group Limited (Catalyst). The decision notices contained fines (of £450,000 and £100,000 respectively) and bans preventing Mr Roberts and Mr Wilkins from performing any role in relation to regulated financial services. Both Mr Roberts and Mr Wilkins referred their decision notices to the Upper Tribunal.

The Upper Tribunal largely upheld the FCA's decision in relation to Mr Roberts (although not all elements of it). In relation to Mr Wilkins, however, it disagreed with the FCA that Mr Wilkins was not fit and proper to perform any role in relation to financial services, and accordingly it rejected the FCA's ban. It also reduced the fine imposed to £50,000.

The enforcement action related to Catalyst's role in the distribution of bonds in relation to which Catalyst knew that the issuer considered that it needed, and did not have, a licence. Catalyst nonetheless provided misleading information to investors, collected funds from them, and did not ring-fence those funds.

The aspect of the Upper Tribunal's decision that has attracted attention is its rejection of the FCA's allegations against Mr Wilkins. It rejected the assertion that he acted without integrity, although Mr Wilkins himself accepted that he had lacked due skill and care in certain respects. The Upper Tribunal therefore remitted to the FCA the decision as to whether Mr Wilkins should be banned.

The FCA considered that the Upper Tribunal's decision was not fully reasoned, and it therefore invited the Upper Tribunal to reach the conclusion that, even if Mr Wilkins passed the "fit and proper" test from the point of view of integrity, he nonetheless failed it in terms of competence. The Upper Tribunal therefore produced additional reasons, the following month, clarifying that it considered the FCA to have failed to discharge its burden of proving Mr Wilkins not to be fit and proper, including as to competence.

FCA obtained injunction and penalty for market abuse

FCA v. Da Vinci Invest Ltd. and others [2015] EWHC 2401 (Ch)

The defendants in this case were alleged by the FCA to have engaged in "layering" or "spoofing" in relation to high-volume trading of CFDs relating to shares listed on the London Stock Exchange, in 2010 and 2011. The FCA sought an injunction in relation to the alleged market abuse under section 381 of FSMA and, for the first time, also sought the imposition of a financial penalty by the court under section 129, rather than imposing the penalty itself.

In considering the FCA's claim, the judge stated that he found it obvious based on the wording of FSMA that there was no jurisdiction for the court to impose a financial penalty under section 129 unless it found that the relevant defendant had engaged in market abuse. The judge rejected the argument that it was an abuse of process for the FCA to apply to the court to impose a financial penalty without going through its internal processes in order to impose the penalty itself. He noted, however, an apparent inconsistency in the drafting of FSMA that meant that defences available where the FCA was considering imposing a financial penalty (under section 123 of FSMA) were not expressly stated to be available where the court used its powers under section 129. It was suggested by the FCA, however, that the court should construe section 129 as though it referred to the same defences. The judge also declined to find that the power to impose a penalty was available only where the court actually granted an injunction.

Da Vinci Invest (DVI, the first of six defendants in this case) argued unsuccessfully against the view that market abuse was to be judged objectively, and did not require the person committing it to have a particular state of mind. The judge further rejected the suggestion that a company such as DVI could avoid liability for market abuse where the relevant behaviour was entered into by traders engaged by it as contractors, rather than by employees. The judge was also called on to decide the appropriate standard of proof in a case of this kind. The judge agreed with the FCA that the ordinary civil standard (balance of probabilities) was the appropriate test, but held that the court should take into account (as it would in a case of civil fraud) the inherent improbability of the behaviour alleged taking place, when applying that test.

In determining whether the defendants had engaged in market abuse, the judge decided that it was appropriate for the court, of its own motion, to take into account the matters set out in Article 4 of the Market Abuse Directive (shortly to be replaced). He also rejected the suggestion that the court had to hear evidence from actual market participants that they were misled. In terms of available defences, the judge found that, while DVI did not actively turn a blind eye to the behaviour of traders on its behalf, it was reckless as to that behaviour in the interests of maintaining profit, and as such did not have a defence. In calculating the appropriate penalty, the judge took the view that it was appropriate to use the procedure under DEPP that the FCA would use were it imposing a fine.

Further action by the FCA in relation to Keydata

Craig McNeil, 21 September 2015

The FCA fined Mr McNeil (Keydata's former finance director) £350,000 and prohibited him from performing any significant influence function in relation to regulated activities performed by any authorised person, exempt person or exempt professional firm. It found that Mr McNeil had breached the APER Statements of Principle 4 (appropriate disclosure to the FCA) and 6 (acting with due skill, care and diligence).

The allegations against Mr McNeil related chiefly to the fact that he was aware that Keydata was not receiving payments from the issuer of the bonds in which it had invested its clients' funds. It did not alert either investors or the FCA to this fact, but continued to meet payments to investors from its own corporate funds, thereby masking the issuer's problems. Mr McNeil was also responsible for the preparation of Keydata's board minutes, which the FCA found did not record what Mr McNeil later stated to have been the key points of various board meetings. In addition, Mr McNeil had permitted various payments and transactions, the purpose of which he did not fully understand.

Defects in FCA's enforcement action

Angela Burns v. FCA [2015] UKUT 601 (TCC)

In 2012, the FCA produced a decision notice, fining and banning Angela Burns based on findings that she had misused her position as a non-executive director in order to further her commercial interests, and that she had failed to disclose conflicts of interest. These failings were said to be in breach of APER Statement of Principle 1, in relation to the integrity required of persons performing a controlled function. Ms Burns referred the decision notice to the Upper Tribunal.

The FCA pursued 10 allegations against Ms Burns, of which the Upper Tribunal (in December 2014) upheld four, finding (in May 2015) that Ms Burns was not fit and proper to perform the CF2 function, and that the FCA should impose a fine on her (albeit a significantly reduced one, set at £20,000). Its decision in September was as to Ms Burns's application for the FCA to pay her costs (in the amount of some £1.8 million, including charges for her own time at £565 per hour).

Ms Burns's application was made on a number of grounds, some of which the Upper Tribunal found entirely unconvincing. She was successful in persuading the Upper Tribunal that the FCA had been unreasonable in seeking to enforce its original fine of £154,800, even where the Upper Tribunal had found that six out of the 10 allegations pursued by the FCA failed. The Upper Tribunal found, however, that it would not be appropriate to award Ms Burns her costs of the FCA's unreasonable action in this regard. It did, however, award her costs of £100,000 in relation to the FCA's decision to restore for the purposes of the proceedings before the Upper Tribunal a mistaken allegation that Ms Burns had solicited a bribe. The Upper Tribunal noted that the allegation was a serious one, and that the RDC had suggested that it be removed from the decision notice.

Fine and ban in relation to failings by Aviva Investors

Mothahir Miah, 17 November 2015

The FCA fined Mr Miah £139,000 (taking account of a discount for early settlement) and banned him for five years. The FCA's action related to Mr Miah's role in relation to failings identified by the FCA in relation to Aviva Investors (summarised in our last update), where he was an investment analyst.

Aviva Investors was fined, and paid compensation to clients, in relation to a failure of systems and controls that had allowed cherry-picking by some of its staff, including Mr Miah. Mr Miah had taken advantage of such failures in order to avoid allocating investments he made to particular clients until he could assess their performance during the day. The FCA found that this showed a want of integrity, in breach of Principle 1 of the Statements of Principle for Approved Persons, and imposed the penalties summarised above on the basis that Mr Miah was not fit and proper. It decided, however, to impose a five-year time limit on the ban placed on Mr Miah, in view of his open and contrite attitude.

Failures in relation to prevention of financial crime

Barclays Bank plc, 25 November 2015

The FCA fined Barclays £72,069,400 in respect of failures to manage appropriately the risk of financial crime posed by a single deal in 2011 and 2012. The FCA found that such failures amounted to a breach of Principle 2, which states that a firm must conduct its business with due skill, care and diligence.

Barclays engaged in a large transaction with clients which it had itself identified as susceptible to a greater than usual risk of bribery or corruption, based on the application of various criteria Barclays used in order to identify what it termed "Sensitive PEPs". This would ordinarily have triggered Barclays to follow internal procedures for dealing with clients of this kind. In this case, however, Barclays had entered into a confidentiality agreement with the clients (the Confidentiality Agreement). The Confidentiality Agreement required that Barclays restrict knowledge of the identity of the clients to a very small number of individuals, including within the bank. If Barclays breached the Confidentiality Agreement, it would be liable to indemnify the clients up to the amount of £37.7 million.

In order to maintain the confidentiality of its clients, Barclays decided to bypass its usual AML procedures. It also decided to keep the clients and the transaction off its IT systems. It was not automatically a problem, in the FCA's view, that Barclays departed from its usual procedures. The difficulty was that it did not put in place an acceptable alternative. There was no indication that actual financial crime had taken place, but the steps Barclays had taken to prevent it were fewer than it would usually undertake in relation to ordinary clients.

The FCA's approach to enforcement was interesting in a number of respects. First, the FCA did not refer to any breach of Principle 3 (requiring a firm to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems), which might seem a more natural basis for enforcement in this case. It is impossible to know why the FCA did not rely on Principle 3, but the most probable reason may be that the Final Notice does not criticise Barclays's risk management systems, as opposed to the fact that they were bypassed in this case. Second, while the requirements of the Money Laundering Regulations are referred to throughout the Final Notice, and the implication is that they were breached, such breaches are not stated as part of the basis for the FCA's enforcement action.

Failure to put in place adequate controls and inaccurate disclosure to regulators

Threadneedle Asset Management, 10 December 2015

Threadneedle Asset Management Limited (TAML), an investment management firm, was fined £6,038,504 by the FCA for breaches of Principle 3 (taking reasonable care to organise and control its affairs responsibly and effectively) and Principle 11 (dealing with regulators in an open and co-operative way). The FCA had asked TAML to report on its risk mitigation, specifically the extent to which fund managers were limited in their ability to book trades. TAML reported that certain members of staff would have oversight of "all aspects of dealing". It later transpired that fund managers remained able to book trades independently of supervision, resulting in a potentially hazardous unauthorised transaction being initiated. The FCA fined TAML both for the failure of control and for misreporting its levels of control. The penalty was reduced by 20 per cent, because TAML agreed to settle at an early stage of the FCA's investigation.

Culture and related issues

Strengthening the alignment of risk and reward: new remuneration rules

FCA PS15/16 and PRA PS12/15, June 2015

This policy statement followed the joint PRA CP15/14 and FCA CP14/14 published in July 2014, and reflected the feedback received from that consultation. The regulators maintained their position on the length of proposed minimum deferral periods for bonuses, accepting that these exceeded the periods set out in the Capital Requirements Directive (CRD) in places, but justifying their decision. The regulators confirmed their position of introducing a presumption against discretionary payments being justified for management of banks in receipt of government support. The regulators committed to exploring the possibility of buyouts of deferred bonuses to be subject to malus by a previous employer. The regulators confirmed that non-executive directors would be banned from receiving bonuses. The FCA also affirmed its proposed guidance on proportionality, and made small amendments to its proposed guidance on ex-post risk adjustment to bonuses, while the PRA announced its intention to introduce stricter requirements in relation to risk adjustment and performance metrics.

The only significant change announced in this policy statement, in comparison to the consultation paper, relates to which employees come under which minimum deferral periods for bonuses. For PRA regulated firms, certain material risk takers (MRTs) (those who are not in significant risk functions) will only be subject to the CRD mandated minimum deferral period (three to five years), rather than the originally proposed five years. Other MRTs will still come under a deferral period of five years. For non-PRA regulated firms, all MRTs who are not within the SMR will be subject to the CRD minimum in any case. For all firms, employees who fall under the SMR will have a seven-year minimum deferral period.

It is notable in this context that the EBA published its final guidelines on remuneration policies on 21 December 2015, including an opinion on the application of proportionality. This opinion agrees with the European Commission that exemptions or waivers to any of the remuneration principles are not permitted whether on grounds of proportionality or otherwise. Nevertheless the EBA recommends that the CRD should be amended to exclude small and non-complex firms from certain remuneration principles, including deferral, but not the "bonus cap".  The EBA has also stated that its guidelines will not apply until 1 January 2017, and the rules will first apply to the 2017 performance year, so firms will not have to adjust existing pay practices yet. A further announcement from the FCA and the PRA is expected in due course.

Risks to customers from performance management at firms – thematic review and guidance for firms

FCA FG15/10, July 2015

The FCA produced guidance following a thematic review of the way in which performance management within firms could pose risks for consumers. Its review was broader in scope than issues connected purely with remuneration, and the finalised guidance refers to formal processes, sales targets and informal communications between sales staff and their managers. The FCA's review was not based on direct assessment, but on information received from whistleblowers and media reports, which was then followed up with firms. The review found instances of poor practice, but no widespread issues.

The FCA's guidance recognises the potential impact on sales staff's behaviour of many strata of management, including pressure applied indirectly from the business needs articulated by senior management. The FCA stated, however, that the right "tone from the top" is not enough, and firms must look not only at their policies in relation to performance management, but at what happens in practice. It recognised that middle management might be under particular pressure to manage conflicts between business needs and avoiding inappropriate selling. The guidance considered the different sources of information available to firms in determining whether undue pressure was being placed on staff to achieve sales targets, as well as identifying some examples of both poor and good practice. In general terms, it is clear that the formal creation of a balanced scorecard, or compliance with remuneration requirements, will not be enough to satisfy the FCA where other aspects of a firm's management of its staff are aimed solely at achieving sales, without proper consideration of the customer's needs.

Decision not to proceed with review of culture within banks

In its Business Plan for 2015/2016, the FCA indicated that it would be carrying out a thematic review of culture in retail and wholesale banks. It was reported at the very end of 2015 that the FCA would not be publishing that review, but the FCA has maintained that it continues to focus on culture as an issue, including at supervisory level with individual banks. The decision, which will have appeared quite reasonable to some in light of the many reforms touching on culture that are still to be fully implemented, has attracted criticism from others, including MPs and consumer groups.

Dealing with customer complaints

Fair treatment for consumers who suffer unauthorised transactions

FCA TR15/10, July 2015

The FCA conducted a thematic review into firms' treatment of customers who suffer unauthorised transactions. The review looked at the application by firms offering current accounts and credit cards of the provisions of the Payment Services Regulations and the Consumer Credit Act 1974. In general, the FCA found that no further thematic work was needed. While requirements were sometimes complex, firms were generally meeting the relevant requirements, and tended to err on the side of the customer in considering claims. The FCA had been concerned that firms might have been holding customers to over-prescriptive security requirements, but it did not find this to be the case. The review contains various examples of good (and indeed some poor) practice. Where the FCA identified concerns, they included: terms and conditions that did not fully inform the customer of his/her rights; lack of clear policies for considering claims; and over-reliance on a small number of staff to consider complaints received.

Improving complaints handling, feedback on CP14/30 and final rules

FCA PS15/19, July 2015

The FCA set out its final position in relation to reforms to the rules around the handling of complaints by FCA-regulated firms, consulted on in CP14/30. These rules apply to all FCA-regulated firms within the scope of the Compulsory Jurisdiction of the Financial Ombudsman Service (FOS): participants in the Voluntary Jurisdiction of FOS are subject to separate rules. Firms are currently permitted not to use a formal response letter to complaints where they respond to complaints before the end of the next business day after receiving the complaint and the complainant accepts their response. The FCA will extend this to the end of the third business day after receiving the complaint. Firms do not currently have to report the number of complaints dealt with in the shorter timeframe. The FCA will make firms report all complaints, whether dealt with in the shorter timeframe or not. In addition, the FCA pledges to amend the twice-yearly "complaints return" that firms currently have to send reporting those complaints. The FCA will also require firms to send a communication to complainants dealt with in the shorter timeframe summarising the response and highlighting their potential recourse to the FOS. These changes will come into force on 30 June 2016. The FCA also said it would require firms to use basic rate phone numbers for customers calling them, rather than premium rate phone numbers, a change which came into force on 26 October 2015.

Changes to DISP

Handbook Notice No. 21, published in April 2015, came into force July 2015

These changes to DISP were made in order to implement the Alternative Dispute Resolution Directive (the Directive) in the UK. Like PS15/19 (referred to above), these amendments were the subject of consultation in CP14/30. The amendments described below apply to the handling of complaints received by firms from 9 July 2015 onwards. Overall, while firms will need to take careful note of the changes introduced in order to implement the Directive, it seems unlikely that they will make any substantial difference to firms' complaints handling in practice.

There are some changes to the information firms must provide to complainants, but the majority of the amendments to DISP relate to referrals to the FOS, by whom they can be made, and when. Where a professional client or eligible counterparty meets the definition of "consumer" adopted by the UK in its implementation of the Directive, he or she will be able to refer a complaint to the FOS. The FOS will now be able to consider a complaint referred to it before a firm has provided its final response to the complaint, or the eight-week period for it to do so has expired, where both complainant and firm agree. Even where this happens, the early reference to the FOS does not absolve the firm of its obligation to deal with complaints within the usual time period.

There are also now only five grounds on which the FOS can refuse a complaint without considering its merits. In particular, the FOS will no longer be able to dismiss a complaint without considering its merits on the grounds that it relates to investment performance.

Rules and guidance on payment protection insurance complaints

FCA CP15/39, November 2015

The FCA consulted on imposing a deadline for complaints relating to PPI. Such deadline is to be preceded by a communications campaign, funded by a new fees rule. Consultation closes on 26 February 2016. The consultation paper records that, to date, firms have paid a total of over £21 billion to 12 million customers in relation to PPI. It also records various issues with complaints received. It was anticipated that the FCA would seek to draw a line under this at some point, and that line is proposed as being two years from the implementation of new rules following the outcome of the consultation.

In some ways more interesting is the second matter dealt with in the consultation paper, which is the approach the FCA says should be adopted in light of the Supreme Court's judgment in Plevin, where a claim could be made under the unfair relationship provisions of the Consumer Credit Act 1974. The FCA proposes, in relation to such cases, that firms that would otherwise be minded to reject a PPI complaint should be obliged to undertake a "step 2" assessment. In basic terms, that second step would require firms to consider whether the amount of their commission was disclosed to the customer and, if not, whether such lack of disclosure gave rise to an unfair relationship. In general, they should assume that it did if the commission accounted for 50 per cent or more of the total amount paid by the customer. The FCA also consults on the appropriate basis for redress in such cases. It does not propose asking firms proactively to review past decisions in relation to complaints that might have been affected by this rule change.

Fair and Effective Markets Review (FEMR)

FEMR's final recommendations

Final report, June 2015

FEMR's final report (into the fixed income, currency and commodities (FICC) markets) recommended various actions, some of which have already led to proposals for implementation, others of which will take longer to put into practice. FEMR itself grouped its recommendations under various headings.

  1. Raising standards, professionalism and accountability of individuals – much of this work is expected to be done by the introduction of the SMR, certification regime and conduct rules. FEMR also recommended introducing globally endorsed trading standards for FICC markets, new training requirements, and the extension of criminal sanctions for market abuse, including an increase from seven to 10 years in the maximum sentence. That increased maximum is still less than the sentence imposed on Tom Hayes, who was prosecuted for conspiracy to commit fraud in relation to his role in LIBOR manipulation, and sentenced to 14 years in prison (subsequently reduced to 11). FEMR also recommended the creation of requirements in relation to regulatory references, to prevent "rolling bad apples", and this recommendation is the subject of ongoing consultation.
  2. Improving the quality, clarity and market-wide understanding of FICC trading practices – the main recommendation under this heading was the creation of a new FICC Market Standards Board (FMSB) including both firms and end-users of benchmarks, which is to assume a number of responsibilities, including in relation to establishing the minimum training standards referred to above. The FMSB's website contains some details of its membership and how it will work, but there are few indications as to future timing.
  3. Strengthening the regulation of FICC markets in the UK – this includes the creation of a new statutory civil and criminal market abuse regime in relation to spot FX. It also included extension of the SMR, certification regime and conduct rules to firms other than banks. The efficacy of these rule changes is, of course, still to be tested, but FEMR has recommended rolling them out to a wider range of authorised firms in some form. Interestingly, it did not advocate extending the presumption of responsibility, which has since been dropped in relation to banks as well. HM Treasury has since announced that the new regime will be applied to all authorised firms, although its precise form remains to be seen.
  4. Launching international action to raise standards in global FICC markets – part of this work includes the creation of a single global FX code (the Bank of International Settlements has set up a working group aimed at achieving this), and the adoption of transparency and controls around FX.

Financial benchmarks – thematic review of oversight and controls

FCA TR15/11, July 2015

This review was, as its name implies, a review into firms' oversight and controls in relation to financial benchmarks. What was perhaps less obvious was the FCA's view of what a "benchmark" actually was. Many of the failings it identified appear to have been attributable to firms not treating as benchmarks things that the FCA considered should have been. The FCA considered that firms should adopt a broad interpretation of the IOSCO definition of benchmarks which would potentially include activities that would not immediately be associated with benchmark activity. It also appears that the FCA does not consider it to be of primary relevance whether a firm considers a published price calculation to be a benchmark, if it is capable of being used in that way. It is worth noting in this context that negotiations are ongoing in the EU as to the EU Benchmarks Regulation, and it appears from the documents published in relation to those negotiations that there is potential for a differently drawn definition of "benchmark" to emerge.

The FCA's review considered 12 banks and broking firms, and found that none had fully implemented changes across all benchmark activities. Its review excluded LIBOR and the WM Reuters 4 p.m. fix. The FCA's key messages were that:

  1. firms needed to adopt the broad IOSCO definition of a benchmark;
  2. senior management needed to act quickly in relation to remaining gaps, in that progress to date had not shown sufficient urgency;
  3. firms needed to strengthen governance and oversight, in order to ensure proper management information, monitoring and co-ordination of roles;
  4. firms needed to review how conflicts of interest might arise and take steps to manage them;
  5. firms needed to pay more attention to in-house benchmarks, where conflicts of interest might exist in relation to, for example, their design and their subsequent use;
  6. firms should give proper consideration to the effect of exiting a benchmark, which the FCA considered should take place in an orderly fashion.


Disclosures to consumers by non-ring-fenced bodies

FCA CP15/23, July 2015

The Financial Services (Banking Reform) Act 2013 created a category of ring-fenced bodies (RFBs) that would only be permitted to carry out retail, not investment banking. Under a later statutory instrument, the FCA was required to make rules for the disclosure of relevant information to individuals who are, or seek to become, account holders with non-ring-fenced bodies (NRFBs), and this consultation paper set out the FCA's proposals and sought views on them. NRFBs are not the same as bodies which are not RFBs; rather, they are UK deposit takers within the same group as RFBs. The FCA did not propose to extend the disclosure regime to all firms which fall outside the ring-fencing regime. The legislation required NRFBs to provide information on any actions they undertook which RFBs are prohibited from undertaking. The FCA proposed that this information should be high-level and preceded by a scene-setting narrative on ring-fencing; should be provided online; and should only be provided to depositors entitled to hold an account with an NRFB (those with assets of more than £250,000). Information would be provided to eligible depositors who currently have an account at a firm that will become an NRFB before that designation takes effect. Once a bank becomes an NFRB, the information would need to be provided before a depositor opens an account. The FCA also proposed that no further changes were necessary to the FCA Handbook. All of these points were open to consultation.

Guidance on the FCA's approach to the implementation of ring-fencing and ring-fencing transfer schemes

FCA GC15/5, September 2015

The FCA has set out in draft form its guidance regarding its approach to its duties under ring-fencing transfer schemes (RFTSs). RTFSs are schemes by which firms may use the legal procedures under Part VII of FSMA to give effect to any transfers of business needed to adhere to the new ring-fencing regime. The PRA will lead RTFSs, but will be required to consult the FCA at certain points in the process. The FCA set out its criteria for setting out its views on proposed skilled persons to produce reports on the schemes before they go to court for approval, its expectations for the content and form of those reports, its guidance on the notice firms have to give prior to the scheme being heard in court, and the matters it will consider when participating in court proceedings.

The implementation of ring-fencing: prudential requirements, intragroup arrangements and use of financial market infrastructures

PRA CP37/15, October 2015

The PRA set out further details of its proposed policies in relation to ring-fencing. This follows CP19/14, which set out the PRA's proposals on legal structure, governance and continuity of services and facilities, and a subsequent policy statement (PS10/15). The PRA began with proposals to ensure that ring-fenced bodies (RFBs) have adequate financial resources, by requiring that RFBs meet specific prudential requirements on a sub-consolidated basis. The PRA's proposals are intended to ensure that RFBs are insulated within the sub-group they are part of, and that they avoid financial contamination by other group members by heavily restricting the flows of capital in and out of the sub-group. Further to this, the PRA proposed guidance to ensure that RFBs deal with members of their group on arm's length terms, as required by statute, and explained how they would interpret that phrase. The PRA, also as required by statute, sought to define which "exceptional circumstances" would allow an RFB to participate in inter-bank payment systems, and, more generally, the conditions under which RFBs could participate in central securities depositories and central counterparties. The PRA also proposed to ensure RFBs were required to demonstrate their compliance with every ring-fencing obligation and to review their policy towards the exceptions permitted by the PRA. Finally, the PRA set out its preliminary views on additional reporting requirements for RFBs. The Consultation Paper was accompanied by draft rules, a draft supervisory statement and proposed consequential changes to existing PRA publications.


Uncertainty over timing for implementation

There is still uncertainty over whether the implementation of MiFID2 will, indeed, be delayed (in whole or in part), but some reports suggest that this is likely.

FCA's first consultation paper in relation to implementation

FCA CP15/43, December 2015

The FCA published its first consultation paper (open until 8 March 2016) in relation to the implementation of MiFID2 in December 2015, and has said that it anticipates publishing a second consultation in the second quarter of 2016 (it also anticipates that the PRA will consult during 2016). The consultation relates to the FCA's regulation of the secondary trading of financial instruments, and considers: (a) trading venues (Regulated Markets, Multilateral Trading Facilities and Organised Trading Facilities); (b) Systematic Internalisers; (c) transparency; (d) market data; (e) algorithmic and high-frequency trading requirements; (f) passporting and UK branches of non-EEA firms; (g) proposed extension of the FCA's Principles for Business; and (h) proposed revisions to the FCA's Perimeter Guidance Manual.

Other developments

Smarter Consumer Communications

FCA DP 15/5, June 2015

With this discussion paper, the FCA intended to start a debate around how the regulator and the industry could deliver information to consumers in more effective ways. The FCA commissioned a review of customer literature in the UK and abroad to identify good practice. The discussion paper argued that too often, customer literature is written to conform to regulatory requirements and/or in anticipation of litigation, and this should change to focus on customer understanding. The FCA proposed to review its Handbook to make sure its disclosure requirements assist the customer rather than merely creating red tape for firms. In particular the FCA recommended that firms should highlight important terms and conditions instead of hiding them within large blocks of text, that firms should be more explicit about fees and charges, that firms should alert customers to the existence of the FOS, and that firms should clarify the extent of customers' recourse to the FSCS. The discussion paper ends by inviting firms to share best practice and suggestions as to how best to communicate to customers. The discussion paper is of note because the FCA may decide to amend its Handbook in order to simplify the disclosure requirements and make the required disclosures more customer-friendly.

Restrictions on the retail distribution of regulatory capital instruments – final rules

FCA PS15/14, June 2015

The FCA published final rules regarding the promotion and sale to retail clients of contingent convertible instruments (CoCos), or interests in funds the investment returns of which are "wholly or predominantly linked to, contingent on, highly sensitive to or dependent on, the performance of or changes in the value of" CoCos. The policy statement also includes rules relating to mutual society shares, which are not discussed here.

The rule changes themselves are made in COBS, predominantly COBS 22.3 and came into force on 1 October 2015, following the introduction of temporary rules in October 2014. The FCA has stated that it views CoCos as inappropriate for non-sophisticated retail customers of ordinary means. Interestingly, the feedback received to the FCA's consultation indicated that, while industry respondents were broadly supportive of the FCA's proposals, investors were not. The majority of the investors who responded were, it appears, holders of the CoCos issued by Lloyds Banking Group which were the subject of the judgment summarised above. In broad terms, the new rules prevent firms from selling CoCos, or communicating/approving inducements to invest in CoCos, to retail clients in the EEA. There are exceptions, including where the client is a sophisticated investor or certified high net worth investor. In the latter case, however, and where the client has self-certified as being sophisticated, the firm must consider the CoCo to be suitable for the individual (within the meaning of COBS 4.12.5G). The restrictions on sale do not apply to MiFID business, although the restrictions on promotion do. The person responsible for compliance oversight, or someone under his or her supervision, must also record the sale/promotion, which exemption applied and why, and such record must be maintained for five years.

The FCA responded to industry concerns by amending the definition of a CoCo, which is drawn by reference to current capital requirements, and which firms will wish to consider when deciding whether the new rules apply. In general, the FCA's view appears to be that, as capital requirements have changed, so too the provisions of CoCos have become more complex, risky and vulnerable to asymmetries of information. This approach is also interesting in the context of the Court of Appeal's approach to the position of retail investors in the LBG CoCos discussed above. More generally, the FCA has indicated that it will keep in mind criticisms that it is applying its product intervention powers inconsistently.

Consumer credit − feedback on CP15/6 and final rules and guidance

FCA PS15/23, September 2015

In this policy statement, the FCA presented its final rules on the consumer credit regime, following proposed rules in consultation paper 15/6, published in February 2015. The FCA largely decided to retain the proposed rules outlined in CP15/6 in light of the consultation responses. However, the FCA decided to amend some proposals and delay others. The FCA amended its draft provisions on guarantor lending. It limited their scope to guarantors and borrowers who are "individuals", and lessened the potential impact of obligations on lenders to explain the contract to the guarantor, by allowing for such explanation to be provided as part of independent legal advice received by the guarantor. It allowed lenders to undertake different creditworthiness checks on guarantors as compared with borrowers. The FCA has also weakened lenders' obligations regarding pre-contract explanations and creditworthiness checks on borrowers themselves. In relation to financial promotions, the FCA has clarified that rules relating to APR comparisons in financial promotions relate to credit, rather than to the goods or services financed by the credit. The FCA has also delayed a proposal in PS14/18 to make GABRIEL reporting mandatory. The FCA has also announced consumer-credit related thematic reviews relating to staff remuneration and early arrears management in unsecured lending, and further reviews of the Consumer Credit Act leading up to 1 April 2019.

Flows of confidential and inside information

FCA TR15/13, December 2015

The FCA conducted a thematic review of the way in which the debt capital markets and mergers and acquisitions departments of 16 small to medium-sized investment banks managed confidential and inside information. The FCA considers, however, that its findings ought to be considered by all firms.

In general terms, the FCA emphasised the need for firms to consider circumstances that might pose heightened risk of misuse of information or conflicts of interest, and manage these accordingly. The FCA also said that the role of senior management and lines of reporting were not always sufficiently clear, and that the role of the compliance function was not always appropriately positioned. Not all senior managers the FCA spoke to understood the difference between confidential and inside information, and some seemed to emphasise the role of compliance at the expense of their own part in ensuring good practice. In some firms, compliance was physically distant from the front office, and seen as an administrative function, whereas in others, the over-strong presence of compliance meant that the front office relied on it too much. The FCA also suggested that information was sometimes shared too widely within firms, for example at team meetings. Finally, the FCA found that policies and procedures, and surveillance techniques, were not fit for purpose in all cases. Firms had also not given enough thought to the physical location of individuals whose roles might create a conflict of interest.

To read the complete Financial Markets Disputes and Regulatory Update - Winter 2015/Spring 2016, click here.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

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.