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In this section:
Senior managers regime, certification regime and conduct rules (SMCR)
Individual Accountability: Extending the Senior Managers & Certification Regime to all FCA firms, and extending the SMCR to Insurers
In July, the FCA published its much-awaited consultation in relation to rolling out the SMCR to all authorised firms. The majority of its Consultation Paper is comprised of the 300 pages containing the revisions to its current rules. The specific requirements of the SMCR are complex, but as an overall summary of the FCA's proposed architecture:
- all authorised firms will be SMCR firms;
- there will be different types of firms, with different obligations applying to each: SMCR dual regulated banking sector firms; SMCR insurance sector firms; core SMCR firms; enhanced scope SMCR firms; and limited scope core SMCR firms;
- almost all employees of SMCR firms will be subject to the individual conduct rules (with some carve-outs for non-financial services activities;
- enhanced scope SMCR firms (i.e. those which meet specific financial tests, or which are required to be enhanced scope SMCR firms by the FCA) will have more applicable Senior Management Functions (SMFs) than core SMCR firms, and be required to allocate more prescribed responsibilities. They will (unlike core SMCR firms) need to prepare management responsibilities maps, and have appropriate handover procedures. Linked to this is the point that this is the only subset of firms now joining the SMCR to which the "no gaps" principle, which has been a significant part of the SMCR as it applies to banks, will apply. The no gaps principle requires a firm to allocate responsibility for each business area, activity or management function;
- limited scope core SMCR firms will, by contrast, be subject to fewer requirements than core SMCR firms, which the FCA describes in the consultation as having a "baseline" of applicable requirements; and
- the certification regime will, in principle, apply to all SMCR firms, but to differing extents.
The CP stated that the FCA's consultation in relation to the introduction of the SMCR to banks went through several rounds. The FCA anticipated publishing final rules in summer 2018, but given the scale and complexity of changes proposed, it would not be surprising if there were further rounds of consultation before all the rules are finalised.
Strengthening individual accountability in insurance: extension of Senior Managers & Certification Regime to insurers
PRA Consultation Paper 14/17, July 2017
In this consultation, the PRA proposed changes to its existing rules in SIMR in order more closely to align the accountability regime for insurers with the SMCR in place for banks. Specifically, the PRA proposed changes in relation to Solvency II firms, insurance special purpose vehicles (ISPVs) and large non-Directive firms (NDFs) in order to:
- create a new certification regime;
- apply conduct rules to all employees within the scope of such regime and create notification requirements in relation to conduct rule breaches;
- set out expectations in relation to the duty of responsibility; and
- align terminology in the SIMR with that used in the SMCR and create requirements for handover procedures.
The PRA consulted on various other amendments to align the SIMR and SMCR, and make it easier for individuals to transfer between the two.
The PRA also proposed to make new rules in relation to small NDFs, including the creation of a certification regime. The PRA's approach to identifying those within the scope of its insurance certification regimes is quite different to that of the FCA, and the PRA says that it intends to align this population so far as possible with those identified in relation to the application of the firm's remuneration policy.
The PRA has also since consulted on, and produced final rules in relation to, amendments to SMCR forms.
Individual accountability: Transitioning FCA firms, insurers, and individuals to the Senior Managers & Certification Regime
The FCA has recently published its consultation on the transitional arrangements for moving firms to the SMCR. Whilst there are some points of interest amongst the technical provisions, the most notable aspect of the consultation is the FCA's revised expectations around timing. It now expects commencement of the SMCR to be in:
- late 2018 for insurers; and
- mid-to-late 2019 for all other firms not currently within the scope of SMCR.
Previously the Treasury and the regulators had suggested that all firms would move to the SMCR during 2018. The FCA has said that the actual transition dates will be up to the Treasury, which will need to draft legislation amending the relevant provisions of FSMA.
As with banks, SMCR will be introduced on a staged basis: whilst much of the regime will be effective from commencement, firms will have a year from commencement to issue certificates of fitness and propriety to those staff who require them, and conduct rules will only apply to staff who are neither senior managers nor staff requiring certification from the first anniversary of commencement.
Responses to this, and the other SMCR consultation papers published in December and mentioned below, are due by 21 February 2018.
The Duty of Responsibility for insurers and FCA solo-regulated firms
Consultation Paper 17/42, December 2017
The "duty of responsibility" is the name given to the statutory power under the SMCR allowing the regulators to fine a senior manager where an authorised firm has breached its duties in an area for which the senior manager was responsible, and the senior manager cannot show that he or she took reasonable steps to prevent the breach. In its July consultation papers, the FCA suggested that further guidance on the duty of responsibility might be required as part of the roll-out of the SMCR to the non-banking financial services industry.
Having considered the matter, the FCA believes that no changes to the existing guidance are necessary, and so none are proposed in this consultation paper. Instead, the FCA has taken the opportunity to reiterate some of the key points from existing guidance, including that:
- whether a senior manager is responsible for the management of an area will be a question of fact: statements of responsibilities and responsibilities maps will be relevant but not definitive; and
- in considering whether to take action, the FCA will consider the seriousness of the breach, the individual's responsibilities and seniority and the need to use enforcement powers effectively and proportionately.
Strengthening accountability: implementing the extension of the SM&CR to insurers and other amendments
PRA Consultation Paper 28/17, December 2017
In this consultation paper, the PRA sets out proposed changes to forms, and other consequential changes and minor amendments to its rules and guidance. It also proposes to remove gendered language from the SMCR rulebook text (e.g. replacing "chairman" with "chair").
The changes are largely technical rather than substantive, with some renumbering of SMF roles applying to insurers (this will not affect the existing SMF roles in banks), integration of the lists of prescribed responsibilities applying to banks and insurers, and arrangements to facilitate SMFs moving from insurance firms to banking firms.
Breaches of the Disclosure and Transparency Rules
EMIR transaction reporting failures
Merrill Lynch International, 18 October 2017
The Financial Conduct Authority (FCA) has reached a settlement with Merrill Lynch International (MLI), under which it has imposed a fine of £34,524,000 on MLI in relation to failures in its reporting of exchange traded derivative (ETD) transactions over a two-year period. The size of the fine reflects the importance the FCA places on accurate transaction reporting. The Final Notice is also interesting for its description of what the FCA considers went wrong at a practical level for MLI – it accepts the genuine difficulties faced by the firm, but illustrates that the FCA expects such difficulties to be overcome.
Unlike previous FCA fines relating to MiFID reporting, the source of the reporting requirement relevant to the Final Notice is the European Markets Infrastructure Regulation (EMIR). Article 9 of EMIR requires counterparties to ETDs, inter alia, to report certain transaction details to a registered trade repository. In August 2013, some six months before its planned implementation date, the European Securities and Markets Authority (ESMA) recommended a delay in implementation of one year for the relevant Article 9 requirement. The European Commission rejected ESMA's recommendation, but did not do so until November 2013. The transaction reporting requirement for ETDs therefore began on 12 February 2014 as originally planned.
The FCA accepted that the bank's ability to carry out testing in the initial period after 12 February 2014 was affected by issues with the data that it received from the trade repositories, themselves suffering from technical issues.
The FCA's fine was imposed both for breaches of EMIR and for breaches of Principle 3, which requires firms to "take reasonable care to organise and control [their] affairs responsibly and effectively, with adequate risk management systems". The FCA's conclusions in this area are of general relevance to firms in relation to transaction reporting, and indeed more widely. The main points to be drawn from the final notice include:
- the bank failed to allocate sufficient personnel, or personnel with the right expertise – these failings continued, in one form or another, until July 2015;
- the bank implemented oversight arrangements for ETD reporting, but such oversight did not scrutinise MLI's compliance in detail; and
- the bank failed to implement adequate completeness and accuracy testing.
FCA fines and bans wife and bans husband financial advisor for lack of integrity
Final Notices have been published by the FCA in respect of Colette and John Chiesa, in connection with integrity failings. Mr and Mrs Chiesa were founders of Westwood Independent Financial Planners (Westwood), which entered sequestration following FCA action in 2011. As partners with unlimited liability in Westwood, Mr and Mrs Chiesa had substantial liabilities arising from claims which had been filed with the Financial Ombudsman Service.
In late 2011, a Trustee was engaged to evaluate the Chiesas' assets and liabilities with a view to allowing them to repay their creditors. The Chiesas made incomplete, inadequate and misleading disclosures to the Trustee. This included failing to disclose that they were in receipt of around £2.6 million from an offshore remuneration trust in the form of loans made between April 2012 and December 2014. The FCA concluded that these loans had never been intended to be repaid.
Westwood's liabilities to customers were ultimately borne by the financial services industry. By late 2016 the Financial Services Compensation Scheme had paid out over £3.8 million in connection with Westwood's activities. During the sequestration, Mr and Mrs Chiesa each paid only £200 per month to their creditors.
Mr and Mrs Chiesa have been banned from working in financial services. In addition, Mrs Chiesa was fined £50,000 for attempting to mislead the FCA during an FCA interview. No settlement discount applies to the financial penalty imposed on Mrs Chiesa. See below for a summary of the decision of the Upper Tribunal in relation to a reference made by Mr and Mrs Chiesa.
Payment of redress by BrightHouse
BrightHouse, 24 October 2017
Following on from engagement with the FCA, Caversham Finance Limited, trading as the rent-to-own provider BrightHouse, has committed to engaging in a customer redress scheme. As part of the redress, BrightHouse has agreed to pay over £14.8 million to 249,000 customers in respect of 384,000 agreements for lending which may not have been affordable and payments which should have been refunded.
Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, stated that BrightHouse "was not a responsible lender" and failed to meet the FCA's "expectations of firms in this sector". One of the key concerns identified by the FCA was that BrightHouse's "lending application affordability assessment procedures and collections processes" did not always deliver good outcomes for customers. There was a particular focus on those customers who were at a higher risk of falling into financial difficulty at the outset of any agreement.
The customer redress scheme proposed by BrightHouse separates customers into two groups:
- customers who may not have been assessed properly at the outset of the loan. Customers who handed back the goods will be paid back the interest fees charged under the agreement, plus compensatory interest of 8 per cent. Customers who retained the goods will have their balances written off. This seeks to deal with 114,000 agreements entered into between 1 April 2014 and 30 September 2016; and
- customers who made the first payment due under an agreement with the firm which was cancelled prior to the delivery of the goods. The first payment in such cases was not returned to all customers. BrightHouse will refund this first payment plus compensatory interest of 8 per cent. This seeks to deal with agreements entered into after 1 April 2010.
The FCA is aware that some customers are likely to fall into both groups. Furthermore, the FCA has confirmed that BrightHouse will write to all affected customers to explain the refund or balance adjustment that they will receive.
The FCA's treatment of this case is part of a continuum of cases relating to poor sales practices, and demonstrates that its interest in this area is ongoing.
Capita Financial Managers to pay up to £66 million for the benefits of investors in the Connaught Income Fund, Series 1
Capita Financial Managers Limited, 10 November 2017
A Final Notice has been published by the FCA in respect of Capita Financial Managers Limited (CFM). CFM was the Operator of the Guaranteed Low Risk Income Fund, Series 1 which later became known as the Connaught Income Fund, Series 1 (the Fund). The Fund was an unregulated collective investment scheme, operating from March 2008 until it went into liquidation on 3 December 2012. CFM had resigned as Operator on 25 September 2009.
CFM was found to have breached two of the FCA's Principles for Businesses during its time as Operator:
- Principle 2 (Skill, care and diligence) - CFM failed to conduct adequate due diligence on the Fund and also failed to correct this when it became aware of the shortcomings in its procedures. CFM further failed to monitor the Fund adequately during its period acting as Operator.
- Principle 7 (Communications with clients) - the FCA found that CFM failed to communicate with the Fund's investors in a way that was clear, fair and not misleading.
CFM has been publicly censured by the FCA and will be making a payment of up to £66 million, via the FCA, for the benefit of the Fund's investors. The FCA would ordinarily impose a financial penalty but chose not to on this occasion, as this would prevent CFM from making this payment, which aims to return the amount originally invested. The size of the payment has been determined taking account of the £22 million that has already been distributed to investors in the Fund by the liquidators.
FCA imposes fine in relation to market abuse
Paul Axel Walter, 22 November 2017
The FCA fined Paul Walter, a bond trader of some 20 years' experience, £60,090 for engaging in market abuse contrary to section 118(5) of FSMA. The relevant market abuse took place in the summer of 2014. It consisted of Mr Walter placing quotes on an inter-dealer trading platform in relation to six Dutch State Loans (DSLs). The quotes indicated that Mr Walter's intention was the opposite to what it actually was, i.e. when he wanted to sell, he represented to the market that he wanted to buy, and vice versa. So, for example, when Mr Walter's intention was to sell, he placed a high bid quote. This encouraged other market participants who were tracking his quotes using algorithms to raise their own bid quotes, such that Mr Walter was able to sell at a higher price than he could otherwise have achieved. He then cancelled his bid. The FCA found that this created a misleading impression as to the price and supply or demand of the DSLs. It also found that Mr Walter did not appreciate that his actions constituted market abuse, but that he should have done, particularly given the length of his experience and the fact that he was an approved person.
The case is a reminder that market abuse continues to be a high priority for FCA enforcement action. FCA statistics show that numbers of market abuse investigations opened by the FCA have risen in the last year.
FCA brings civil claim based on misleading statements
FCA announcement, 30 November 2017
The FCA has announced that it has started a civil claim in relation to misleading statements made in a pension report service, and is seeking orders for restitution and ancillary declarations and injunctions.
FCA fines Bluefin £4 million for misleading customers
Bluefin Insurance Services Limited, 06 December 2017
A Final Notice has been published in respect of Bluefin Insurance Services Limited (Bluefin). Bluefin is an insurance broker which was wholly owned by a large insurance group until 31 December 2016 but had held itself out to be "truly independent" during the period between 9 March 2011 and 31 March 2014. This was despite having a policy (which was not disclosed to customers by Bluefin brokers) that focused on increasing the business placed with its parent company. The FCA found that Bluefin failed to implement adequate controls to manage this conflict, meaning there was a risk that customers were misled into believing the Bluefin brokers would conduct an unbiased search of the market.
As a result, Bluefin was fined £4,023,800 (including a 30 per cent discount for early settlement). The Final Notice is a further example of the FCA's ongoing concern, over a number of years, in relation to conflicts of interest and their potentially prejudicial effects.
Complaints in relation to the FCA
Application for disclosure of FCA internal documents refused
Chiesa v FCA  UKUT 0275
The Upper Tribunal dismissed an application for disclosure of materials relating to the FCA's internal decision-making processes around initiating and pursuing action against approved individuals.
Mr and Mrs Chiesa were founding partners of FCA-authorised Westwood Independent Financial Planners (Westwood). In May 2011 the FCA took enforcement action against Westwood for mis-selling geared traded endowment policies and fined it£100,000. As a result of numerous customer complaints liabilities Westwood became insolvent and entered sequestration. The Chiesas were partners of Westwood with unlimited liability and a trustee was appointed to establish the value of their assets and liabilities so that an assessment could be made that would allow payments to creditors (one of whom was the FCA). The assessment process required the Chiesas to make full disclosure. During this process they remained approved persons. The FCA instigated an investigation and in October 2016 issued Decision Notices banning them and finding that they made inadequate, incomplete and misleading disclosures to the trustee about their financial situation to avoid the trustee inquiring into, and potentially recovering, assets for the benefit of their creditors. In addition, a £50,000 penalty was imposed on Mrs Chiesa for making misleading statements during a compelled interview.
In November 2016 the Chiesas referred the FCA's decision to the Upper Tribunal. In March 2017 they applied for disclosure of FCA internal decision-making materials under rule 5(3)(d) of the Tribunal Procedure (Upper Tribunal) Rules 2008. The Chiesas' argument was essentially that the FCA proceedings against them were instituted and pursued in bad faith; they were a means to enable the FCA to impose a financial penalty as a way of recovering the fine they imposed on Westwood and disclosure was necessary for the Tribunal to deal fairly and justly with the case.
In his 13 July 2017 judgment Judge Sinfield refused the application on the following grounds:
(1) Relevance: the disclosure sought was not relevant to the issues before the Upper Tribunal. The Tribunal's remit was the Chiesas' fitness and propriety and the appropriate action to be taken. Adopting the approach of Judge Berner in Ford & Ors v FCA  UKUT 41 (TCC), it was held that the Tribunal does not have jurisdiction to deal with complaints about the FCA's conduct of investigations which should be dealt with through the FCA complaints processes. The cases the Chiesas relied upon in arguing that there were real concerns of an abuse of power by the FCA that led to unfairness, or brought the Tribunal proceedings into disrepute, were very different in that in those cases the alleged abuse affected the facts forming the basis of the claim or was such that no proceedings could have taken place without it.
(2) Lack of evidence of bad faith/improper motive: even if he had been persuaded that the FCA's conduct was relevant, in any event the Judge was not satisfied there was evidence of bad faith or improper motive on the part of the FCA (on the balance of probabilities). Absent such evidence, there could be no duty on the Tribunal to order disclosure wherever bad faith or improper motive was alleged. Judge Sinfield considered some of the Chiesas' supporting evidence as "based on suspicion and supposition". In particular, he disagreed that the FCA approach to Mrs Chiesa's interview was designed to trick her into giving misleading answers and commented that it seemed "perfectly fair and proper".
Following this decision, the Chiesas agreed to settle the case in September 2017 with final notices published on 12 October 2017 (as to which see above).
Over recent years it has become more common for subjects of FCA enforcement action to contend bad faith/impropriety by the regulator and to seek disclosure of internal documents. This decision follows that of Judge Berner in the Ford case and Judge Herrington in Hussein v FCA  UKUT 0549 (TCC) in refusing to order such disclosure. Essentially, since the Tribunal is a de novo hearing concerned with the subject's behaviour it is clear that it will be extremely difficult to show that the regulator's conduct is of sufficient relevance to justify ordering disclosure. Whilst this judgment does not completely rule out the possibility, it is very clear that the situations where the regulator's conduct may be relevant are very limited and likely to be extremely rare (e.g. where it affects the facts forming the basis of the FCA's case). Although similar applications may continue to be made for tactical reasons, we would generally expect to see fewer of them in future.
Upper Tribunal upholds FCA fine and ban
Charles Anthony Llewellen Palmer v. Financial Conduct Authority  FS/2015/017
In September 2015, the FCA issued a decision notice to Mr Palmer imposing a fine of £86,691 and a full prohibition order against him. The prohibition order prevented him from holding a position in an authorised firm where he could exert significant influence on the carrying out of a regulated activity. Mr Palmer referred this to the Upper Tribunal. On 8 August 2017, the Upper Tribunal upheld the FCA's decision.
Mr Palmer was the majority shareholder and CEO of Standard Financial Group Limited. He was also a director and de facto CEO of Financial Limited and Investments Limited (the Firms). The Firms' business was the operation of a network of adviser firms. This network comprised 397 appointed representatives (ARs). Each of the ARs had its own customer base and the ARs acted as financial advisers. Under an agreement between each of the ARs and the Firms, the Firms accepted responsibility for the conduct of the ARs.
The FCA found that Mr Palmer failed to exercise due care, skill and diligence in his controlled function in managing the business of the adviser firms that he was responsible for. It considered that there was a critical lack of systems and controls in place for the activities of the approved individuals within the Firms, such that the Firms could not effectively monitor (and therefore control and mitigate) the risk of unsuitable advice to underlying customers.
Mr Palmer referred the FCA's decision to the Upper Tribunal based on three main grounds:
- the adviser firms having been disciplined by the FCA in relation to the failings, he was not personally culpable for them;
- in any case, these failings were the responsibility of the compliance systems and controls manager; and
- the FCA had "cherry-picked" examples of incidents so as to seek to paint a picture of an inappropriate culture.
The Upper Tribunal paid particular attention to Mr Palmer's role within and across the Firms and observed that his role, in reality, was quite different from that which he had described in his evidence. He denied have a controlling function and suggested that the Firms' board collectively controlled the group. In fact, Mr Palmer founded the group and devised and took ownership of the very business model on which the Firms operated. Mr Palmer had also accepted that he was aware of the enhanced risks of the model, associated in particular with the flexibility and the freedom afforded to each AR.
The Upper Tribunal held that, while the Board had overall responsibility for the Firms' systems and controls, it agreed with the FCA that Mr Palmer was responsible for ensuring that such systems and controls were effective and as robust as the business model required. As a result, the FCA's penalty and its severity were justified. In its conclusions, the Upper Tribunal noted that it did not find Mr Palmer to have the necessary competence to carry out the regulatory role and, perhaps more damagingly, that he did not see the value in the controls and compliance required by the regulations.
This is not the first time that Mr Palmer has been the subject of regulatory enforcement. He was issued with a final notice by the FSA in 2010 as an alternative to the FCA imposing a penalty on Financial Limited. The FCA did not consider that Mr Palmer responded adequately to the 2010 decision notice. His general history of compliance and the fact that the FCA had previously taken action were aggravating circumstances that weighed against him in the FCA's calculation of his penalty.
It is open to Mr Palmer to take his case to the Court of Appeal.
Findings of Complaints Commissioner – Failure by FCA to disclose documents during an investigation
Complaints Commissioner Response, 15 September 2017
The Complaints Commissioner has published his findings in relation to a complaint brought against the FCA with respect to shortcomings in the way it handled an investigation and the subsequent complaints process. The (then) FSA's Enforcement and Financial Crime Division (the Enforcement Team) started an investigation into the complainant on 29 November 2012. This investigation ultimately led to the Regulatory Decisions Committee (RDC) issuing a Warning Notice in 2014. This was done in reliance upon documents which had been requested by the US Commodity Futures Trading Commission (CFTC) and which had been provided by a bank to the FSA over several months starting from 2 November 2010.
Prior to the issue of the Warning Notice, the Enforcement Team had not raised with the RDC that the receipt of those documents potentially undermined the case against the complainant due to limitation. The limitation issue came to light later, resulting in the FCA dropping its case. This was notified to the complainant on 25 July 2014, with an explanation and apology following on 3 October 2014.
The Complaints Commissioner looked into: (i) the limitation matter, given the complainant's allegations that the Enforcement team had deliberately withheld/failed to disclose relevant material; and (ii) the FCA's subsequent delays in dealing with the complaint. The complainant requested a full independent and detailed explanation of what went wrong, an apology, and damages for distress/inconvenience.
In relation to the limitation issue, the Complaints Commissioner:
- found that there was evidence that the FSA had been aware of the potential significance of the limitation issue as early as the first half of 2011;
- concluded that the problem had not been a lack of awareness, but that a decision had been made early on to treat some of the documentation as having no impact on the limitation period, despite others in the Enforcement Team holding a different view;
- found no evidence that the FCA had deliberately withheld information from the RDC, but was critical of the fact that no one had alerted the RDC to the differing arguments on the limitation issue;
- agreed with the final decision of the FCA that the failure to alert the RDC to the limitation issue had been a serious mistake, rather than evidence of bad faith; and
- was critical of what he perceived to be the FCA's "closed minded attitude" and a "lack of rigour in important proceedings".
The Complaints Commissioner then considered the FCA's delay in handling the complaint. He considered that the delay between the initial FCA letter on 25 July 2014 and the explanation and apology on 3 October 2014 was unsatisfactory, and that the apology did not go far enough. His letter also notes that he had to intervene on several occasions when the FCA postponed its investigation, stating that in his view the FCA's view on investigating the complaint while related proceedings were ongoing had been unnecessarily cautious.
In light of his findings, the Complaints Commissioner stated that the FCA's failings in the case had been considerable. However, he did not believe the complainant's request for damages was justified.
Powers in relation to LIBOR contributions
Consultation Paper 17/15, June 2017
The FCA consulted on the way in which it would use its powers under FSMA (sections 55L, 137A and 137F) or the Benchmarks Regulation (BMR) to compel firms to contribute to LIBOR. The BMR power has not yet arisen, but the FCA's consultation is intended to be compatible with it. In particular, the FCA referred to one of the tests for compulsion under the BMR, being the firm's "actual and potential participation in the market that [LIBOR] intends to measure". This test requires the FCA to define the relevant market for these purposes and this formed part of its consultation.
Some interesting points, as to the FCA's general approach as well as specific proposals, include:
- the FCA does not rule out making firms contribute to LIBOR even where they are not already contributors, or do not contribute to the relevant currency;
- the FCA envisages that it would require contributions only from large banks that have good credit quality (issued debt of investment grade) and a presence in the UK;
- the FCA is consulting on its proposed criteria for measuring actual market participation, but is simultaneously gathering the data such criteria contemplate; and
- the FCA's estimate of the ongoing cost of contributing to LIBOR (£2.4 million each year) and the initial one-off cost to set up the infrastructure for doing so (£3.5 million).
While the FCA initially proposed to publish responses to the consultation and final rules in September 2017, it has not done so, probably because of the later announcement of the demise of LIBOR from 2021.
Handbook changes to reflect the application of the EU Benchmarks Regulation
Consultation Paper 17/17, June 2017
The Benchmarks Regulation (BMR) will, for the most part, apply from 1 January 2018. In this Consultation Paper, the FCA has set out its proposed amendments to the Handbook to make sure that it is consistent with the BMR. The areas of proposed change include:
- application of the SMCR (Senior Managers and Certification Regimes) and Approved Persons regime to benchmark activities;
- prudential requirements for administrators of benchmarks;
- expectation that administrators should forward to the FCA all suspicions of benchmark manipulation;
- provisions relating to a right of those compelled to contribute or continue administrating a benchmark to make representations to the FCA;
- application of BMR provisions to contributors that are UK branches of third country (i.e. non-EU) firms; and
- how the FCA intends to deal with applications for authorisation or registration under the BMR.
The FCA published final rules in late December 2017, which we will cover in the next edition of this update.
End of LIBOR
Speech by Andrew Bailey, 27 July 2017
In a speech on 27 July 2017, Andrew Bailey announced that LIBOR would be supported for a further five years, to the end of 2021, with a transition away from it taking place by the end of that time. He said: "We do not think we will complete the journey to transaction-based benchmarks if markets continue to rely on LIBOR in its current form. And while we have given our full support to encouraging panel banks to continue to contribute and maintaining LIBOR over recent years, we do not think markets can rely on LIBOR continuing to be available indefinitely." (Please click here for our note on that speech.)
Since then, the FCA has confirmed (on 24 November 2017) that all 20 panel banks have committed to ensuring the sustainability of LIBOR until the end of 2021. It has since announced the start of the next phase of sterling LIBOR transition work, together with the Bank of England (announcement of 29 November 2017). The announcement refers to the expanded, market-led Working Group, and its role in catalysing the change to SONIA as the primary sterling interest rate benchmark by the end of 2021.
Advice and customer understanding
Advising on Pension Transfers
Consultation Paper 17/16, June 2017
In this Consultation Paper, the FCA consults on changes to COBS 19 designed to secure better outcomes for those affected by the pensions freedoms introduced in 2015. In particular, the FCA is concerned to protect those who might be encouraged to exchange pensions with safeguarded benefits for investments with no safeguards. The FCA's proposals are summarised in five key points:
- all advice on the conversion or transfer of a safeguarded benefit must result in a personal recommendation (which the FCA believes reflects common current practice anyway);
- additional guidance in relation to such personal recommendations;
- amendment to the definition of a pension transfer specialist and guidance in relation to the same;
- replacement of the transfer value analysis requirement (TVA) (amidst concerns that advice had become focussed on it) with an appropriate analysis of the client's options, including a prescribed comparator indicating the value of the benefits being given up;
- the application of additional requirements in respect of pension opt-outs to cases where there are potential safeguarded benefits.
However, the Consultation Paper raises a number of other issues for discussion, including the risk that additional requirements will result in firms ceasing to provide this type of advice. Final rules are expected in early 2018.
FCA published findings from its Ageing Population Project
The FCA published an occasional paper setting out the key findings and outcomes from its "Ageing Population Project". The paper also outlines the FCA's strategy for mitigating potential harm which might arise in the way in which financial services are provided to the elderly.
The FCA found that, overall, there was scope for financial services firms to do more to enable elderly customers to access financial services easily and safely. The project and resulting report identified particular issues relating to retail banking, third party access, later life lending and long-term care. The issues identified largely fell under the following three broad headings:
Product and service design
The FCA found that many products and services appeared to have been designed with an "average" consumer in mind, and only a small minority of products were designed with an anticipation of the needs of an ageing population.
To this end the FCA suggested that firms try to understand the needs of older customers and take them into account when developing distribution channels. It also suggested involving older and vulnerable customers in testing and product design.
The FCA recognised that not all processes can or should be built around the specific needs of an ageing population. However, where other considerations have taken priority firms should consider the support they offer older customers and how this should change over time.
To this end, the FCA suggests firms could:
- better understand how to help older customers find the most appropriate products and services for their needs;
- help customers to identify when they are struggling and encourage them to seek help; and
- take greater steps to mitigate risks and provide appropriate support as consumer needs and circumstances change.
Continuously review and adapt strategies
The FCA suggests that firms could:
- consider whether they need to adapt or retain access channels for groups who depend on them; and
- continuously review strategies, business models, supporting policies and controls to ensure they remain appropriate in light of demographic change or changing consumer behaviours and needs.
At present, the FCA is treating this issue as part of firms' obligation to treat customers fairly, but this paper may be something of a shot across the bows, if firms do not take steps to address the issues identified by the FCA.
Customer understanding: Retail banks and building societies
FCA TR17/1, 17 July 2017
Building on the results of a survey commissioned in response to the recommendations of the Parliamentary Commission on Banking Standards, the FCA has published a thematic review on customers' understanding of the products they buy.
The FCA based the review on information requested from 18 banks and building societies and obtained by conducting visits to a sample of these firms. Examples provided by banks were about mortgage, credit card and cash savings account transactions. In particular, the review identified that:
- firms are increasingly aware of the importance of assessing customer understanding. Many have embedded (or are in the process of developing) systems which allow them to assess their customers' understanding of particular products throughout their lifecycle;
- some firms are confusing customer understanding with customer satisfaction;
- the most developed systems and practices for checking customer understanding are undertaken after a sale is made; and
- practices are least developed in online sales.
The review report also gives examples of differing pre-sale, point-of-sale and post-sale practices, to help other firms develop their approaches in this area. Initiatives taken by firms included:
- simplifying products and information;
- nominating individuals to be accountable for customer understanding (in some firms, this aligned with those performing relevant senior management functions);
- implementing online web-based chat systems; and
- having a team of qualified advisers to conduct post-sale follow-up calls.
The FCA does not have any specific rules regulating the assessment of customer understanding. However, it is worth nothing that it considers Principles 6 (customer's interests) and 7 (communications with clients) to be relevant. The findings will be used to inform the FCA's Strategic Review of Retail Banking Business Models.
Information about current account services
In July 2017, the FCA opened its consultation on introducing new rules for business current account (BCA) and personal current account (PCA) providers to publish information on service and performance. The Executive Director of Strategy and Competition at the FCA had suggested that, as information may not be as readily available as it could be, customers are "discouraged from looking for current accounts offering better performance".
The FCA's aim was to "promote effective competition" and empower customers to make effective comparisons between providers of PCAs and BCAs by requiring providers to publish information in the following categories:
- account opening, including account opening processes and information on the time it takes to open an account;
- time taken to replace lost, stolen or stopped debit cards;
- service availability – how and when services can be accessed; and
- major incidents – information about the number of operational and security incident reports to the FCA.
The consultation closed on 25 September 2017, and the FCA has now published a Policy Statement containing its feedback to the consultation, which has shaped the final rules. PS17/26 affects the majority of participants in the PCA and BCA markets, as well as those interested in the market. This includes firms that accept deposits (for example, banks and building societies) and those that provide payment accounts as defined by the Payment Accounts Regulations. It is also of interest to organisations that offer comparison services.
The response to the consultation was broadly supportive, although concerns were raised in some areas and some respondents submitted that the proposals could actually go further. The main changes to the rules consulted on in CP17/24 are as follows:
- In response to concerns about the suitability of the metrics relating to powers of attorney as an indicator of the service provided to vulnerable customers, these data will not be required to be published. Instead, UK Finance and the Building Societies Association are to coordinate development of an industry agreement to publish comparable information voluntarily.
- Transitional provisions will be put into place allowing firms not to publish account opening metrics and debit card replacement metrics until 15 February 2019. Firms will need to begin recording the time taken to open accounts and replace debit cards from 1 October 2018.
- Information about current account services is to be presented in a series of standardised tables in a set order. The FCA believes that this will make it easier to compare the information as published.
The full rules will come into force on 15 August 2018, when providers will be required to publish standing data in relation to account opening, service availability and major incident metrics.
Financial Advice Market Review (FAMR): implementation Part II and insistent clients
Policy Statement 17/25, December 2017
FAMR's final report, published in March 2016, set out to tackle the barriers facing consumers in accessing financial advice in relation to three main areas (please click here for our summary of FAMR's final report). One issue identified by firms in that context was their hesitation in providing customers with guidance, in case they were held to have given advice, albeit inadvertently.
As a result, FAMR recommended that the definition of advising on investments in the Regulated Activities Order be changed in line with the MiFID definition, such that most firms would only be carrying out the regulated activity if they provided a personal recommendation. In its Consultation Paper 17/28 the FCA consulted on the Handbook changes necessary as a consequence (including in relation to access for consumers to the FOS and FSCS).
The Policy Statement largely implements the consequential changes proposed in the consultation paper, and issues new guidance on how firms should process requests from "insistent clients" (i.e. those who have received a personal recommendation and decide to do something other than follow it).
The Consultation Paper had proposed extensive changes to PERG, including such scenarios as pre-purchase questioning (including decision trees), filtering on websites, and how the narrowing in scope of regulated advice (described above) will apply. Rather than implementing these changes at this stage, the FCA is considering these further and aims to publish guidance on these points early in 2018.
The Policy Statement also consults on retiring two pieces of non-Handbook Guidance: on inducements and conflicts of interest (FG14/1), and on independent and restricted advice (FG12/15).
Streamlined advice and consolidated guidance
Finalised Guidance 17/8, September 2017
Like the policy statement summarised above, this Finalised Guidance relates to recommendations made by FAMR. In this case, the guidance relates to two specific issues: streamlined advice, and the fact-find process.
For firms which have been following the development of the FCA's guidance in this area, it is worth noting that two key pieces of guidance (FG15/1 and FG12/10) will be retired from 3 January 2018. The Finalised Guidance now produced by the FCA replaces or restates certain parts of those two documents.
The term "streamlined advice" is used to describe a personal recommendation limited to one or more of a client's specific needs, that does not involve analysis of the client's circumstances not directly related to those needs. The FCA's guidance in relation to the provision of streamlined advice focuses on firms' provision of automated advice services, and it is clear that such services will need to be designed, tested and analysed carefully to ensure that customers use them appropriately. The guidance is detailed and the FCA has included examples of good and poor practice by firms.
The FCA also raises the possibility of "porting" a fact find from one firm to another, and anticipates that this might have advantages if done appropriately. It is clear, however, that each firm relying on the fact find would need to have suitable arrangements in place to confirm the accuracy of data before they are used.
Asset Management Market Study (AMMS)
Final report, June 2017
The final report of the AMMS is extensive, and will have been pored over in some detail by those in the sector. It emphasises the importance of the asset management industry in managing some £6.9 trillion in assets. The FCA's own summary of its findings indicates:
- weak price competition in a number of areas, which has a material impact on investors through the charges they pay for asset management services;
- no clear relationship between charges and the performance of retail active funds;
- sustained, high profits in the asset management industry over a number of years;
- lack of clarity as to fund objectives and inappropriate measure of performance;
- heavy reliance by some investors on the advice of consultants, and concerns as to the way in which the investment consultant market operates; and
- retail investors do not appear to benefit from economies of scale when pooling their investments.
Some of the specific remedies proposed are summarised below, but in addition, the AMMS final report refers to continued support for consistent disclosure of costs and charges. The FCA also indicated that it would chair a working group to consider how to make objectives clearer and more useful to investors. It further announced its intention to recommend that HM Treasury consult on bringing investment consultants within the regulatory perimeter.
Consultation on implementing asset management market study remedies and changes to Handbook
Consultation Paper 17/18, June 2017
The FCA's consultation builds on the findings of the AMMS, and contains proposals on three specific areas: governance; moving investors into better value share classes (and the circumstances in which the Authorised Fund Manager (AFM) could undertake a mandatory conversion); and risk-free box profits (where the AFM makes a risk-free profit on holding fund units sold in a "manager's box" before selling them at a higher price within the same valuation point). The FCA also launched a discussion as to whether it should consider introducing an end to the payment of trail commission, and whether remedies outlined in the Consultation Paper should be applied to other retail investment products.
The most interesting of these proposals is arguably governance, in relation to which the FCA focused on the boards of AFMs. The FCA proposed that the boards of AFMs should be required to assess (and document) annually whether value for money had been provided to fund investors. The FCA set out various points that the value for money assessment would need to include. Further, the FCA proposed that AFMs should be required to appoint a minimum number of independent directors. The Consultation Paper also indicated that the FCA would consult, as part of the Senior Managers and Certification Regimes (SMCR), on the introduction of a prescribed responsibility on the chair of the AFM board to act in the best interests of investors, but such prescribed responsibility does not appear in the list of those the FCA proposes as part of the extended SMCR (as to which see above).
The FCA's actions in relation to asset management since the publication of the AMMS final report, including first use of its competition enforcement powers
In September, the FCA announced a final decision to make a market investigation reference on investment consultancy and fiduciary management services to the Competition and Markets Authority, and to reject proposed Undertakings in Lieu.
The FCA went on to publish the Investment Platforms Markets Study Terms of Reference (MS17/1.1).
Finally, at the end of November, the FCA announced that it had provided a statement of objections to four asset management firms, alleging breaches of competition law as a result of sharing information relating to the prices they intended to pay for shares in forthcoming IPOs. As the FCA put it, the bilateral sharing of information allowed firms to know the other's plans during the IPO or placing process "when they should have been competing for shares". It does not seem to be alleged that the firms actually agreed to bid at specific prices. Given the fact that buy side market practice in this area has been varied, and in light of the economic dynamics of the current IPO market, it will be interesting to observe how the case proceeds.
This marks the FCA's first use of its competition enforcement powers. The statement of objections procedure is drawn from the Competition and Markets Authority's enforcement procedure, and the statement of objections itself is broadly equivalent to a combined warning notice and investigation report under the FSMA procedure.
The treatment of politically exposed persons for anti-money laundering purposes
Finalised Guidance 17/6, July 2017
The FCA has finalised its guidance on how firms should approach politically exposed persons (PEPs), their families and known close associates. The guidance is issued under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, and the FCA considers that it will satisfy the requirement for the FCA to issue guidance under section 333U of FSMA, when that provision comes into force.
The guidance is detailed in a number of respects, and should generally be helpful to firms in determining what procedures are appropriate in particular cases. It should also be helpful to individuals, in that the guidance sets out instances where firms ought not to treat a person as a PEP (e.g. because the office they hold is too junior), or ought to treat a PEP as posing a lower risk. The guidance also reiterates the FCA's position that firms are not expected to "de-risk" by refusing to have PEPs as customers, simply because they are PEPs
The FCA has produced detailed considerations as to: who a PEP is; who the family members of a PEP are; who the known close associates of a PEP might be; risk factors pointing to a PEP posing either a lower or higher risk; and steps that the firm might consider taking depending on the level of risk posed by a PEP. The guidance also contains useful information as to the level of sign-off firms should obtain in respect of high risk and low risk PEPs and how this interacts with the Senior Managers Regime.
It is clear from all this guidance, however, that firms will have to consider the detail of each case in order to determine how to proceed and document this carefully. The FCA has also since produced further draft guidance (in Consultation Paper 17/39) in relation to the Financial Crime Annual Return (REP-CRIM), including guidance to the effect that firms need only report in relation to PEPs (including their family and known close associates) whom they identify as high risk. The FCA says that this means, in practice, that firms will not need to make reports in relation to UK PEPs.
Proposed guidance on a sourcebook for professional body supervisors on anti-money laundering supervision
Guidance Consultation 17/7, July 2017
In March 2017, the government announced that it planned to introduce the Office for Professional Body AML Supervision (OPBAS), to be hosted by the FCA. As a result, in July 2017, the FCA launched a consultation process, part of which relates to the introduction of a "sourcebook for professional body supervisors", setting out guidance on how professional body supervisors should carry out their anti-money laundering supervision work.
The draft sourcebook (at Appendix 1 to the Guidance Consultation) includes the following expectations of professional body supervisors:
- that they allocate responsibility within the organisation for supervision of AML;
- that there is adequate management information in relation to the supervision of AML;
- that they allocate their resources as regards supervision on a risk-based approach (maintaining a risk profile for each member) and support their members in doing so;
- suggestions as to how ongoing supervision should be undertaken, such suggestions indicating that the burden of supervision is likely to be relatively heavy for professional body supervisors; and
- specific guidance on information sharing.
Responses to the consultation have been lukewarm – both the Law Society and the Bar Council have been critical of a lack of clarity as to how the relationship between OPBAS and professional body supervisors will actually work, and it is true that the FCA's proposed sourcebook is far more focused on its expectations of professional body supervisors than on the practicalities of OPBAS's role.
The consultation process closed in late October 2017, and it remains to be seen what the FCA makes of responses it receives.
Investment and corporate banking: prohibition of restrictive contractual clauses
Policy Statement 17/13, June 2017
The FCA published final rules (in COBS 11A.2) to prohibit UK firms from including restrictive clauses in written agreements with their clients (whether based in the UK or overseas). The prohibition extends to clauses which give firms a: "right to act", i.e. the right to provide any future primary capital market or M&A services to the client, or; "right of first refusal", i.e. the firm has the right choose to provide such services before anyone else can.
The following features of the FCA's final rules are also worth noting:
- the ban only applies to written agreements containing clauses relating to unspecified and uncertain future services – there is no restriction on firms agreeing terms for specific and known future work;
- "right to match" clauses are acceptable – this covers clauses that allow firms the chance to match an offer made to a client by another firm, so long as the client retains the right to choose either firm to provide the service;
- the ban applies to clients of all sizes;
- the ban only affects primary market services;
- restrictive clauses contained in bridging loan agreements or agreements for warehouse facilities are excluded from the ban because there are legitimate commercial reasons for their inclusion;
- the FCA rejected the argument that the ban (and its geographic scope in particular) would prejudice UK firms at the expense of their international counterparts (who, it was said, would be able to price initial work more cheaply because of the use of restrictive clauses ensuring income from future work).
The ban will take effect from January 3, 2018.
Staff incentives, remuneration and performance management in consumer credit – findings from the FCA's thematic review and proposed new rule and guidance
The FCA has consulted on the introduction of new rules and guidance in CONC, in order to try to improve on incentives, remuneration and performance management in consumer credit firms following a thematic review. The new rules would not apply to firms already subject to any of the remuneration codes in SYSC 19A to SYSC 19F inclusive, or to remuneration provisions made by an EEA regulator pursuant to specific EU legislation.
For those firms affected by the Consultation Paper and Guidance Consultation, the key points are:
- a rule requiring firms to put in place adequate arrangements to detect and manage any risk of non-compliance with their regulatory obligations arising from their remuneration or performance management practices;
- a requirement that firms take account of the nature, scale and complexity of their businesses, and the range of financial services and activities undertaken in the course of that business, when deciding how to comply;
- guidance on the purpose of the new provisions, including their relationship with existing requirements; and
- specific examples of good and poor practice.
The outcome of this consultation should be to focus the minds of consumer credit firms on an area that was subject to considerable scrutiny and reform in banks in particular, in the wake of the financial crisis. Given that scrutiny, it is perhaps surprising that the FCA found some of the higher risk incentives that it identified among consumer credit firms. Final rules are expected in early 2018.
Markets in Financial Instruments Directive II Implementation – Consultation Paper VI
FCA CP17/19, 03 July 2017
In July, the FCA published a Consultation Paper on its sixth set of implementation proposals for MiFID II and proposed changes to the FCA Handbook. In this Consultation Paper, the FCA published proposals:
- to bring recognised investment exchanges operating multilateral trading facilities and organised trading facilities within the scope of the Financial Services Compensation Scheme (as required by Article 5 of MiFID II);
- to amend the changes proposed to DEPP and the Enforcement Guide (as described in CP17/8), in order to comply with the final legislation introduced by the Treasury to implement MiFID II; and
- to make consequential changes to the Prospectus Rules and Glossary in the Handbook, to comply with legislative changes introduced by the Treasury to implement MiFID II.
The Consultation Paper once more reflects the significant amount of regulatory change currently underway, not least as a result of the imminent introduction of MiFID II. The necessary rule changes were due to be finalised by November 2017, but had not yet been published by the time this update was finalised.
FCA issues Policy Statement on implementation of the revised Payment Services Directive (PSD2)
The FCA issued a Policy Statement setting out its approach to implementation of PSD2 and the changes which will consequently need to be made to the FCA Handbook. The FCA plans to implement the changes to the FCA Handbook and the Approach documents as consulted on in CP17/11 and CP17/22 earlier in the year.
The FCA considers the changes to be of particular interest to payment services providers, banks, e-money issuers, money remitters, non-bank card issuers and merchant acquirers among others.
The Policy Statement covers changes in the following areas:
- Perimeter Guidance;
- authorisation and registration;
- complaints handling and reporting;
- conduct of business;
- regulatory reporting, notifications and record keeping;
- account information services, payment initiation services and confirmation of availability of funds; and
- payment providers' access to payment account services.
The Policy Statement also sets out the specific changes to be made to the Approach document and the approach that will be taken to regulation and enforcement by the Payment Services Regulator post-implementation.
The appendices contain the text of the changes which will be made to the FCA Handbook and non-Handbook directions for excluded providers.
FCA's Annual Report and Accounts 2016/2017
The body of the FCA's Annual Report focused on how the FCA furthered its three key objectives over the course of the past year, highlighting notable achievements as follows:
Securing protection for consumers
The FCA's work in this area included:
- investigating the markets in packaged bank accounts and contracts for difference;
- new rules requiring insurers to encourage consumers to shop around when policies expire;
- taking measures to ensure mortgage and consumer credit customers in arrears are treated fairly;
- capping pension exit charges;
- helping firms prepare for the impact of an interest rate rise on vulnerable customers;
- continuing to seek redress for consumers mis-sold PPI while bringing in a deadline for complaints of 29 August 2019; and
- investigating unfair treatment of small business customers.
Protecting and enhancing the integrity of the UK financial system
The FCA referred to ongoing supervision work, including:
- consulting on a range of measures designed to improve the access to information for investors on an IPO;
- undertaking a range of preparations for MiFID II implementation including publishing four consultation papers and holding a number of workshops;
- taking action against market abuse;
- conducting an ongoing review of rules relating to crowdfunding;
- addressing concerns in relation to "dark pools"; and
- implementing measures to support and encourage whistleblowing.
This section of the report also contained more in-depth analysis of the FCA's work in relation to wholesale financial markets; financial crime and anti-money laundering and firms' culture and governance.
Promoting competition for consumers
The FCA also reported on the following work related to its competition remit:
- market studies into the investment and corporate banking, credit card, asset management, insurance add-on and mortgage markets;
- the New bank Start-up Unit in conjunction with the PRA; and
- support for an effective implementation of the Second Payment Services Directive.
The FCA also noted that it is providing impartial technical advice to the government in relation to Brexit, and is working with firms to plan for the future.
FCA Mission – Our Future Approach to Consumers
FCA Mission Paper, 6 November 2017
In April 2017 the FCA published "Our Mission 2017", which provides a framework for the FCA's framework choices. As part of that Mission, the "Future Approach to Consumers" paper has been published to explain the approach to regulating for retail consumers in greater depth.
In this paper, the FCA offers its insight into "who are consumers in 2017" and lays out its vision for a well-functioning market that works for consumers. In all markets it wants to see:
- that consumers are enabled to buy the products and services they need because the environment in which they are sold is clear, fair and not misleading, with a good choice architecture; and
- high-quality, good-value products and services that meet consumers' needs.
Additionally, the FCA states that, where markets work well for consumers, it should be possible to observe:
- inclusion – everyone is able to access the financial products they need and the needs of vulnerable consumers are taken into account; and
- protection – consumers are appropriately protected from harm.
This approach has been developed using a wide range of research, including the results of the Financial Lives Survey (published on 18 October 2017). It is based around five core ideas: consumer and firm responsibility; keeping pace with a changing environment; regulating for vulnerable consumers; having regard to access and tackling exclusion; and delivering better outcomes for all consumers.
The FCA states that its approach will be based on an appropriate balance of its existing range of tools and convening powers, used to diagnose and remedy harm. The intention is to prioritise the needs of all types of retail consumers in the FCA's interventions and other decisions.
One additional point firms should note is that the paper mentions that a number of stakeholders have identified a potential need to introduce a new duty of care. This would impose an obligation on firms to exercise reasonable skill and care in the provision of services to customers. However, the FCA has stated that this will require detailed consideration, best done following Brexit. At that time, a Discussion Paper will be published to explore the issue separately. It is questionable, however, what such a duty would add to the obligations already on firms.
It is worthwhile noting that the FCA has stated that this paper is not its final and definitive approach – in addition to setting out the general approach, the paper contains six consultation questions. The FCA will consider responses to this consultation, with a final Approach to Consumers due to be published in 2018. Responses to the consultation should be submitted by 5 February 2018.
PRA Policy Statement in relation to regulatory references
Policy Statement 19/17, 20 July 2017
In February 2017 the PRA published the Occasional Consultation Paper (CP2/17), setting out proposed changes to PRA rules and existing Supervisory Statements (SS). The consultation was relevant to all PRA authorised firms. In this Policy Statement, the PRA has published feedback to CP2/17. PS19/7 includes the final rules and updated SS34/15 "Guideline for completing regulatory reports" and SS9/13 "Securitisation".
The PRA has given feedback and set out its final policy decisions as follows:
- Regulatory references – minor amendments are to be made to the language relating to the regulatory references rules in the Fitness and Propriety, Insurance – Fitness and Propriety and Large Non-Solvency II Firms – Fitness and Propriety parts.
- Non-Solvency II firms – external audit reporting and supplementary notes. Rule 2.5 of the Insurance Company – Reporting Part is to be amended to exclude from the scope of external audit the reporting that is required under Insurance Company – Reporting 4.24 to 4.25.
- Remuneration – committees and deferral periods. Minor amendments are to be made to Remuneration 7.4, as proposed in the CP. However, the PRA has decided to leave Remuneration 15.17(1)(b) as it is currently drafted. This is because a response was received indicating that the proposed amendment would not clarify the provision.
- Ring-fencing – residual reporting requirements for ring-fenced bodies (RFBs). Amendments and additions are to be made to the reporting requirements for RFBs, and amendments are to be made to the reporting requirements set out in the Regulatory Reporting Part of the PRA Rulebook. In addition to the changes which are to be made, the PRA confirmed that there will be no need to submit duplicate data to meet IFRS 9 reporting requirements where an RFB sub-group already reports the same data under FINREP reporting requirements.
- Securitisations – implicit support and external credit assessment institution mapping. Changes are to be made to SS9/13 to align the Implicit Support and SRT chapter (5) with the EBA guidelines on implicit support for securitisation transactions. Chapter 7 "Mapping of ECAI credit assessments to credit quality steps" is to be deleted.
The PRA is also considering the responses received to Chapter 2 "Credit risk mitigation – secured guarantees" and has said that feedback is to be provided in a separate PRA document.
Bank of England seeks views on details of the procedure for the Enforcement Decision Making Committee (EDMC)
The Bank of England (the Bank) has published a consultation paper on the procedure for the EDMC, which has been set up following the outcome of an earlier consultation paper issued in July 2016.
The Bank now proposes that:
- the remit of the EDMC will be to make decisions (which can be appealed to the Upper Tribunal) on behalf of the Bank in contested enforcement cases with respect to Prudential Regulation, Financial Market Infrastructure and Resolution as defined in the draft statutory provisions annexed to the Consultation Paper;
- members of the EDMC will be independent of the current Bank executive (and not employees of the Bank), appointed for fixed three-year periods by the Court of Directors of the Bank (the Court) with a term limit of two consecutive terms, removable prior to the expiry of their fixed term by the Court only where they are unable or unfit to discharge their function;
- the EDMC will eventually consist of nine members, of whom three will be legally qualified, but the Court will appoint an initial five, of whom two will be legally qualified, it will be chaired by one of its legally qualified members and all members will receive reasonable remuneration and expenses; and
- a panel of at least three EDMC members, of whom one must be legally qualified, should be convened to hear and resolve each contested enforcement case by majority vote, with a nominated "Panel Lead" (chosen from the legally qualified members) having a casting vote in the event of a split vote.
The Bank invites feedback until 2 February 2018. The structure and procedure proposed by the Bank will not be entirely alien to those familiar with the Regulatory Decisions Committee of the FCA, but these proposals mark an interesting further step in the development of the Bank's enforcement procedures.
Consultation Paper on Industry Codes of Conduct and Discussion Paper on FCA Principle 5
Consultation Paper 17/37, November 2017
The proposals in this consultation paper are closely related to the Fair and Effective Markets Review (FEMR) in relation to fixed income, currency and commodities (FICC) markets. One of the main recommendations of FEMR was the development of new industry codes of conduct, including in relation to the global spot FX market.
The FCA is now consulting on industry codes in relation to unregulated activities. Its proposals are, in summary:
- to recognise certain industry codes in relation to unregulated activities, with the effect that compliance with such codes would tend to indicate compliance with applicable FCA rules that reference "proper standards of market conduct"; and
- to set out the criteria and outline process it would apply to deciding whether or not to recognise a particular code.
The FCA also seeks views on whether its approach to enforcement in the context of the Senior Managers and Certification Regimes (SMCR), including the conduct rules, is sufficiently clear in relation to the relevance of industry codes.
Finally, the FCA has started a discussion as to whether Principle 5 (requiring a firm to observe proper standards of market conduct) should be extended to unregulated activities. This is clearly a possibility that the FCA favours.
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