Includes:

  • FCA Paper on “Regulatory Sandbox”
  • Terms of Reference for the FCA’s Asset Management Market Study
  • FCA Consults on Regulatory Fees and Levies for 2016/17
  • Guidance for Outsourcing to the Cloud and other Third-Party IT Services
  • Speech on Internal Investigations by Firms
FCA Paper on “Regulatory Sandbox”

The FCA has published a report to the HM Treasury that sets out its plans to expand the scope of Project Innovate by implementing a ‘regulatory sandbox’.

The ‘Sandbox’
The ‘regulatory sandbox’ endeavours to offer an environment in which regulatory exemptions apply and financial services firms are able to test “innovative products, services, business models and delivery mechanisms” without immediately facing all the usual regulatory consequences of engaging in the activities in question.

It is thought that this innovative new service holds the potential to generate greater competition in the interests of consumers by:

  • Reducing the time taken and, potentially, the cost of getting innovative ideas to market;
  • Allowing greater access to finance for innovators;
  • Enabling more products to be tested and, thus, potentially introduced to the market; and
  • Enabling the FCA to work with innovators to ensure that suitable consumer protection safeguards are built in to their new products and services.

Both non-authorised companies and existing authorised firms will be able to engage with the ‘sandbox’, although “consistent criteria” on eligibility for testing via the scheme will apply.

One option the regulator has proposed for un-authorised firms would permit these businesses to experiment with new products or services in a real-life environment whilst observing a ‘light touch’ regulatory regime. It was clarified, though, that firms carrying out payment services or e-money activities would not have access to this restricted authorisation mechanism, and that this would not “replace the banking mobilisation authorisation process” that exists already. The restricted authorisation option would enable businesses to be authorised in their own right, while having to meet authorisation requirements that are proportionate to testing activities, although when launching full commercial activity firms will be required to apply to have restrictions lifted so as to carry on relevant regulated activities. There will, however, be no need to apply for new authorisation.

The sandbox would also be open to authorised firms and technology companies providing outsourced services in the financial services sector.

Firms engaging in sandbox testing via this mechanism could receive assistance in a number of ways, including assurances from the regulator that their testing activities will not be subject to enforcement action. The FCA may also provide guidance on how regulations apply to their testing activities, and in some circumstances sandbox companies could also obtain waivers to carry out testing activities that do not comply with existing regulations.

Next Steps
The FCA intends to open the ‘sandbox unit’– the team that will be responsible for considering sandbox applications and monitoring the testing process – to proposals from firms for testing in spring 2016, and over the next few months it will engage with interested parties to finalise the design of how ‘sandbox unit’ will operate.

Terms of Reference for the FCA’s Asset Management Market Study

In its 2015/2016 business plan the FCA announced its intention to undertake a market study into the £6.6 trillion UK asset management industry, and the terms of reference for this market study have now been published.

Background
The UK is Europe’s largest asset management market with around £6.6 trillion invested, and is second only to the US globally. Of this £6.6 trillion £2.1 trillion are pension fund investments, with £1.2 trillion in retail investment products and £0.4 trillion in public sector and charity investments.
When the FCA announced its intention to undertake the market study this followed feedback from the wholesale sector competition review in 2014 which indicated that there might be competition issues in asset management, in particular:

  • The difficulty investors have in making sure they are getting value for money and in monitoring the performance of asset managers;
  • The role of investment consultants and potential conflicts of interest arising from the provision of advice and asset management services;
  • The incentives and ability of asset managers to control costs incurred on behalf of investors; and
  • The bundling of ancillary services and the quality of some of the services provided.

The Study
This study marks the first example in the asset management sector of the FCA beginning to explore the possibilities of its new competition power. Based on its current understanding of how the asset management sector works, and with the feedback from the wholesale sector competition review in mind, the FCA will assess three main areas over the course of the next year:

  • How asset managers compete to deliver value;
  • Whether asset managers are motivated and able to control costs along the value chain; and
  • What effect investment consultants have on competition for institutional asset management.

Across all three of these areas of focus the FCA will look at whether there are any barriers to innovation and/or technological advances in asset management, and will consider both retail and institutional investors in its study.

Given the size of the market and the long-term nature of investments, even a small improvement in the effectiveness of competition could be of substantial benefit for investors. For instance, with over £6.6 trillion assets under management, an improvement in competition that reduced totals charges paid by investors by a small amount could have a significant impact on net returns for investors.

FCA director of strategy and competition, Christopher Woolard, described asset managers as providing an important economic function, bringing together those with money to invest and companies and governments that need capital, adding that the FCA’s market study “aims to ensure that both retail and institutional investors get value for money when purchasing these services – which we expect to further strengthen the UK’s position as a major centre for asset management”.

Next Steps
This document marks the launch of the FCA’s market study, throughout which it is eager to hear from all market participants about their experiences. The regulator aims to publish an interim report in the summer of 2016 to set out its analysis and preliminary conclusions.

FCA Consults on Regulatory Fees and Levies for 2016/17

The FCA has issued a consultation paper (CP15/34) titled ‘Regulatory fees and levies: policy proposals for 2016/17’, outlining its proposed policy amendments and detailing how its fees will be raised from 2016/17.
A summary of the FCA’s proposals are as follows:

  • Chapter 2 – To make a free-standing FCA fees handbook, independent of the PRA Handbook. The PRA is holding a similar consultation on its handbook. The FCA will make only the minimum necessary changes to text, rather than proposing any changes to policy per se;
  • Chapter 3 – To begin to claw back the data reporting costs associated with market monitoring under MiFID II and MiFIR;
  • Chapter 4 – To simplify and make clearer its transaction charges and yearly fees for UK Listings Authority (UKLA) costs recovery, and to target cost recovery more effectively towards the demands made on UKLA’s resources;
  • Chapter 5 – To impose a 10% discount on fees paid by EEA branches that passport into the UK market as home finance intermediaries under the Mortgage Credit Directive, and to bring forward – from 30 April to 1 April – the 'on-account' date when larger firms pay the first instalment of their annual fees, with effect from 1 April 2016.

The regulator has set a deadline of 8th January 2016 for comments in relation to CP 15/34.

Guidance for Outsourcing to the Cloud and other Third-Party IT Services

Introduction
The FCA’s proposed guidance on its rules relating to outsourcing to the cloud and other third-party IT services has been published in its Guidance Consultation 15/6.

The draft guidance endeavours to assist all firms in successfully overseeing all aspects of the life cycle of their outsourcing arrangements, from deciding to outsource, choosing an outsource provider, and monitoring outsourced activities on an ongoing basis, through to exit.
In producing this guidance the FCA worked closely with Project Innovate to identify areas where its regulatory framework needs to adapt to enable further innovation in the interests of consumers.

‘The Cloud’
‘The cloud’ is a broad term which not all firms have interpreted in the same way. For the FCA it comprises a spectrum of IT services provided in various formats over the internet including, for instance, private, public, or hybrid clouds, as well as Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and Software as a Service (SaaS). The aim of the regulator is to avoid imposing inappropriate barriers to firms’ ability to outsource to innovative and developing areas, while ensuring that risks are appropriately identified and managed.

Draft Guidance and Risks of Outsourcing
The FCA identifies that there are particular risks associated with outsourcing to the cloud which differ from traditional outsourcing arrangements, and these risks principally impact the degree of control exercised by the firm:

  • Cloud customers could feasibly have less scope to tailor the service provided;
  • Cloud customers might have to accept that cloud service providers will move their data around (customers may in some cases, however, be able to specify the overall geographic region in which their data is stored); and
  • Firms should have consideration for the risk associated with outsource service providers who may contract out part of their operation to other cloud providers, something which may occur without the firm initially realising.

Consequently the FCA is elucidating in greater detail its approach to regulating firms who outsource to the cloud and other third-party IT services; the regulator has identified no fundamental reason why cloud services (including public cloud services) cannot be implemented – with appropriate consideration – in a way that complies with its rules fully.

The FCA stresses also that firms need to be aware of international developments that could feasibly impact their process of decision-making in regard to the use of cloud services, most notably the new EU digital Single Market strategy and EU Data Protection legislation reform. As these are evolving areas, the FCA is engaging in this work as proposals develop and, as such, firms and service providers alike ought to monitor EU developments and the impacts on their businesses.

Critical and Important, or Material Outsourcing?
It is expected that Firms will be able to demonstrate that outsourced functions are considered critical or important, or whether it is material outsourcing. These are specific terms in respect of outsourcing and are defined in the Handbook or Regulations as follows:

  • Critical or important – if a defect or failure in its performance would materially impair the continuing compliance of a common platform firm with the conditions and obligations of its authorisation, its other obligations under the regulatory system, its financial performance, or the soundness or continuity of its relevant services and activities (SYSC 8.1.4R).
  • Material outsourcing – outsourcing services of such importance that weakness or failure of the services would cast serious doubt upon the firm’s continuing satisfaction of the threshold conditions or compliance with the Principles for Businesses (PRIN).

Next Steps
The FCA are consulting on this guidance for three months and welcome any comments, with the deadline for responses the 12th February 2016.

Speech on Internal Investigations by Firms

Introduction and Background
On 5th November Jamie Symington, director in enforcement (wholesale, unauthorised business and intelligence) at the FCA gave a speech at the Pinsent Masons Regulatory Conference 2015 in relation to internal investigations by firms.

Internal investigations conducted by firms of their own affairs when things have gone wrong – either at their own initiative or through agreement with the FCA – is a long-established and largely uncontroversial practice, and often such investigations and reports are prepared by firms where there is no likelihood of enforcement action.

Where firms wish to undertake internal investigations of matters where there is a possibility of enforcement action by the regulator, however, great care must be taken to ensure that any such action is not prejudiced. These instances, therefore, prove to be more problematic.

In his speech Mr Symington discusses the ‘delicate balance’ that must be struck between a handful of different factors, and the most significant points of interest are summarised below.

Factors to Consider
• Self-Reporting – Where a firm has decided to investigate conduct concerns, they are expected to consider whether it is appropriate to notify the FCA and should do so at the earliest possible opportunity. This is consistent with Principle 11 in the FCA Handbook, which requires regulated firms to “deal with its regulators in an open and cooperative way”, and inform the FCA of anything about which it would reasonably expect notice.

Firms are not encouraged to report every single issue on a daily basis but rather they are expected to be capable of judging the seriousness of a problem and subsequently decide if it is urgent enough to tell the FCA (fully and promptly). When a firm acts promptly in reporting a serious problem, the most obvious mutual benefits are efficiency and speed of outcome.

• Importance of early engagement with the FCA – If a matter is such that it would trigger notice to the FCA then it is vital that the firm discusses the scope of its investigation with the regulator as early as possible, and the conversation will often be with Supervisors in the first instance. Typically the regulator can only properly make the most of the utility of the report if it has had the opportunity to comment on its proposed scope and purpose.

It is important for firms to recognise how early engagement with the FCA can benefit them as well as the regulator. If the FCA does not have the chance to comment on the scope of the report, for instance, the firm might spend time inefficiently – and potentially unnecessarily – at a later stage attempting to convince the regulator why the scope it chose and the methods employed hold up to scrutiny. Worse, the FCA could conclude that the report generated cannot be relied on and the investigation has to be completely redone.

• Importance of Transparency – “If there is one core value that I would stress and encourage above all”, Mr Symington said, “it is transparency”.

When it comes down to the details of whether, how, and when a firm chooses to share specific documents, there are a many obstacles that they can choose to put in their path. Typically the FCA do not encounter issues with businesses sharing historic evidence gathered in the course of an investigation, but what is more problematic are documents that are created during the firm’s investigation.

The FCA understands and respects the needs and rights of firms to claim and protect their rights to legal privilege where appropriate, although at the same time firms need to take care when conducting internal investigations not to let legal privilege become an unnecessary barrier to sharing the output with the FCA. With care the right balance can be struck.

The FCA appreciates that maintaining confidentiality is something that firms feel very strongly about, and recognises that firms are more likely to volunteer information to them if they know that the regulator is mindful of this sensitivity. Mr Symington stressed that the FCA certainly has “no interest in deliberately undermining confidentiality or legal privilege”.

Conclusion
The FCA has the job to look after its statutory objectives – protecting consumers, guarding market integrity, promoting competition. These come first, although it is willing to be creative and work with the regulated community on how it achieves those goals.

However it also must operate with certain core values, and in an enforcement investigation it needs to get at the facts and the evidence. The FCAs want to do that in the most efficient way possible without compromising rigour, fairness and justice to all parties.

Includes:

  • Responses to ESMAs Consultation on ITS – Data Service Providers, Derivatives Reporting
  • Minutes of FCA Meeting on MiFID II Implementation
  • Speech by Steven Maijoor and Potential Delay of Entry into Force
Responses to ESMAs Consultation on ITS – Data Service Providers, Derivatives Reporting

On 4th November ESMA published the responses received to the Consultation on Draft implementing technical standards in relation to trading suspensions, data service providers, and derivatives reporting under MiFID II.

Respondents generally agreed with the draft ITS on the timing and format of communications and publications, although a handful recommended having some workshops with different organisations in order to share the knowledge and the best practices about this topic, whilst others suggested that perhaps National Competent Authorities (NCAs) should also make use of relevant news services where available when communicating the suspension or removal from trading of an instrument.

As regards the draft ITS for data reporting services providers, despite overall support a number of questions and doubts were voiced regarding the channel of the communication. Typically the idea of a single and centralised mechanism was supported as economies of scale could be achieved both for reporting entities and regulators provided that eventually local direct reporting mechanism will no longer be operating and all the waivers currently in force under MiFID will still apply. The overriding opinion is that such a centralised mechanism should be organised and made precise by ESMA, although respondents would appreciate more details regarding the channel of communication between Banks and ESMA.

As for the draft ITS for data reporting services providers, Article 58 of the Directive will require an investment firm or market operator operating a trading venue which trades derivatives or emission allowances, or derivatives thereof, to produce and submit:

a. A weekly public report with the aggregate positions held by the different categories of persons for the different commodity derivatives or emission allowances or derivatives thereof traded on their trading venue, specifying the number of long and short positions by such categories and changes thereto since the previous report; and
b. Provide the competent authority with a complete breakdown of the positions held by all persons, including the members or participants and the clients thereof, on that trading venue at least on a daily basis.

Generally the proposed day and time for submission was accepted, however some respondents raised concerns that having a monthly report is enough. For some weekly reporting may be too demanding to manage with the standard of data and information potentially suffering as a result, thus raising concern as regards a potential inverse relationship between the frequency of a report and its quality.

Next Steps
On the basis of the responses received, ESMA will revise the draft technical standards and send the final report to the European Commission for endorsement by 3 January 2016.

Minutes of FCA Meeting on MiFID II Implementation

The minutes from the latest meeting of the FCA’s MiFID II implementation roundtable have been made public. The FCA provided the following updates on the implementation measures for MiFID 2:

  • It now appears likely, based on comments made by a senior commission official at a recent conference, that the Delegated Acts will be adopted towards the end of this year. They will then enter a period of scrutiny by the Parliament and Council during the first quarter of 2016 before being published in the Official Journal.
  • When asked if it had any view on what will be in a regulation versus what will be in a directive, it noted that at the Expert Group of the European Securities Committee (EGESC) in May several Member States had argued for use of a directive for some of the implementing measures, particularly those dealing with client assets and conduct provisions covered by Article 24 of the level 1 where in both cases there are provisions allowing Member States to go beyond the provisions in MiFID II.
  • The Parliament and Council are meeting to discuss the technical standards and, so far, the majority of external commentary on the standards has focused on non-equity transparency, position limits, the ancillary exemption for commercial firms trading commodity derivatives, and position limits.

As discussed at the previous Roundtable, the FCA said that it plans to publish consultation papers in December and, probably, March 2016 on the implementation of MiFID II.

The first consultation will cover mainly markets issues whilst the second consultation will cover, amongst other things, conduct issues, client assets, systems and controls, enforcement, commodities and the definition of a financial instrument. It is not appropriate to consult on matters covered by the delegated acts until they have been adopted by the Commission.

The FCA is planning to include a Handbook Guide to MiFID II. This reflects the fact that a significant amount of MiFID II takes the form of directly applicable regulations most of which will be referenced in the Handbook but not copied out. The guide will attempt to clarify how the various parts of the UK’s implementation of MiFID II fit together, and a draft would be included in the December Consultation Paper.

Speech by Steven Maijoor and Potential Delay of Entry into Force

On 10th November Steven Maijoor, ESMA Chair, gave a speech before the Economic and Monetary Affairs Committee of the European Parliament (ECON) providing an update on ESMA’s work in connection with the revised MiFID II. Mr Maijoor covered the following issues in particular:

• Non-Equity Transparency – ESMA have ultimately adopted an instrument-by-instrument approach in determining whether a bond is liquid. ESMA has taken the view that this approach delivers greater accuracy and adaptability, and therefore captures a population of bonds that, based on recent trading activity, can be considered as liquid. Mr Maijoor mentioned that the non-equity transparency regime covers a vast range of asset classes, particularly on the derivatives side, and ESMA must now focus on preparing for the crucial phase of implementation, which will include performing liquidity assessments and setting the thresholds for transactions across asset classes and having them in place in time for market participants who need to adjust their systems accordingly.

• Position Limits – ESMA has adjusted the range of limits that can be set within 5% to 35%, taking into consideration ECON’s concerns that the previous lower limit of 10% may not be sufficiently strict to deal with highly illiquid contracts, for instance. This approach should result in national regulators setting strict limits where necessary, while allowing them to set less ambitious limits where this is adequate in order to maintain minimum levels of liquidity.

• Implementation Work – Mr Maijoor clarified that the next technical standards package to be issued will have regard to the implementing technical standards which will address, inter alia, position reporting.

Timing
In his speech Mr Maijoor discussed the implementation challenges in the run-up to the implementation date of MiFID II, mentioning that the timing for stakeholders and regulators alike to implement the rules and build necessary IT systems is “extremely tight”. Moreover, there are a few areas where the calendar is “already unfeasible” down to the need for certain regulatory technical standards (RTS) to be finalised before the necessary complex IT systems can be built.
The possible need for delaying parts of MiFID II was raised in a letter from Mr Maijoor to Oliver Guersent (director general financial stability, financial services, and capital markets at the European Commission), in which he shared his analysis on the feasibility of having all required systems in place by 3rd January 2017.
The letter is accompanied by a note explaining that it is unlikely that the Level 2 provisions will be in the Official Journal of the EU before March 2016 – this would leave less than nine months to develop the systems needed for MiFID II implementation, which for most complex systems is insufficient.

European Parliament’s statement on potential delay
On 27th November the European Parliament (EP) informed the European Commission of its position regarding the potential delay of the entry into force. As things stand there is no clear indication whether the European Commission will either delay or phase in certain elements of MiFID II, or whether they will take any action at all. However, a recent press release states that the European Parliament is ready to accept a one-year delay, although this applies only “if the Commission finalises the implementing legislation swiftly and thereby takes into account the European Parliament’s priorities”.

Conclusion
Despite strong suggestions that the implementation date of MiFID II will likely be shifted back (or, at least, some elements of the Directive), the safest course of action for firms would be to continue with their planning for the new regime on the assumption that the 3rd January 2017 implementation date still stands.

Includes:

  • FCA’s Consultation on Implementation of MAR
FCA’s Consultation on Implementation of MAR

The FCA has published a Consultation Paper titled “(CP15/35) Policy proposals and Handbook changes related to the implementation of the Market Abuse Regulation” regarding the forthcoming changes to the market abuse regime under the Market Abuse Regulation (MAR).

From its implementation due date on 3rd July 2016, the principal legal obligations relating to market abuse will be set out in the EU Market Abuse Regulation (EU MAR) and its implementing measures, and it is proposed that the Handbook will provide guidance on, and signposts to, EU Mar where the FCA considers it appropriate.

Background
The new regime entails a considerable degree of change from the FCA’s current market abuse regime; whereas the current regime is centred largely around the 2003 Market Abuse Directive (MAD) with specific UK ‘add-ons’ founded upon the then existing UK regime, the new regime will derive from the Market Abuse Regulation 596/2014 (EU MAR).

Since the adoption of MAD in 2003, the financial markets have seen both the creation of new forms of financial instruments and the emergence of new trading platforms, coupled with a poor track record for the prevention and enforcement of market abuse in some Member States. Against this backdrop, the Market Abuse Regulation (MAR) was negotiated and is intended to update and strengthen the existing EU market abuse regime.

The New Regime
Being in the form of an EU Regulation, the new regime will be directly binding in all Member States and will require the FCA to make a number of alterations to the existing UK regime.
Among the chief changes introduced by the new regime (set out in Article 2 of EU MAR) is the expansion of its scope to capture all financial instruments traded on, or admitted to trading on, a Multilateral Trading Facility (MTF) and an Organised Trading Facility (OTF), in addition to regulated markets. This will encompass also those investments whose price is referenced to such investment, such as contracts for difference. Captured also by its scope will be particular spot commodity contracts where the behaviour, for instance, could impact the price or value of such financial instruments.

The FCA is consulting on its proposed changes and also on two aspects of MAR where it has a choice as to the approach to take in the UK. These are: 1) the threshold for disclosure of dealings by a person discharging managerial responsibility (PDMR), and 2) whether issuers are required to issue an explanation automatically every time they delay disclosure of inside information or on request only. The regulator’s Consultation Paper invites comments on these two issues in particular, with the closing date for responses set at 4th February 2016.

Further proposals in the Consultation Paper comprise:

  • The Disclosure Rules in DTR 1-3 would largely be deleted, with only a portion of the current guidance remaining;
  • Repealing the Model Code on dealings by directors and senior managers, since there are provisions prohibiting dealings by PDMRs in closed periods in MAR. The FCA does propose, however, requiring premium listed companies to have appropriate systems on giving PDMRs clearance to deal; and
  • Changes to the status and content of the Code of Market Conduct.

Next Steps
The FCA will consider any feedback and publish its Final Handbook Provisions in a Policy Statement in spring 2016, and firms will be required to review their policies and procedures in respect of market abuse in time for MAR’s implementation on 3rd July 2016.

Includes:

  • HM Treasury Advisory Notice on AML/CTF Controls in Overseas Jurisdictions
HM Treasury Advisory Notice on AML/CTF Controls in Overseas Jurisdictions

The HM Treasury has published an advisory notice on money laundering and terrorist financing controls in overseas jurisdictions, following the Financial Action Task Force’s October 2015 statements identifying jurisdictions with strategic deficiencies in their anti-money laundering and counter terrorist financing regimes.
The Financial Action Task Force (FATF) is the global standard setting body for anti-money laundering and combating the financing of terrorism (AML/CTF), and so as to protect the international financial system from ML and TF (terrorist financing) risks and to encourage greater compliance with the ML/CTF standards, the FATF has identified jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system.

The Money Laundering Regulations 2007 require regulated entities to put in place policies and procedures in order to prevent activities related to money laundering and terrorist financing.

In response to the statements published by FATF on 23 October 2015, HM Treasury advises firms:

1) To consider the Democratic People’s Republic of Korea*, Iran*, and Myanmar as high risk for the purposes of the Money Laundering Regulations 2007, and so apply enhanced due diligence measures in accordance with the risks

2) To take appropriate actions in relation to the following countries to minimise associated risks, which may include enhanced sue diligence measures in high risk situations:

a. Afghanistan*, Algeria, Angola, Bosnia and Herzegovina, Guyana, Iraq*, Lao PDR, Panama, Papua New Guinea, Syria*, Uganda and Yemen

*These jurisdictions are subject to sanctions measures at the time of publication of this notice which require firms to take additional measures.

Includes:

  • Barclays Bank fined £72 Million for Poor Handling of Financial Crime Risks
  • Former Investment Analyst Fined and Banned for ‘Cherry Picking’
Barclays Bank fined £72 Million for Poor Handling of Financial Crime Risks

The FCA imposed a fine of £72,069,400 on Barclays Bank on 26th November for failings pertaining to a £1.88 billion transaction it arranged and executed with a number of ultra-high net worth clients in 2011 and 2012.

Barclay’s Failings and Fine
Barclays failed to take appropriate steps to minimise the risk that it may be used to facilitate financial crime by not undertaking enhanced levels of due diligence on these individuals who were ‘Politically Exposed Persons’ (PEPs).

According to the Authority the bank did not follow its standards procedures, “preferring instead to take on clients as quickly as possible and thereby generated £52.3 million in revenue”. It said “unusual” steps were taken to keep the details of the clients and the transaction off of its computer system (where it would typically be recorded) and even purchased a safe specifically for storing some documents relating to the clients and agreeing to pay them £37.7 million if ever their identities were revealed.
Furthermore, the FCA specifically found that Barclays:

  • Did not to react appropriately to a number of features of the business relationship that indicated a greater financial crime risk;
  • Adopted a less robust process than it would have done for lower risk business relationships;
  • Failed to establish the purpose and nature of transaction and did not adequately verify the clients’ stated source of wealth and funds for the transaction; and
  • Failed to monitor sufficiently, on an ongoing basis, the financial crime risks associated with the business relationship.

Of the £72 million fine imposed on Barclays a little over £52 million comprised disgorgement, clawing back the profit Barclays made on the transaction. This is the largest disgorgement penalty ever imposed by the Financial Conduct Authority, who also remarked that the size of the deal meant “very significant” harm could have been done to the integrity of the UK finance system and society had it indeed been related to criminal activity.

Former Investment Analyst Fined and Banned for ‘Cherry Picking’

On 17th November the FCA imposed a fine of £139,000 on Mothahir Miah, a former investment analyst at Aviva Investors Global Services Limited (Aviva Investors), and banned him from performing any function in relation to the financial services industry for failing to act with honesty and integrity.

While at Aviva Mr Miah exploited weaknesses in their trading systems and controls in order to delay the booking and allocation of trades. Resultantly he was able to assess the performance of a trade during the day and allocate trades “which had benefitted from favourable price movements to hedge funds that paid performance fees and trades that had not benefited to certain long-only funds that paid lower or no performance fees”. This abusive practice is referred to as ‘cherry picking’.

Director of Enforcement at the FCA, Mark Steward, asserted that Mr Miah exploited the trust given to him by his clients “in a very clear and deliberate way”, despite the vital obligation for Approved Persons to act with honesty and integrity at all times.

Mothahir Miah’s actions resulted in Aviva Investors having to pay significant compensation to a number of long-only funds, having been fined £17.6 million in relation to his failings on 25th February 2015.
Mr Miah agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a Stage 1 discount of 30%. Were it not for this discount, the financial penalty would have been £198,600.

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