• FCA Changes its Supervisory Model
FCA Changes its Supervisory Model

In the FCA’s September Regulation round-up Tracey McDermott announced the changes being made to the FCA’s supervisory model – including in particular how the firms are classified – in order to support a new sector-based approach.

The FCA previously used four categories (C1-C4) for the conduct classification of firms. In line with its revised strategy this approach has been simplified, and now firms are differentiated as either “fixed portfolio” or “flexible portfolio”. It is these categories that determine the nature and intensity of the FCA’s conduct supervisory approach.

Fixed Portfolio
Fixed portfolio firms are a small population of businesses regulated by the FCA which, based on factors such as size, market presence and customer footprint, require the highest level of supervisory attention and will continue to be subject to a programme of firm or group-specific supervision (Pillar 1). These firms are allocated a named individual supervisor, and are proactively supervised using a continuous assessment approach.

Supervising Fixed Portfolio Firms
Pillar 1 supervision of Fixed Portfolio Firms will predominantly entail business model strategy analyses (BMSA), proactive engagement, deep-dive assessments, and firm evaluations.

Business Model Strategy Analysis (BMSA)
A BMSA is where the FCA inspects the firm’s/group’s business model and strategy in detail in order to comprehend the risks posed to consumers or market integrity. Indicators of greater risk will attract particularly heightened attention, such as

  • Rapid growth
  • High levels of profitability (especially when concentrated in particular areas or relative to other firms in the same peer group)
  • Strategies dependent on cross-selling
  • Products with ambiguous features or pricing
  • Products being sold into markets for which they were not originally designed
  • Inherent conflicts of interest.

Proactive Engagement
The FCA will engage regularly with a fixed portfolio firm so as to maintain an understanding of fundamental aspects of its operation, including its business model, culture, governance and business processes. Such a supervisory approach will aid in identifying emerging risks and working with the firm to take pre-emptive action where essential.

The three key areas of this proactive engagement will be meeting with key individuals at the firm, conducting regular reviews of management information, and holding annual strategy meetings.

Deep-dive Assessments
Deep-dive assessments are in-depth assessments examining particular risks the FCA has identified in the BMSA and other engagement, and they are used to identify the root causes of risks and test how a fixed portfolio firm manages and mitigates these at every level of the business.

Each deep dive focusses on one of four risk groups: culture and governance; product design; sales and transaction processes; or post-sales/services and transaction handling.

The FCA will write to the firm after a deep dive setting out its key findings and what outcomes it wants the firm to achieve. It will usually be for the firm to decide the appropriate approach, with senior management being personally accountable.

Firm Evaluation
A firm evaluation is a summary of the Authority’s view of the fixed portfolio firm/group and where it inspects all the information it has, including all the work undertaken in relation to the firm since the previous evaluation. This includes the BMSA, deep dives, thematic issues and products work, events-based reactive work, sector analysis, and any specific risks relating to financial crime and client assets.

Firm evaluations are undertaken in a cycle ranging from 1-3 years, depending on the scale of the firm/group’s activities and the FCA’s assessment of risk.

Flexible Portfolio Firms
The majority of firms are now classified as flexible portfolio. These firms are proactively supervised through a combination of market-based thematic work and programmes of communication, engagement, and education activity aligned with the key risks identified for the sector in which the firms operate. These firms will use the FCA’s Customer Contact Centre as their first point of contact as they are not allocated a named individual supervisor, and will be subject to event-driven reactive supervision (Pillar 2) and thematic issue or product supervision (Pillar 3) only.

The FCA’s approach in the flexible portfolio is to focus at a market level, to understand conduct on a sector or subsector basis and mitigate risks accordingly.

Supervising Flexible Portfolio Firms
Pillar 2 supervision of flexible portfolio firms will have a pre-emptive focus, aiming to identify and prevent consumer detriment and threats to market integrity before they materialise. However, when things go wrong the FCA undertakes to take quick and robust action, including securing redress for consumers.
Although the regulator is able to discover risks or issues through a number of sources, it is the responsibility of the flexible portfolio firm to inform the FCA of any risks or issues that materialise that may impact its statutory objectives, such as consumer detriment. The FCA’s response to an event will then depend on the nature and size of the problem.

Baseline monitoring will also be undertaken, involving a review of the regulatory data the firm submits and acting as a vital source of information which will assist in the detection of risk.

Pillar 3 supervision of such firms will comprise a blend of market-based work, including thematic reviews, and with a greater emphasis on understanding customers’ experiences and a particular focus on achieving sector-wide outcomes.

The FCA looks at each sector as a whole to analyse current events and investigate potential drivers of poor outcomes for consumers and markets. This is done on an ongoing basis, so the FCA can address risks common to more than one firm or sector before they can cause widespread damage. These could be issues like a trend for a particular business practice, or a problem with a certain product.

It is recognised that the key channel of communication for all firms, particularly those in the flexible portfolio bracket, will be through its website. As such, the website has recently seen updates based on the feedback received from firms.


  • New FCA Handbook and PRA Rulebook Websites
  • New Financial Services Register
New FCA Handbook and PRA Rulebook Websites

On 29th August the new FCA Handbook Website was launched which, according to regulator, has:

  • A cleaner layout and easier navigation;
  • A timeline allowing one to see when rules changed;
  • An option to add ‘favourites’ so that the user can build a more tailored Handbook;
  • A better quality search function; and
  • A pop-up window displaying Glossary definitions.

The PRA Rulebook Website was launched on the same day, also featuring a pop-up window for Glossary definitions in addition to the ability to view all the rules applicable to one type of firm together.

New Financial Services Register

The FCA launched its new Financial Services Register on 7th September with the primary intention of making it easier to source information on individuals and firms that are, or have at one point been, regulated by the FCA/PRA.

The new look Register’s single search field targets a better navigation around the online facility, by which users can search by name, post code, or reference number in order to find a firm, individual, or collective investment scheme. Metadata such as permissions and Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) coverage enables users to filter search results, and a clearer language aims to better explain some fundamental technical, regulatory, and financial terms.

Firms to Avoid
Included in the Register for the first time are firms that have been flagged for providing regulated products or services without authorisation. Such firms appear in red text alongside warning signals so as to stress that
firms should avoid any dealings with them or individuals connected with them.

Consumer Credit Firms
So that users do not have to perform a separate search of the Consumer Credit Interim Permission Register, search results will automatically include firms with such interim permission.


  • Wolfsberg Group FAQs on Risk Assessments for Money Laundering, Sanctions and Bribery and Corruption
  • UK Government Reviews Effectiveness of AML/CTF Rules
Wolfsberg Group FAQs on Risk Assessments for Money Laundering, Sanctions and Bribery and Corruption

The Wolfsberg Group, an association of 13 global banks, has issued a set of FAQs in relation to risk assessments for money laundering, sanctions, and bribery and corruption. These are based on the Group’s views on current best practices and, in some aspects, on how it believes those practices should develop over time. These target the promotion of effective risk management and to further the goal of Wolfsberg Group members to endeavour to prevent the use of their institutions for criminal purposes.

Summary of FAQs
The FAQs cover, inter alia;

  • Whose responsibility is it to undertake a risk assessment?
  • What is the purpose of a risk assessment?
  • Should the scope of a money laundering risk assessment encompass bribery and corruption along with other notable financial crimes?
  • What impact should a financial institution’s risk assessment have on its risk appetite?

What is the Conventional/Standard ML Risk Assessment Methodology?
The paper puts particular emphasis on setting out the “conventional/standard” money laundering risk assessment methodology, increasingly the most common approach used by financial institutions (FIs). This method can be considered in three distinct phases.

Phase One: Determining the Inherent Risk
‘Inherent Risk’ represents the exposure to money laundering, sanctions or bribery and corruption risk in the absence of any control environment being applied.
As no two financial institutions are the same, inherent risk ratings may vary depending upon the size and scope of their businesses and the risks involved. In order to identify an FI’s inherent risks, assessment across five risk categories is commonly undertaken:

  • Clients
  • Products and Services
  • Channels
  • Geographies
  • Other Qualitative Risk Factors (for instance, significant strategy and operational changes such as the introduction of a major new product, a merger/acquisition, or opening in a new location which may impact the inherent risk)

The categories of risk can be very broad. These broad risk categories are then sub-divided into inherent risk factors that are derived from regulatory guidance or expectations as well as leading industry practices, and include a mix of both qualitative and quantitative criteria.

Each risk factor is usually assigned a score or weighting which reflects the level of risk associated with that risk factor and the prevalence of that risk compared with other risk factors.

Phase Two: Assessing the Internal Control Environment (both design and operating effectiveness)
Subsequent to identifying and assessing inherent risk, internal controls ought to be evaluated to ascertain just how effective they are at mitigating overall risks and identifying residual risk ratings.

AML controls are usually assessed across the following control categories:

  • AML Corporate Governance; Management Oversight and Accountability
  • Policies and Procedures
  • Know Your Client (KYC); Customer Due Diligence (CDD), Enhanced Due Diligence (EDD)
  • Management Information/Reporting
  • Record Keeping and Retention
  • Designated AML Compliance Officer/Unit
  • Detection and SAR filing
  • Monitoring and Controls
  • Training

As with Phase One, the response to each area under examination is assigned a score which, when aggregated, reflects the relative strength of that control. Each can then be assigned a weighting based on the importance that the institution places on that control, and controls should be linked to Key Performance Indicators or other metrics where possible.

Phase 3: Deriving the Residual Risk
Once the inherent risk and effectiveness of the internal control environment has each been considered, the residual risk (the risk remaining after controls have been applied to the inherent risk) can be determined by balancing the level of inherent risk with the overall strength of the risk management activities/controls. The residual risk rating is used to indicate whether the ML risks within the financial institution are being adequately managed, and a three-tier rating scale can then be applied to evaluate residual risk on a scale of High, Moderate, or Low.

A financial institution’s ML, sanctions or bribery and corruption Risk Assessment should be designed by subject matter experts within the specialist unit responsible, for example Compliance, and endorsed by Senior Management. The results of a Risk Assessment should be communicated to relevant stakeholders and business divisions, and regulatory and supervisory authorities should be advised as appropriate.

UK Government Reviews Effectiveness of AML/CTF Rules

The Department for Business, Innovation & Skills (BIS) and HM Treasury have launched a review to improve the effectiveness of rules designed to prevent money laundering and terrorist financing.

In light of recent concerns expressed by businesses pertaining to current guidance, rules, and proof of identity requirements being needlessly unwieldly and complicated, this review is one of six selected for the first wave of the government’s ‘Cutting Red Tape’ programme.

The reviews mark the primary step to working with UK businesses to axe unnecessary regulation and its poor implementation by a further £10 billion over the course of this parliament. The government is appealing for businesses to step forward and highlight areas for change through the new programme.

Sajid Javid, Business Secretary, announced this review on 28th August to reduce complexity in the system and to make certain that the rules were not “unintentionally holding back” British businesses. The government intends for such rules to safeguard the UK’s world leading financial services industry, whilst at the same time avoiding disproportionate burdens being put on legitimate businesses or companies using their services.

The review is seeking a wide range of evidence, including:

  • Whether existing guidance satisfies business needs;
  • The effectiveness and proportionality of supervisors’ approach to supervision and enforcement;
  • Where and how supervision and enforcement is not proportionate to the risks presented; and
  • Any instances of good practice that could support businesses in meeting their obligations and might be replicated elsewhere.


  • ITS Regarding Trade Suspensions, Data Service Providers and Derivatives Reporting
  • ESMA Level 2 Measures
  • FCA Implementation Roundtable
ITS Regarding Trade Suspensions, Data Service Providers and Derivatives Reporting

ESMA has published a consultation paper on the remaining draft Implementing Technical Standards (ITS) under Directive 2014/65/EU (MiFID II), and seeks views on three draft ITS on which it has not yet consulted.

The Three Draft ITS
1) The suspension and removal of financial instruments from trading on a Trading Venue.
This covers the timing and format of publications and communications foreseen by MiFID II in the case of a suspension or removal of an instrument.

2) The notification and provision of information for Data Reporting Services Providers (“DRSPs)
This addresses both the application for authorisation by DRSP applicants, as well as the notification of members of the management body of a DRSP and any changes to its membership.

3) The weekly aggregated position reports for commodity derivatives, emission allowances and derivatives thereof.
This intends to deliver transparency and support monitoring of the new position limits regime. Article 58 of the Directive requires trading venues to produce and make public, subject to de minimus thresholds, a weekly report of the aggregate positions in commodity derivatives, emission allowances, and derivatives of emission allowances on that trading venue.

In the consultation paper ESMA consults on the empowerment under article 58(7) of the Directive to prepare ITS in relation to sending the weekly position reports to ESMA at a specified time, for their centralised publication by ESMA.

The draft text of the ITS relating to these areas is contained in the final section of this consultation paper.

Next Steps
On the basis of the responses to this consultation paper, ESMA will revise the Draft Technical Standards and send the final report to the European Commission for endorsement by 3rd January 2016.

ESMA Level 2 Measures

On 28th September ESMA published the final technical standards in relation to the revised MiFID II Directive and associated Regulation (MiFIR). The report deals with technical standards from the areas of transparency, data publication and access, requirements pertaining to trading venues, commodity derivatives, and investor protection, with the draft technical standards contained in Annex 1 of the paper.

Fairer, safer and more efficient markets
MiFID II will introduce tests to determine whether a non-financial firm’s speculative investment activities are significant enough to be subject to the regime. Ranges for the new EU-wide commodity derivatives position limits regime will be ushered in, and rules governing high-frequency-trading will impose a strict set of organisational obligations on investment firms and trading venues alike. In an effort to encourage greater competition, provisions regulating the non-discriminatory access to central counterparties (CCPs), trading venues, and benchmarks will be announced, and new provisions requiring trading venues to offer disaggregated data will require them to do so on a “reasonable commercial basis”.

Greater transparency
The new regime will aim for greater transparency by requiring thresholds for the pre- and post-trade transparency regimes to be extended to equity-like instruments, bonds, structured finance products and emission allowances. A newly introduced trading obligation will require shares and certain derivatives to be traded only on regulated platforms and limitations on dark trading and the use of waivers for shares and equity-like instruments.

Next Steps
The European Commission now has three months in which to approve the technical standards and once endorsed, the European Parliament and the Council will have an objection period.

FCA Implementation Roundtable

Minutes of the FCA MiFID II Implementation Roundtable on 14th September have been published, providing an update on MiFID II implementing measures, the Authority’s implementation work, and ESMA’s Level 3 work in particular.

MiFID II Implementing Measures
The Delegated Acts have not yet been adopted by the European Commission (EC) and, as there is still a process of internal consultation within the Commission to be gone through and the need for translation of the texts, it now seems unlikely that they will be adopted before the beginning of November 2015. The European Parliament (“EP”) and Council will be given three months after they have been adopted to decide whether or not to object to these Delegated Acts.

The Regulatory Technical Standards (RTS) were submitted to the ESMA Board of Supervisors (BoS) meeting on 24th September for approval. Upon receiving the draft RTS the EC will need to decide, within a period of 1 month, whether or not to endorse them. It is uncertain what would happen with regard to the European Parliament and Council if the Commission opted not to endorse some standards – there is vagueness regarding whether the Commission would wait to send all the RTS in one go or whether different standards will be sent at different points in time.

FCA Implementation Work
Due to the lack of certainty concerning the legislative timetable, the timetable for its planned December 2015 consultation on Handbook changes may shift. More will be known depending on the outcome of ESMA’s September BoS meeting and once the Delegated Acts are published. One possibility being deliberated by the FCA is to issue one Consultation Paper in December 2015 covering issues around which there is certainty, and then to consult on other issues in a second Consultation Paper next year.

It was announced that the FCA will be undertaking a cost benefit analysis (CBA) for aspects of MiFID II implementation where it has some degree of discretion. In this regard a questionnaire, to inform the CBA for consultation, has gone out to firms.

In addition, the FCA MiFID II conference, which will largely focus on wholesale issues, will take place on 19th October 2015.

ESMA Level 3 Work
As a result of work on the draft RTS, ESMA has had little time to start work on Level 3 to assist firms in comprehending MiFID II, and no such work which has links to any of the Level 2 measures can be published until the relevant objection period for the European Parliament and Council has expired.



  • UCITS V Implementation and Handbook Changes
UCITS V Implementation and Handbook Changes

The FCA, which is required to transpose UCITS V by 18th March 2016, has published a consultation paper containing three sets of proposals in relation to the regulation of authorised investment funds, covering the implementation of UCITS V, the ELTIF regulation, and other changes to Fund regulation.

Part One: Implementing UCITS V
In this part of the paper the regulator consults on:

  • The obligations pertaining to management companies, including the remuneration principles and the transparency obligations applicable to investors; and
  • Alterations to the regime for depositaries, including the eligibility criteria for firms acting as depositaries of UCITS and the capital requirements applicable to them.

It is proposed that an ‘intelligent copy-out’ approach – one which entails adhering closely to the wording of UCITS V when drafting the relevant provision in the Handbook, but using alternative wording where appropriate to align with UK law and practice – will be employed to transpose these requirements, which would be consistent with the approach the FCA decided upon when transposing the Alternative Investment Fund Managers Directive (AIFMD).

The European Commission is also empowered under UCITS V to adopt delegated acts (referred to as the Level 2 measures), which will set out most of the detailed requirements with which depositaries and management companies of UCITS will have to comply. For the Level 2 measures to come into force, they need to be adopted by the European Commission and agreed by the European Parliament and the European Council.
It is expected that the Level 2 measures will be broadly in line with the AIFMD Level 2 Regulation, but the FCA is unable at this stage to describe their full effect on firms.

In addition to the delegated acts that will form the Level 2 measures, UCITS V requires ESMA to issue:

  • Level 3 guidelines on sound remuneration policies and practices for management companies (the ESMA guidelines); and
  • Draft ITS to be adopted by the Commission, determining the procedures and forms to allow national competent authorities to submit information to ESMA on penalties and measures imposed on management companies.

Part Two: The European Long Term Investment Fund (ELTIF) Regulation
Part Two consults on a set of changes to the Handbook to ensure the EU Regulation introducing European long-term investment funds (ELTIFS) will operate effectively.

The FCA proposes a new section of the Investment Funds sourcebook (FUND), called ‘European AIF Regimes’, to include rules and guidance relating to ELTIFS. FUND 4.2 will set out the interaction between:

  • The ELTIF Regulation and FCA Rules, in particular for the depositary of an ELTIF marketed to retail investors; and
  • ELTIFS and authorised funds.

The ELTIF Regulation is directly applicable under EU law and does not require implementation by the FCA. However, with the Treasury, the Authority has identified areas of the UK Regulatory Framework that will require adaptation so that the ELTIF Regulation can function properly in the UK; while also making sure the FCA’s objective of investor protection continues to be met.

The ELTIF Regulation will apply from 9th December, 2015, and will create a new cross-border product framework for long-term investments aimed at increasing the amount of non-bank finance available to companies and projects in the EU that require access to long-term capital.

Part Three: Other Miscellaneous Changes to Fund Regulation
This section consults on a number of modifications to the Handbook to keep FCA rules and guidance for authorised investment funds up-to-date. The proposed changes – all of relatively low impact – set out to clarify and standardise some of the FCA’s reporting requirements, to introduce greater operational flexibility and efficiency in certain areas, and to elucidate ambiguities in the application of certain rules, whilst also bringing the Handbook up-to-date with market practice and deleting obsolete provisions.

The paper also seeks stakeholders’ feedback on some discussion points that it will consider consulting on in the future if there is a case for changing its rules, such as netting between unit classes, investments in ELTIFs, and rules about which bodies can be counterparties to an OCT derivative transaction undertaken on behalf of a UCITS scheme.

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