Includes:

  • Handbook Notice – 28th January
  • “Dear CEO” Letter on Client Take-On Review in Firms Offering CFD Products
  • Policy Development Update
  • FCA Data Bulletin – Financial Promotions and Attestations
  • Thematic Review on how Firms Assess Suitability of Products and Services
  • Handbook Notice – 26th February
Handbook Notice – 28th January

On 28th January the FCA issued a notice of changes made to the FCA handbook comprising the following:

Individual Accountability (Extension of Scope) and Whistleblowing (Amendment) Instrument 2016 (FCA 2016/1) – This instrument extends the Certification Regime to wholesale market activities and makes the corresponding amendments to the whistleblowing rules in SYSC. The changes are confirmation that the whistleblowing rules do not apply to foreign branches;

Individual Accountability (Swiss General Insurers) Instrument 2016 (FCA 2016/3) – This applies interim rules to Swiss General Insurers (GIs) to reflect the PRA’s treatment of UK branches of Swiss GIs within the scope of the new Senior Insurance Managers Regime (SIMR) rules as large non-Directive firms;

UCITS V Directive Instrument 2016 (FCA 2016/4) – This sets out the final rules and guidance implementing the UCITS V. The rules and guidance intend to enhance the protection of investors by strengthening the regime applicable to depositaries, which “keep the assets of UCITS safe and provide oversight of the fund manager’s key duties”. UCITS management companies will be subject to remuneration principles designed to prevent excessive risk-taking by relevant fund manager staff; and

Individual Accountability (Regulatory References) (Interim Requirements) Instrument 2016 (FCA 2016/7) – This makes final rules and guidance to implement an interim referencing requirement for the Approve Persons regime and SM&CR. These rules will:
i) Require relevant authorised persons to give a reference when another firm wants to appoint someone to a pre-approved role; and
(ii) Confirm that firms that are not relevant authorised persons are obliged to give a reference when a relevant authorised person wishes to appoint someone to a pre-approved role under the SM&CR.

“Dear CEO Letter” on Client Take-On Review in Firms Offering CFD Products

In a “Dear CEO” letter the FCA has set out the results from a review of the procedures for taking on new clients, using a sample of 10 firms offering contracts for difference (CFD) products.

The Regulator said it had identified several areas for concern on the back of its review, the key focus of which was to assess the client take-on procedures against the requirements of the COBS and SYSC rules. Three key failings were identified:
(i) It saw a broad range of approaches to completing the appropriateness assessment, most of which did not comply with COBS 10;
(ii) Clients who failed the appropriateness assessment were issued a risk warning, although the majority of these were deemed to be inadequate; and
(iii) AML controls in place to manage the increased risks posed by higher risk clients were largely insufficient;

The findings also suggest that firms may not be acting in the best interests of clients and treating them fairly, bringing into question the firms’ compliance with COBS 2.1.1R and the Principles. The FCA stress that all firms operating in this sector should ensure that they comply with its requirements when making non-advised sales of CFDs.

Next Steps
Firms ought to consider the points raised in the letter, and if they identify any areas of concern when reviewing their processes the FCA’s expectation is that they have regard to Principles 6 (‘Customers’ Interests’) and 11 (‘‘Relations with Regulators’) and act accordingly.

Policy Development Update

The FCA has published its latest policy development update, which contains a timetable of upcoming publications, including:

  • Policy Statement to CP14/13, “Strengthening accountability in banking: a new regulatory framework for individuals”, expected date to be confirmed;
    Policy Statement to CP16/3, “Financial Services Compensation Scheme – management expenses levy limit 2016/2017”, expected date to be confirmed;
    Policy Statement to CP15/42 chapter 5, “Solvency II – Consequential changes to the Handbook for non-Directive firms”, due March 2016;
    Policy Statement to CP15/36, “Future regulatory treatment of CCA regulated first charge mortgages”, due March 2016;
    Consultation Paper, “Secondary Annuity Market”, due March/April 2016;
    Consultation Paper, “Implementation of MiFID II”, due Q2 2016;
    Policy Statement to CP15/35, “Policy proposals and Handbook changes related to the implementation of the Market Abuse Regulation”, due spring 2016;
    Policy Statement to CP15/41, “Increasing transparency and engagement at renewal in general insurance markets”, due mid-2016;
    Policy Statement to CP15/43, “Markets in Financial Instruments Directive II Implementation – Consultation paper I”, expected date to be confirmed;
    Policy Statement to CP15/32, “Smarter Consumer Communications: Removing certain ineffective requirements in our Handbook”, expected date to be confirmed;
    Policy Statement to CP15/18, “Fair, reasonable and non-discriminatory access to regulated benchmarks”, expected date to be confirmed;
    Policy Statement to CP12/20, “Review of the client money rules for insurance intermediaries”, expected date to be confirmed;
    Policy Statement to CP15/40, “Financial Services Compensation Scheme: changes to the Compensation sourcebook”, due April 2016; and
    Policy Statement to CP15/33, “Consumer Credit: proposals in response to the CMA’s recommendations on high-cost short-term credit”, due Q2 2016.
FCA Data Bulletin – Financial Promotions and Attestations

The FCA has published the fifth edition of its data bulletin which, among other things, informs the market of how the FCA reviews and acts on certain financial promotions and how it uses attestations.

Update on Financial Promotions
The second issue of the Data Bulletin (issued in January 2015) provided information in respect of how the FCA reviews financial promotions, and the new issue gives an update for the period 1st July to 30th September 2015. During this period a total of 1,108 financial promotions were reviewed with 24 cases resulting in one or more promotions being amended or withdrawn through the FCA’s interaction with the firms involved; 22 of these cases occurred in the Consumer Credit sector, with a further 9 in Retail Investments, 2 in General Insurance, and 1 in Pensions and Retirement Income.

Update on Attestations
In this Data Bulletin the FCA provides an update on attestation statistics, including breakdowns by firm categories and sectors.
During the period covered by the statistics, the FCA assigned every firm or group to one of four categories of conduct supervision (C1, C2, C3 and C4). These broadly reflected a firm’s size and retail customer numbers or wholesale presence and the corresponding level of risk the firm potentially posed to the FCA’s objectives. Each category was subject to a different level of supervision, allowing the FCA to use its resources as efficiently as possible and concentrate on the areas that pose the greatest risks.

During Q2 2015/16 the FCA requested 15 attestations:

10 in the Wholesale and Investment Management sector (5 in C2, 3 in C3 and 2 in C4); and
5 in Long-Term Savings and Pensions (4 in C2 and 1 in C4)

Thematic Review Report on how Firms Assess Suitability of Products and Services

The FCA has published a thematic review entitled “Assessing suitability: Research and due diligence of products and services” containing high level findings from its thematic review of the research and due diligence processes carried out by 13 advisory firms on the products and services they recommend to retail clients.

Background
Previous thematic work and instances of consumer harm have shown that the poor quality of advisory firms’ research and due diligence is one of the three root causes of poor consumer outcomes, the other two being: (i) incorrect risk profiling and (ii) costs (in relation to replacement business, for instance). In this latest thematic review the FCA considered how advisory firms review the market and ensure that they recommend suitable solutions for retail clients, and also sought to explore how firms undertake research and due diligence on products and services in order to understand the risks and benefits.

Findings
In the main it was found that firms sought to achieve positive outcomes for their clients when undertaking research and due diligence. Typically firms demonstrated some good practice in this area, although many failed to demonstrate consistent good practice across all services and products. The poor practice identified varied from issues that are easily addressed to those that are more significant, and the FCA expressed its disappointment in identifying issues relating to platform research and due diligence having previously published its expectations around these topics.

The review unearthed that the culture of a firm was a significant factor in the success of its research and due diligence process. Firms demonstrating good practice had research and due diligence as a central function of the advice process and clearly showed that they had the best interests of their clients at heart and put this into practice.

Another key finding was that a corporate culture of challenge was a key driver of good research and due diligence. The better firms had either in-built challenges in the process and/or individuals who were “knowledgeable, enthusiastic and challenged the firm’s approach”. Where there was no culture of challenge within the firm the research and due diligence process showed weaknesses, namely:

Firms did not seek to understand or challenge their own inappropriate bias towards products, services or providers and this led to a lack of objective consideration; and
Firms inadequately managed conflicts of interest between their client’s interests and themselves. This was evident, for instance, in the consideration of service level as an over-riding factor when selecting platforms.

Next Steps
Following visits to the 13 firms during the review the FCA undertook a range of measures to address the issues identified. Three firms were instructed to make improvements in their research and due diligence process and were asked to make an attestation that they have done so. In order to help firms raise standards and adopt good practices, the FCA will provide further communications setting out its expectations on this area in greater detail.

Handbook Notice – 26th February

On 26th February the FCA issued a notice of changes made to the FCA Handbook. Legislative changes include the following:

  • Handbook Separation (Fees) Instrument 2016 (FCA 2016/12) – This instrument makes rules to create a free-standing FCA fees manual with no unnecessary references to the PRA or to rules shared between the PRA and FCA. This came into force on 1st March 2016;
  • Retail Distribution Review (Miscellaneous Amendments) Instrument 2016 (FCA 2016/14) – This makes rule changes to ensure that the FCA can continue to meets its obligations under the Retail Distribution Review (RDR) and identify individuals no longer subject to regulatory pre-approval. Part of this instrument came into force on 7th March 2016 with the remainder due for 31st December 2016; and
  • Handbook Separation (Insurance) Instrument 2016 – This instrument amends the existing FCA Handbook rules to accommodate the PRA re-write of shared PRA and FCA rules. This is partly due to the PRA reworking the PRA Handbook into the PRA Rulebook and the movement of PRA-only rules into the PRA Rulebook. The instrument also makes consequential changes to clarify the FCA’s rules for insurers and other firms. This came into force on 1st March 2016.

Includes:

  • Commission Extends Application by One Year
  • ESMA Migrates MiFID and Short Selling Regulation Registers
Commission Extends Application Date by One Year

ESMA has published the legislative acts amending the revised MiFID and MiFIR and delaying the implementation date until 3rd January 2018.The delay takes into account the implementation challenges faced by regulators and market participants alike, including the need for ESMA to design data exchange systems with approximately 300 trading venues offering somewhere in the region of 15 million financial instruments in order to implement the regulation. ESMA were required to work closely with National Competent Authorities (NCAs) and trading venues themselves, but the body informed the European Commission that neither the NCAs nor market participants would be able to have the necessary systems ready by 3rd January 2017.

Since provisions in MiFID II impact the applicability of certain provisions in the Market Abuse Regulation (MAR) and the Central Securities Depositaries Regulation (CSDR), the legislative act amending MiFIR will also amend MAR and the CSDR so as to provide certainty as to when and how certain provisions in MAR and the CSDR will apply.

MAR is due to be implemented on 3rd July 2016 and contains references to certain provisions contained in MiFID II. There are already provisions in MAR, which ensure that before the originally unforeseen date of entry into application of MiFID II, concepts and rules of MiFID I will continue to apply. The Regulation amending MAR and the CSDR clarifies that the concepts and rules as set out in MiFID I should be used until 3rd January 2018 and that concepts introduced by MiFID II shall not apply until that date.

As regards the CSDR, it has been necessary to clarify that until the new date of entry into application, the rules set out in MiFID I should be used.

ESMA Migrates MiFID and Short Selling Regulation Registers

The registers under MiFID and the Short Selling Regulation have been migrated to the global ESMA Registers portal. The migration concerns the following registers:

(i) Shares admitted to trading on regulation markets;
(ii) Exempted shares;
(iii) Systematic Internalisers;
(iv) Regulated Markets;
(v) Multilateral trading facilities; and
(vi) Central counterparties.

In order to ensure a smooth transition the data will be made unavailable in both Portals between 1st February and 31st March 2016. On 1st April 2016 the old portal will be shut down and no longer accessible.

Includes:

  • ESMA Consolidated Q&As on Application
  • FCA Policy Statement on Implementation
ESMA Consolidated Q&As on Application

On 1st February ESMA published a consolidated Q&A including new questions on additional documents that need to be provided by funds under UCITS V. The document also brings together the following four existing ESMA Q&As on the new Directive:

  • The Key Investor Information Document (KIID) for UCITS (2015/631);
  • Q&A on ESMA’s guidelines on ETFs and other UCITS issues (2015/12);
  • Notification of UCITS and exchange of information between competent authorities (2012/428); and
  • Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS (2013/1950).

The Q&A clarify that where the applicable law did not oblige UCITS to produce a UCITS V compliant KIID by the Directive’s transposition date on 18th March 2016, the KIID will have to be updated at the next annual update after this date or “at the occasion of the next revision or replacement that occurs for other reasons”, if the relevant information is available at that time.

Additionally, for the purpose of Article 69(1)(b) on remuneration disclosure in the prospectus and Article 78(4) sub-paragraph 2 on remuneration disclosure in the KIID, the relevant website should be updated to make available the additional information about the management company’s remuneration arrangements as soon as they are available.

Annual reports published on or after 18th March 2016, but before the end of the management company’s first performance period in which it has to comply with the Directive’s remuneration rules, ought to include the remuneration-related information “on a best efforts basis and to the extent possible”. The management company will be required to justify any omissions.

FCA Policy Statement on Implementation

The FCA has issued a Policy Statement (PS16/2) which sets out Handbook changes affecting managers and depositaries of UCITS and AIFs and responds to feedback received on Part 1 of its Consultation Paper (CP) 15/27 “UCITS V Implementation and other changes to the Handbook affecting investment funds”. The policy statement affects:

  • UCITS management companies and alternative investment fund (AIF) managers;
  • Depositaries and custodians of UCITS and AIFs; and
  • Representative trade bodies, business advisers and consultants, and other advisers involved in or linked to the fund management industry in the UK.

Summary of Feedback and FCA Responses to (CP) 15/27
In CP15/27 the FCA consulted on proposed rules and guidance for implementing UCITS V Directive requirements, in particular:

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

The Regulator received 12 responses to CP15/27, and Chapter 2 of PS 16/2 summarises the feedback received on the proposed remuneration code and disclosure requirements for UCITS managers. Some respondents asked for clearer or further guidance on the application of certain remuneration or disclosure requirements, and the FCA has considered these comments and has made some changes to its guidance on payments in non-cash instruments. Other respondents were opposed to the extension of certain UCITS V disclosure requirements to managers of non-UCITS retail schemes (NURS), in particular the disclosure of the list of the depositary’s delegates and sub-delegates in the prospectus. The FCA has taken account of these comments so that managers of NURS will not now be required to make this disclosure, however it is maintaining some of the disclosure requirements for NURS where they are consistent with the AIFMD.
Chapter 3 deals with feedback received to the FCA’s proposed rules for the appointment, operational duties and responsibilities of UCITS depositaries. A number of respondents inquired as to how some of the proposed rules will apply in actuality and how some of the proposed provisions could be better aligned with the UCITS V requirements. PS 16/2 clarifies the FCA’s position on the level of infrastructures that non-bank depositaries must have in place when delegating the safekeeping function to a third party, as well as clarifying that UCITS depositaries would be able to delegate the performance of administrative and technical tasks to a third party.

Next Steps
The FCA implemented UCITS V on 18th March 2016 and the rules and guidance came into force on this date. The Handbook changes impacting managers and depositaries of AIFs also took effect on this date, although there are transitional provisions applying to some of the final requirements which run for up to two years, starting from 18th March 2016.

Includes:

  • FCA Final Rules on Extension of Certification Regime and Interim Rules on Regulatory References
FCA Final Rules on Extension of Certification Regime and Interim Rules on Regulatory References

The FCA has published a Policy Statement (PS16/3) setting out final rules for the new accountability framework for individuals performing certain wholesale market activities working in banks, building societies and credit union (collectively known as Relevant Authorised Persons (RAPs).

Extension of the SM&CR to Wholesale Market Activities
The FCA issued final rules in respect of the SM&CR in July 2015 and simultaneously consulted on extending the regime to additional wholesale market activities as well as some changes to its territorial scope.

The Regulator received substantial feedback from firms in response to CP15/22. In particular firms commented on the territorial scope of the rules, both in respect of UK RAPs and Foreign Branches, and the latter was dealt with in PS15/30 (in December 215) where the FCA introduced its final rules for the regime as it applies to branches.

CP15/22 asked for views on the FCA’s proposals to extend the SM&CR to two new functions: (i) the ‘client-dealing’ function (encompassing individuals involved in wholesale or retail activities such as trading), and (ii) the ‘algorithmic trading’ function, for both UK RAPs and Foreign Branches. It also proposed including in the new client dealing function all dealing and arranging activities regardless of who they are with, thereby going beyond the existing Glossary definition of ‘client’ to more broadly include wholesale activities. This was because the Regulator considered that these contacts could pose a risk of ‘significant harm’ to the Firm or any of its customers.

It was also proposed to reflect this broader meaning of ‘client’ in the tests used to determine the territorial scope of the wider SM&CR and Conduct Rules for UK RAPs and Foreign Branches. Firms felt that this extension was disproportionate and presented practical implementation and enforcement challenges. Whilst it is no longer applicable to Foreign Branches following the removal of the UK client test in PS15/30, the FCA agrees that the test could be disproportionate for staff based outside the UK. It has therefore reverted to the existing Handbook Glossary definition of ‘client’ for the territoriality test, and considers this a pragmatic solution and plans to revisit territoriality in due course after commencement.

Summary of Feedback to the Regulatory References Consultation Paper (CP15/31)
Responses received to CP15/31 raised a number of complex issues as well as legal concerns requiring further deliberation.

The FCA stated in the Consultation Paper that it wanted the final rules to be in place for the start of the SM&CR in March 2016, however given the complexity of concerns raised in the feedback this will not be possible. To allow time to fully consider the issues raised in feedback, and to take account of these when finalising our approach, finalising the new regulatory referencing regime will be delayed until after commencement. The FCA will aim to confirm its final policy and rules in the summer.

Respondents highlighted also that they would require sufficient time to implement the full regulatory references regime, and suggested the need for transitional arrangements (e.g. a phased or delayed implementation) to allow them to establish systems and processes to support the new requirements. Therefore, the FCA has announced that its final rules will be accompanied by a transition period to allow firms time to implement any such changes.

The FCA will retain the existing referencing rules for RAPs and insurers from 7th March 2016 to ensure that the existing requirements remain in place whilst it considers feedback to its proposals.

Includes:

  • FCA Fines Former Senior Manager £792,900 for Failing to be Open and Co-Operative
  • FCA Fines and Restricts Firm for Market Abuse and Conflicts of Interest Failings
FCA Fines Former Senior Manager £792,900 for Failing to be Open and Co-Operative

On 9th February the FCA fined Achilles Macris £792,900 for failing to be open and cooperative with the Regulator. Mr Macris was Head of CIO International for JP Morgan Chase Bank, N.A. in London.

Mr Macris was head of the London branch of JP Morgan’s chief investment office and was responsible for several of the division’s investments, including a substantial portfolio of credit swaps. Between 29th March 2012 and 29 April 2012 Mr Macris failed to notify the FCA of concerns with the synthetic credit portfolio and, as a result, fell short off the standards expected of an approved person under Statement of Principle 4.

Mark Steward, Director of Enforcement and Market Oversight at the FCA, said “a failure to communicate openly with us can affect the well-running of markets and cause unnecessary harm to investors, especially in times of financial stress or crisis. Regulators need open communication with firms so that better decisions can be made sooner. Mr Macris should have explained the position more squarely especially when he knew that the synthetic credit portfolio’s losses had worsened”.

Although settlement was reached during Stage 2 (which would usually lead to a 20% discount), in exceptional cases the FCA may accept that there has been a substantial change in the nature or seriousness of the action being taken and that an agreement would have been possible at an earlier stage if the action had commenced on a different footing. The FCA and Mr Macris therefore agreed that an additional 10% discount is appropriate; were it not for the total discount of 30% the financial penalty would have been £1,132,747.

5.2 FCA Fines and Restricts Firm for Market Abuse and Conflicts of Interest Failings

W H Ireland Limited (WHI) have been fined £1.2 million and restricted from taking on new clients in its corporate broking division for 72 days as part of a sanction over its inadequate controls against market abuse.

The FCA found that between 1st January and 19th June 2013 WHI failed to ensure it had the proper system and controls in place to prevent market abuse being detected or occurring.

WHI’s failings (amounting to a breach of Principle 3) included:

  • Unsatisfactory controls to ensure inside information did not leak from the private to the public side of its business,
  • Inadequate personal account dealing rules for employees;
  • Failures to maintain an effective written Conflicts of Interest policy, and inadequate recording of the kinds of service or activity carried out by WHI in which a conflict of interest had arisen or may arise; and
  • Deficient compliance oversight, including the absence of formal risk management framework for market abuse and inadequate post-trade surveillance system.

The FCA considers these failings to be particularly serious as the range of services performed by WHI during this time meant that the Firm was exposed to a broad range of market abuse risks. Moreover WHI received inside information on a regular basis; as such there was significant scope for an adverse impact on the market and on a large number of other market participants if that inside information was mishandled.
The Firm received a 20% Stage 2 settlement discount, without which the fine would have been £1.5 million and the restriction would have been 90 days.

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