FCA Updates & Developments

The FCA has introduced further guidance on authorising investment firms and updated its webpage regarding notification obligations for firms in relation to ancillary activity exemption, systematic internalisers, Direct Electronic Access (DEA) providers & algorithmic trading and trading venue notifications.

Section 1 of the general guidance is in relation to:

  • Initial authorisation application process and forms
  • Variation of permission for existing authorised persons seeking to become a MiFID firm
  • Variation of permission for existing MiFID authorised investment firms

Section 2 of the guidance  relates to prudential categorisations for MiFID firms, which will allow  firms to identify which categories they fall under.

The FCA has updated its webpage regarding changes in control notifications following the implementation of the MiFID II. The update includes new forms to be used by persons who wish to become a controller of a MiFID II authorised firm and include the following:

  • Corporate controllers form (MiFID): to beused by a firm that is either a limited company of a limited liability partnership.
  • Partnership controllers form (MiFID): to be used by a firm that is a partnership.
  • Individual controllers form (MiFID): to be used by an individual.
  • Trust controllers form (MiFID): to be used by a trustee, settler or beneficiary of a trust.
  • Intragroup transactions form (MiFID): to be used by a firm undertaking an internal reorganisation.

The FCA’s webpage regarding market data regimes has been updated, specifically focusing on the types of market data reported by specific regulated entities. The FCA webpage on market data reporting and market data processing provides information on the new Market Data Processor (MDP) system, which will assist firms with the changes in volumes and ranges of data reporting as part of the obligation under MiFID II.

The FCA has updated its webpage on transaction reporting reflecting the implementation of MiFID II. The update is in regard to the following:

  • Transaction reporting
  • Requesting sample transaction reporting data
  • Instrument reference data
  • MiFID I transition arrangements
  • ESMA transaction reporting exchange mechanism

Information regarding the change of legal status has been updated on the FCA’s website.  This update provides new forms to be used by authorised firms under MiFID II in relation to the change of legal status.

The update sets out how MiFID firms should proceed with changing their legal status. The following are the forms for MiFID firms to complete:

  • MiFID authorisation form
  • List of members of the management body form
  • Application and cancellation form for MiFID firms
  • Changes to contact or standing data
  • Disclosure of significant events
  • Appointed Representatives involved with either the applicant firm or existing firm
  • MiFID (IT) assessment questionnaire

The FCA has announced the appointment of Charles Randell CBE as the new Chair of the FCA. He is due to take up the role on 1 April 2018 for a five-year term.

The FCA has published the Enforcement (Packaged Retail and Insurance-based Investment Products Regulations 2017) Instrument 2018. The instrument makes amendments to the Handbook regarding the Decision Procedure and Penalties manual (DEPP) and the Enforcement Guide (EG).

The instrument is in force from the 4 January 2018.

The FCA has published a statement relating to concerns about the performance scenarios in the Key Information Document (KID). The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation requires PRIIP manufacturers to prepare and publish a KID for each of their PRIIPs. Firms advising a retail investor where a KID must be provided well in advance of the conclusion of the transaction have a more onerous obligation placed upon them.

The FCA’s statement addresses concerns manufacturers may have of the ‘performance scenario’ information required in the KID appearing too optimistic, potentially leading to  misleading the clients.  However, firms can provide additional explanatory materials to put such items into context and set out concerns for investors to consider.

The FCA has published an article regarding its expectation of providers and brokers of retail Contract For Difference (CFD) products and also includes  views  on spread betting and rolling spot forex. The FCA article includes the following topics:

  • A dear CEO letter regarding providers and distributors of CFD products
  • A document on the latest information from the FCA and ESMA regarding the sale of CFDs
  • A consultation paper (CP16/40) proposing changes to prove the conduct of firms as well as reducing consumer detriment.
  • A dear CEO letter regarding client take-on
  • FCA’s future focus and expectations for CFD providers
  • Investor information for customers considering an investment in CFDs

The FCA has released on its website a new instrument reference data errors and omissions form. The form may be used by trading venues and systematic internalisers when complying with their duty to notify the FCA of any errors or omissions in their instrument reference data.

The FCA has published its Handbook Notice 51 regarding changes made to the Handbook from 2018. The changes have been made in relation to the following instruments:

  • Enforcement (Packaged Retail and Insurance-based Investment Products Regulations 2017) Instrument 2018 (Effective from 4/1/18)
  • Conduct of Business Sourcebook (Projections) (Amendment No 2) Instrument 2018 (Effective from 6/4/19)
  • Client Assets (Term Deposits) Instrument 2018 (Effective 22/1/18)

The FCA has updated its website regarding skilled person reviews, more specifically, the skilled person panel and are as follows:

  • Where a regulated firm is in contract with a skilled person, it may consider sourcing a supplier listed on the skilled person panel.
  • The regulated firm will be responsible for assessing the individual appropriateness of the skilled person’s firm for its particular requirements.
  • The regulated firm should have in mind the guidance in SUP 5.4 of the Handbook.

The FCA has published a policy statement (PS18/02) that summarises the feedback regarding the consultation on depositing client money in unbreakable deposits. The FCA has recognised the increasing difficulty for firms depositing client money at banks. The industry feedback has suggested that the cause is partly due to the liquidity rules applicable to banks, alongside the rule in the Client Assets sourcebook (CASS) that prevents a firm from placing client money in bank account with unbreakable terms for longer than 30 days (30-Day rule).

This policy statement sets out the final amendments to the 30-Day rule as proposed previously in the consultation paper (CP17/29).

The policy statement is applicable to regulated firms that hold client money in relation to investment business, banks with whom firms deposit client money and auditors who provide client assets audit reports.

The rules entered into force on 22 January 2018.

The FCA has published a consultation on plans to widen the Financial Ombudsman Service (FOS) to be more  accessible to smaller businesses. The FCA believes that businesses which  are not able to access the FOS and can only resolve their issues at court would struggle to do so, due to the size of their business. The changes proposed by the FCA suggests an increase of approximately 160,000 additional small and medium enterprises able to access the FOS.

The suggestion would be done by changing the eligibility criteria to access the Ombudsman. The eligibility criteria would be changed as follows:

  • Businesses with fewer than 50 employees
  • Annual turnover below £6.5m
  • An annual balance sheet below £5m

The FCA consultation also proposes to extend eligibility to personal guarantors of corporate loans providing it meets the criteria.

Responses are welcomed by the FCA by 22 April 2018 and a policy statement is intended to be published in the summer of 2018.

PRA Updates & Developments

The PRA has updated its webpage regarding the proposals of Pillar II liquidity reporting in CP13/17. The document intends to terminate the FSA047 and FSA048 whilst at the same time implement the PRA110.

The proposal has been postponed with the introduction of the reporting template being delayed by 6 months, from 1 January 2019 to 1 July 2019. The interim reporting due in March 2018 will also be delayed by 6 months to September 2018.

EU Regulatory Updates

The European Commission has released its first report on the functioning of the Online Dispute Resolution (ODR) platform. The ODR was introduced to aid consumers and traders in resolving their disputes about online purchases without going to court by connecting them with alternative dispute resolution bodies.

The report includes the result on the 20,000 EU online traders and marketplaces that were assessed on their compliance along with their legal obligation regarding the inclusion of a link of the ODR platform and an email address on their website.

ESMA has published a public register of derivative contracts subject to the trading obligation under the Market in Financial Instruments Regulation (MiFIR). The document provides market participants with a clear view on the application of the trading obligation and information on:

  • The classes of derivatives subject to the obligation
  • The trading venues on which the derivatives can be traded
  • The dates on which the obligation takes effect

The register will be updated when changes have been made regarding new trading venues. ESMA will consult market participants should it seek to include more derivatives into the scope of MiFIR’s trading obligation.

The European Central Bank (ECB) has released on a Frequently Asked Questions (FAQ) on ECB’s role in supervising euro area banks in light of Brexit. The following are the topics included in the ECB’s expectations:

  • Competencies for banking supervision within the euro area
  • Authorisations and licences to carry out banking activities in the euro area
  • Internal governance and risk management
  • Recovery planning
  • Internal models
  • Issues related to ongoing supervision

The FAQ will be updated with additional material as appropriate over the next few months.

The following are documents that have been published in the Official Journal of the EU (OJ):

  • Commission Delegated Regulation (EU) 2018/63 amending Delegated Regulation (EU) 2017/571 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards on the authorisation, organisational requirements and the publication of transactions for data reporting services providers
  • Commission Delegated Regulation (EU) 2018/105 amending Delegated Regulation (EU) 2016/1675 as regards adding Ethiopia to the list of high-risk third countries in the table in point I of the Annex.

ESMA has published a paper calling for evidence on matters relating to investor protection concerns from the sale, distribution or marketing of contract for differences (CFDs) and binary options.

ESMA is considering a prohibition on the marketing, distribution or sale of both CFDs and binary options to retail clients. In relation to CFDs, ESMA has analysed more options regarding CFDs which are listed as follows:

  • Leverage limits on the opening of a position by a retail client
  • A margin close-out rule on a position by position basis
  • Negative balance protection on an account basis to provide an overall guaranteed limit on retail client losses
  • A restriction on incentivisation of trading
  • A standardised risk warning

The deadline for comments was 5 February 2018.

The Financial Services Compensation Scheme (FSCS) has published its Plan and Budget for 2018/19. The plan outlines the expected management costs and the initial levy forecasts firms will pay next year.

The FSCS is expecting to levy the industry £336m for the nine months up to 31 March 2019, an increase from the 2017/18 figure of £320m over a 12-month period.

The European Banking Authority (EBA) has published its final guidelines on disclosure requirements of International Financial Reporting Standards 9 (IFRS 9). The IFRS 9 has been in force from 1 January 2018. The guideline provides a uniform disclosure template for firms to use when disclosing information on their own funds, capital and leverage ratios, with and without the application of transitional arrangements for IFRS 9 or analogous expected credit losses (ECL).

Financial Crime

The Association for Financial Markets in Europe (AFME) has published a revised version of the Due Diligence Questionnaire (DDQ) for global custodians.

Compared to its predecessor, the DDQ contains 20 additional questions and should further standardise the process for firms. There is also an additional section in the DDQ, Global Custody section, that allows entities to outline their due diligence approach for third parties.

The European Supervisory Authorities (ESAs) have published translations of the final guidelines on anti-money laundering (AML) and countering the financing of terrorism (CFT) regarding electronic transfers under the Wire Transfer Regulation.

The scope of the guidelines sets out:

  • the factors that Payment Services Providers (PSPs) and Intermediary Payment Service Providers (IPSPs) should consider when establishing and implementing procedures to detect and manage transfers of funds which lack the required information on the payer and/or the payee to ensure that these procedures are effective
  • What PSPs and IPSPs should do to manage the risk of money laundering or terrorist financing where the required information on the payer and/or the payee is missing or incomplete
Enforcement Action

The FCA has fined Neil Danziger, a former trader in Royal Bank of Scotland, an amount of £250,000 and prohibited him from performing any function relating to any regulated financial activity.

During the period between February 2007 and November 2010, Mr Danziger was found to have:

  • Intended to benefit from the trading positions for which he and others were responsible
  • On two occasions, obtained a broker’s assistance to attempt to manipulate the JPY LIBOR submissions of other banks

The FCA found Mr Danziger to have been knowingly concerned in RBS’s failure to observe proper standards of market conduct and has determined that he is not fit and proper because he acted recklessly and lacks integrity.

The FCA has placed a financial penalty on Interactive Brokers (UK) (IBUK) for failing in its post-trade systems and controls for identifying and reporting suspicious transactions in the period between February 2014 to February 2015.

IBUK was found to have failed to adequately input into the design and calibration of the monitoring system, or test their operation to ensure potential market abuse would be captured IBUK carried out no quality assurance or monitoring of the outsource monitoring team’s review of the reports and failed to ensure that the staff conducting the reviews were adequately trained.

The FCA consider the breach of IBUK to reveal serious and systemic weakness within its procedures. The FCA has therefore fined IBUK the amount of £1,049,412.

The FCA has published decision notices regarding One Call Insurance Services Limited (One Call) and its Chief Executive John Lawrence Radford. The FCA has found One Call to have failed in its obligation to arrange adequate protection for its client money. This is in breach of Principle 10 in the FCA’s Principles for Business and the Client Money Rules. One Call has made a reference to the Upper Tribunal for a decision which may result in the amendment of the notice.

The current decision notice sees the FCA fining One Call £684,000 and imposing a restriction on One Call from charging renewal fees to its customers for 121 days from the date of the final notice. This will cost One Call approximately £4.6 million.

The decision notice also sees the FCA fining Mr Radford £468,600 as well as prohibiting him from having any responsibility in relation to client money and/or insurer money. Mr Radford has already agreed to settle at an early stage and therefore qualified for the 30% discount. If not for the discount, the FCA would have fined him £669,531.

The FCA has assisted in the investigation and prosecution of Samrat Bhandari who has played a significant role in the operation of an investment scheme which led to the loss of £1.4 million for investors. On 31st January 2018, Samrat Bhandari was sentenced to a total of three and a half years of imprisonment, as well as being disqualified from holding the position of directors for 12 years.

This sentence follows that of Dr Aleem Mirza, Michael Moore and Paul Moore who were all given prison sentences for their involvement in the investment scheme. The FCA comments that the prosecution reflects its commitment to protect investors by bringing unauthorised investment schemes to justice.

The FCA notes that in due course, it will invite the Court to order the sums confiscated from the defendants to be used to compensate the victims of the scheme.

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