FCA Updates & Developments

The FCA has confirmed in its press release new rules restricting the sale, marketing and distribution of CFDs and CFD-like options to retail customers. The new rules will make the European Securities and Market Authority’s (ESMA) temporary restrictions permanent to address harm to retail consumers.

When CFDs or CFD-like options are being sold to retail clients, firms will be required to:

  • Limit leverage to between 30:1 and 2:1
  • Close out a customer’s position when funds fall to 50% of the margin needed to maintain open positions on their account
  • Provide protections that guarantee a client cannot lose more than the total funds in their account
  • Stop offering monetary and non-monetary inducements to encourage trading
  • Provide a standardised risk warning which requires firms to tell potential customers the percentage of retail clients that makes losses

The FCA has further clarified the scope of the restriction to:

  • Excluding firms that sell CFD-like options in other jurisdictions, where the product is sold through an intermediary outside the UK
  • Excluding the sales and distribution activities of EEA firms outside the UK. These firms are still prohibited from actively marketing unrestricted CFD-like options to UK retail consumers.

Where intermediaries sell, market or distribute CFD-like options in or from the UK, they will still be subject to FCA rules.

The rule will apply from 1 August 2019 for CFDs and 1 September 2019 for CFD-like options.

For guidance and support in meeting these requirements, please contact us.

The FCA has published policy statement (PS19/19) setting out the final 2019/2020 regulatory fees and levies for:

  • The FCA
  • The Financial Ombudsman Service

Firms can use the regulator’s online calculator to work out the fees based on the final rates. Fee payers will be invoiced from July 2019 onwards.

The FCA is proposing rules to address harm to retail consumers through the sale of derivatives and exchange traded notes (ETNs) to certain types of cryptoassets. The regulator considers these products to be unreliable in determination of the value and risks for retail consumers due to the inherent nature of the underlying asset, the prevalence of market abuse and financial crime, extreme volatility in price and inadequate understanding of the product themselves.

As a result of these features, the FCA is concerned this may lead retail consumers to suffer harm from losses in their investment. Therefore, it is consulting on banning the sale, marketing and distribution of all derivatives and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK.

For guidance and support in relation to the regulation of cryptoassets, please contact us.

The FCA has published its findings from a multi-firm review on eleven non-bank payment service providers (PSPs) to assess how well they were meeting the requirements for safeguarding users’ funds. The regulator found that the following improvements are needed:

  • Greater clarity for Firms on its business model and what funds are relevant or not
  • Expeditious segregation of the funds upon receipt by firm, agent or distributor
  • Increased checks to ensure safeguarded funds remain accurate
  • Additional oversight to manage the risks of safeguarded funds

The FCA, on the 4 July 2019, published a Dear CEO letter to all electronic money institutions and authorised payment institutions to request attestation of their compliance with the requirements.

The FCA notes it will conduct further work on firm’s safeguarding arrangements and expects firms to have reviewed and remediated their processes

The FCA has updated its webpage on the Senior Managers and Certification Regime (SM&CR) to provide clarification on timings for submitting Form O (notification of change to firm classification). The new deadline for submitting the Form O is 24 November 2019.

The FCA has reviewed business continuity planning (BCP) within small and medium sized retail banks, payment institutions and electronic money institutions. The review conducted found that firms often take steps to build resilience to prevent events from occurring. However, the regulator notes that firms should also anticipate, plan and test where events occur and carry out proper planning and testing to respond to such events.

The FCA expect firms to proactively identify, test and revise any relevant capabilities which mitigate harm in the event of an incident occurring. Where necessary, the firm should enhance certain areas to deal with incidents effectively. This should be part of an ongoing assessment of the firms systems and controls.

The review sets out good practice areas and potential areas for enhancement which may benefit firms required to have a business continuity plan.

The FCA has begun work to improve the way data is collected from firms and plan to make a transition to a new platform which will include replacing Gabriel. The platform is in its early stages of development and the regulator is seeking feedback from current Gabriel users via a survey to help shape their thought process for the system.

The FCA has released a Dear CEO letter setting out its views of key risks of harm for customers of wealth management and stockbroking firms. The risks highlighted should be considered and where applicable, the firm should look to mitigate any risks.

The regulator lists four key ways which customers may be harmed within the sector:

  • Reduced levels of savings and investments due to fraud, investment scams and inadequate client money, or asset controls
  • Losing confidence in the industry to deliver financial objectives due to mismanagement of conflicts of interests and market abuse
  • Reduced levels of savings and investments due to order handling procedures and execution processes not delivering the best outcomes
  • Unable to understand the costs of services provided by firms due to insufficient or inaccurate disclosure of costs and charges

The FCA has launched a consultation on proposed guidance for firms on the fair treatment of vulnerable customers. The guidance will set out the FCA’s view of the firm’s requirement to ensure that vulnerable consumers are consistently treated fairly across the financial industry.

The regulator expresses it wants to see the principle of treating vulnerable consumers fairly in firms’ culture. This will require firms to think about what the guidance means for their business and customers and how they are addressing the needs of any vulnerable customers.

The guidance will be in two stages, the FCA is seeking comments on the first stage of the consultation with the deadline being 4 October 2019.

PRA Updates & Developments

The European Banking Authority (EBA) has published an opinion on the link between money laundering and terrorist financing concerns and prudential objectives. It seeks to send messages to supervisors and institutions to factor AML/CFT issues into prudential supervisory processes and cooperation between parties for this purpose.

It notes that prudential supervisors need to be aware of ML/TF risks and in particular:

  • When considering authorisation of an institution or when assessing proposed acquisitions of qualifying holdings
  • As part of ongoing supervision, e.g. when assessing the adequacy of governance and risk management systems
  • When taking measures to address potential weakness from a prudential perspective

The EU Council has made clear in its 2018 action plan that the link between ML/TF risk and prudential objectives creates a need for AML/CFT supervisors to cooperate closely and share information.

For support with your AML/CFT requirements, please contact us.

EU Regulatory Updates

ESMA has published a consultation paper setting out draft guidelines on the compliance function requirements under the Markets in Financial Instruments Directive II (MiFID II).

The guidelines aim to clarify and foster convergence in the implementation of certain aspects of the compliance function requirements under MiFID II. The paper builds upon previous ESMA guidelines and will replace the existing ESMA guidelines on the same topic issued in 2012.

The deadline for comments is 15 October 2019 and ESMA intends to publish the final guidelines in Q2 2020.

To discuss these requirements or to commission a review of your Compliance function, please contact us.

ESMA has published a call for evidence on the impact of MiFID II’s requirement regarding inducements disclosure and costs and charges disclosure.

The European Commission, under Article 90 of MiFID II, must, following consultation with ESMA present a report to the European Parliament and the European Council to include the impact of the inducements disclosure and costs and charges disclosure and how the application of the rules varies across Member States.

Financial Crime

The Financial Action Task Force (FATF) has published a report setting out its guidance on assessing terrorist financing risk. The report provides sources, approaches and examples to consider when carrying out an assessment of terrorist finance risk and covers:

  • Considerations for the scope and governance of the assessment
  • Examples of information sources when identifying threats and vulnerabilities
  • Examples of information sources when identifying risks within banking and money transfer sectors

The report notes the importance of monitoring risk on an ongoing basis and to review continuously the approach to the risk assessment.

For support with your AML/CFT requirements, please contact us.

HM Treasury has published an anti-money laundering and counter-terrorist financing supervision report for 2017 – 2018. The report consists of information provided by supervisors in their annual returns and incorporates the FATF’s evaluation report.

The report confirms the intention to transpose the fifth money laundering directive into UK law by January 2020.

The Joint Money Laundering Steering Group (JMLSG) has, following consultation on sectors 4 (Credit Unions) and 20 (Brokerage services to funds), announced its guidelines have been submitted to HM Treasury for approval and notification of approval will be published on the website once received.

JMLSG also notes that it is continuing work on preparing new guidelines to reflect changes in the money laundering regulations due to the fifth money laundering directive. It is anticipated that the finalisation and publication will be in line with the timing of the expected implementation of the regulation on 10 January 2020.

Enforcement Action

The FCA has fined Standard Life Assurance Limited (SLAL) £30,792,500 for failures relating to non-advised sales of annuities. SLAL did not dispute the FCA’s findings and qualified for a 30% discount. If not for the discount, the penalty would have been £43,989,300.

The Firm had failed to put in place adequate controls to monitor the way the Firm was selling its product via phone calls. This is in addition to the fact that the Firm was offering large financial incentives to sell annuities which encourage staff to place their own financial interests ahead of the Firm’s customers. The circumstances posed a significant risk that SLAL’s staff would fail to provide customers with information for an appropriate product.

SLAL voluntarily agreed to conduct a past business review to identify and redress customers who were likely to have suffered from its failures. As at 31st May, the Firm had paid approximately £25.3 million to 15,302 customers.

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