FCA Updates & Developments

The FCA has published a statement welcoming the US Securities and Exchange Commission’s (SEC) extension of the no-action relief in relation to the potential conflict between US regulation and the Markets in Financial Instruments Directive II (MiFID II). The existing relief is due to expire on 3 July 2020, but the extension deadline will now be 3 July 2023.

During the period of the no-action relief, broker-dealers subject to the US regime may receive payments for unbundled research from firms subject to MiFID II without being considered an investment adviser under US law. This will continue to apply to firms in the event of EU withdrawal before or during the extended period.

The FCA intends to carry out further work in 12 – 24 months’ time to assess firms’ ongoing compliance with the rules and developments in market research.

The FCA has released an article on questions and answers for firms regarding conduct risk during the LIBOR transition.

LIBOR has long been used as the interest rate benchmark to price or value a range of financial products, but it is expected to cease after end of 2021, requiring firms to find a suitable alternative. The market-led risk-free rate working group recommends the Sterling Overnight Index Average rate (SONIA) as a replacement and is supported by the FCA and the Bank of England.

Firms that are affected include:

  • Investment banks
  • Asset and wealth managers
  • Insurers
  • Advisors and brokers

The FCA sets out some points for firms to consider in respect of this transition and notes that even if a firm does not provide or distribute products linked to LIBOR, it may have other links in its systems or contractual relationships through other firms.

The FCA expects firms’ senior managers and boards to understand the risks associated with the transition and take appropriate action to move to alternatives by the end of LIBOR. A robust governance arrangement should be in place to manage risk in the business.

Firms subject to the Senior Managers and Certification Regime (SM&CR) that are impacted by the LIBOR transition should identify the senior manager responsible for overseeing transition and detail the responsibilities in the relevant Statement of Responsibilities (SoRs).

The article provides additional views from the FCA on alternative rates, treating customers fairly, new products, communication with customers and maintaining best interest on customers’ behalf.

The FCA has announced it will introduce temporary rules to prevent consumer harm by banning the promotion of high risk speculative mini bonds to most retail consumers. The rules will apply from 1 January to 31 December 2020.

Financial promotions relating to a speculative illiquid security will be restricted to sophisticated or high net worth individuals. Where products continue to be marketed to high net worth individuals or sophisticated investors, it must comply will the disclosure of appropriate risk statements.

Speculative illiquid securities are defined by the FCA as unlisted bonds and preference shares where the issuer uses the funds raised to lend to a third party, invest in other companies, or purchase or develop property. The measures set out by the FCA will not apply to companies using unlisted securities to buy or construct property used for their own commercial or industrial purpose, or to investment vehicles that only invest in a single UK-based property.

 

The FCA has published a guidance on approving financial promotions of unauthorised persons and provides practical implications of the FCA’s existing requirements, rather than setting out new standards. The guidance is written in light of the temporary ban of mini bonds promotion to retail investors, but firms may still benefit from this guide.

Firms must ensure all financial promotions are fair, clear and not misleading, whether they are to be communicated by an authorised firm or an unauthorised person and should consider:

  • The presentation of the promotion (e.g. whether risk warnings are given sufficient prominence)
  • The substance (e.g. the fairness of claims made)

Additionally, the FCA notes a promotion must comply with the financial promotion rules under COBS 4.

When approving a financial promotion of or for an unauthorised person, firms should not accept at face value information provided by the unauthorised person. Independent views should be taken to assess whether the promotion complies with the relevant rules.

For advice and support in relation to the approval of financial promotions, please contact us.

 

The FCA has published a consultation paper (CP19/31) on extending the Senior Managers Regime (SMR) to benchmark administrators on 7 December 2020. The consultation paper sets out the proposals for applying the regime to benchmark administrators who do not carry out any other regulated activities.

Firms that carry out benchmark activities alongside other regulated activities will be caught under the extension of the SM&CR for solo regulated firms.

The consultation deadline is by 28 February 2020.

For advice and support in relation to SM&CR, please contact us.

PRA Updates & Developments

The Basel Committee on Banking Supervision has issued a consultative document on the introduction of guidelines on the interaction and cooperation between prudential supervision and anti-money laundering and countering financing of terrorism (AML/CFT) supervision. The proposed revisions introduce Annex 5 which provides detailed guidance on when and how prudential and AML/CFT supervisory functions could exchange information and cooperate with each other.

A number of examples are included to provide insight for implementing the recommendations. In addition, a range of supervisory practices, which may not be applicable to all jurisdictions, are presented whenever deemed useful.

The deadline for comments is 6 February 2020.

The European Banking Authority (EBA) has published a consultation paper on the draft amended regulatory technical standard and implementing technical standard on passport notification. The EBA aims to improve the quality and consistency of information provided by credit institutions when notifying the relevant competent authority with the intention to open a branch in another member state.

The submission of comments will end by 13 February 2020.

EU Regulatory Updates

The European Securities and Markets Authority (ESMA) has updated the following Q&As:

Financial Crime

The UK Financial Intelligence Unit (UKFIU) has published new glossary codes and reporting routes regarding Suspicious Activity Reports (SARs). The use of glossary codes is considered good practice and is crucial to enable UKFIU and law enforcement to conduct analysis to identify money laundering trades and take action where necessary.

When submitting a SAR, the glossary code should be included in the ‘Reason for Suspicion’ text space and it may include multiple codes. The booklet will replace all previous publications.

For advice and support in relation to financial crime systems and controls, including SARs process, please contact us.

Enforcement Action

Stuart Malcolm Forsyth, the former CEO of a small mutual insurer, has been banned by both the FCA and the PRA and fined £78,318 and £76,180 respectively.

The joint investigation found that between 2010 and 2016, Mr Forsyth transferred excessive amounts of his remuneration to his wife to reduce his own tax liability.  Mr Forsyth concealed the arrangement from the firm’s board and created false minutes to give the misleading impression that the salaries of both Mr and Mrs Forsyth were agreed by the Remuneration Committee. Subsequently, on an information request from the PRA, Mr Forsyth responded by sending the false minutes. As a result of his actions, the individual was found to have acted without integrity and to his financial benefit.

 

The PRA has imposed a combined penalty on Citigroup Global Markets Limited, Citibank N.A. London branch and Citibank Europe Plc UK branch for £43.9 million for failings relating to their internal controls and governance arrangements underpinning the PRA’s regulatory reporting requirements.

Between 2014 and 2018, the firm’s UK regulatory reporting framework was not designed, implemented or operated effectively which led to failures to submit complete and accurate regulatory returns to the PRA.

As a result of its actions, Citi was found to have breached the relevant requirements under the PRA Rulebook including Fundamental Rule 6, Branch Return Rule and Rule 6.1 of the Notifications Part of the Rulebook.

 

Share this