June Regulatory Update

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Assessing adequate financial resources – FCA Consultation Paper (CP19/20) 

The FCA has published a Consultation Paper (CP19/20) on the purpose of, and the FCA’s approach to, its assessment of adequate financial resources for FCA solo-regulated firms. The Consultation Paper sets out: (i) the role of assessing adequate financial resources in minimising harm; (ii) what the FCA looks for from firms when assessing adequate financial resources; and (iii) the FCA’s expectations as to the practices firms should adopt in their assessment of adequate financial resources. The FCA aims to improve the way firms operate so that they can prevent harm from occurring, improve controls, consider the risk in their activities, and carry out remedial action when needed. The consultation period closes on 13 September 2019.


FCA publishes updated version of approach document for payment services and e-money

The FCA has published version four of its approach document on its role under the Payment Services Regulations 2017 and the Electronic Money Regulations 2011. The updated version contains new Guidance on charges for refused payments.


Understanding the money laundering risks in capital markets 

The FCA has published the findings of its Thematic Review (TR19/4) into the money laundering risks in capital markets. The review’s findings included that:

  • although identified money-laundering risks are mitigated to an extent by the nature of the firms in the market, there remain some risks particular to capital markets;
  • some firms need to be more aware of the money-laundering risks in capital markets. Many are in the early stages of their thinking in relation to these risks and need to do more to fully understand their exposure;
  • effective customer risk assessment and customer due diligence are key to reducing exposure to money laundering risk, particularly in capital markets due to the nature of the sector’s transactions;
  • some firms were not clear on their obligations to make suspicious activity reports under the Proceeds of Crime Act 2002;
  • and  accountability and ownership of money laundering risk in the first line of defence needs to increase, rather than being viewed as a compliance or back-office responsibility.

The FCA expects firms to consider their approaches to identifying and assessing the money laundering risks to which they are exposed in light of the report. It is considering its supervisory approach in response to this work.


FCA perimeter report 2018/19 

The FCA has published its first annual report on the FCA perimeter. The FCA perimeter determines which firms require authorisation, and what level of protection consumers can expect for the financial services and products they purchase. The report focuses on areas where perimeter issues are most likely to cause harm to UK consumers and markets, and sets out: (i) what the FCA does and doesn’t regulate; (ii) what challenges the perimeter presents and the actions the FCA is taking to overcome them; (iii) the impact for consumers; and (iv) whether any perimeter issues might require legislative or other changes.

As part of its work to make its role clearer and to explain what compensation may be available, the FCA is working with the Financial Ombudsman Service (FOS), the Financial Services Compensation Scheme (FSCS), and industry and consumer groups to develop an online disclosure system to help consumers understand what protections are in place.

The 2020 perimeter report is to focus on: (i) the extent to which the FCA can exercise its functions in relation to all financial services related activities undertaken by an authorised firm; (ii) the alignment between the perimeter and the coverage of the FOS and the FSCS; and (iii) making clear the distinction between what is covered by the perimeter and what is not. This may create a tier of activities covered by the FCA, the FOS and the FSCS, and a tier that is not.


Suspension of the LF Woodford Equity Income Fund 

The FCA has published a letter from Andrew Bailey (Chief Executive of the FCA) to Nicky Morgan MP (Chair of the House of Commons Treasury Committee) in response to a letter from Ms Morgan on 10 June 2019 requesting information with regard to the suspension of the LF Woodford Equity Income Fund (Woodford Fund).

Mr Bailey indicates that the FCA has opened an investigation, but cannot comment any further. The FCA is due to appear before the Treasury Committee to give evidence about its work on 25 June 2019


IOSCO publishes final report by its cyber task force on cyber regulation  

The International Organization of Securities Commissions (IOSCO) has published a final report by its cyber task force on IOSCO member jurisdictions’ existing frameworks for cyber regulation. The report examines how members are using three prominent and internationally recognised cyber frameworks: (i) CPMI-IOSCO Guidance on Cyber Resilience for Financial Market Infrastructures; (ii) the National Institute of Standards and Technology Framework for improving Critical Infrastructure Cybersecurity; and (iii) the International Organization for Standardization 27000 series standards. The report indicates how such existing cyber frameworks could help address any gaps identified in members’ current regimes, and provides a set of core questions that firms and regulators may use to promote awareness of good practices or to enhance existing practices.


Law Commission publishes report on the SARs regime – Anti-money laundering

The Law Commission has published a final report on suspicious activity reports (SARs) under the anti-money laundering regime. The report states that a significant number of SARs being submitted are of low quality, waste valuable time and resources, and can contain limited or no useful intelligence. The Law Commission is therefore recommending: (i) the creation of an advisory board (containing experts from the public and private sector) to oversee the drafting of guidance, and advise the Secretary of State on appropriate improvements and how best to respond to emerging threats; (ii) a standardised online form for the submission of SARs; and (iii) statutory guidance to be issued by the Secretary of State to reduce confusion and uncertainty around a number of key legal concepts and to ensure reporters understand their legal obligation to report suspicious activity.


Review of the UK payments landscape and regulatory framework 

Phillip Hammond MP (Chancellor of the Exchequer) has delivered his Mansion House speech in which he announced a Treasury-led review of the UK payments landscape and a long-term review into the future of the UK’s regulatory framework. The payments review aims to bring together policymakers and regulators to make sure that the UK’s regulation and infrastructure is keeping pace with new payment models.

The FCA and HM Treasury will also work on a new agenda for Open Finance to give small businesses and consumers control over their financial data. The review of the regulatory framework aims to deliver a system that enables innovation, protects consumers, maintains high standards, is proportionate and policed by independent regulators, and recognises that the EU will continue to be one of the UK’s major trading partners. The first phase of the review will start with a summit of all relevant regulators to improve coordination between authorities, following which HM Treasury intends to publish a call for evidence.


Global Financial Innovation Network publishes progress report  

The Global Financial Innovation Network (GFIN) was launched by the FCA in conjunction with other financial regulators and related organisations in January 2019, following an earlier proposal for a ‘global sandbox’. Its objective is to help innovative firms interact with regulators and test new ideas. GFIN has now published a report setting out the progress made in its first year. The report includes: (i) an overview of the development of the GFIN in its first year; (ii) the GFIN’s reflections on its development so far; and (iii) a summary of the GFIN’s plans for the future.


Council of the EU invites COREPER to approve negotiating mandate

The Council of the European Union has invited its Permanent Representatives Committee (COREPER) to approve the negotiating mandate on the proposal for a Regulation on European Crowdfunding Service Providers (ECSP) for Business and amending Regulation (EU) 2017/1129, and a Proposal for a Directive amending the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II), and to invite the Presidency to begin negotiations on this mandate as soon as possible.


Using InsurTech to help low income renters 

HM Treasury and the FCA hosted an industry workshop on 20 June 2019 to generate innovative ideas for increasing the uptake of contents insurance, particularly among low-income private renters. The workshop explored innovative technologies and services which have the potential to significantly increase insurance coverage. Insight from the workshop will help the broader market to develop further new insurance services and products.


FATF publishes outcomes from plenary meeting

The Financial Action Task Force (FATF) has published the outcomes of its plenary meeting on 16-21 June 2019, which include:

  • guidance for a risk-based approach to virtual assets and virtual service providers, as well as a public statement on virtual assets and related providers;
  • an updated assessment of the financing methods employed by ISIL, Al Qaeda and affiliates;
  •  the release of a public statement on FATF members’ actions to identify and disrupt their financing;
  • a list of members with strategic anti-money laundering (AML)/countering the financing of terrorism (CFT) deficiencies;
  • and  a statement on Brazil’s progress in addressing the serious deficiencies identified in FATF’s third mutual evaluation report.


HM Treasury updates advisory notice on money laundering and terrorist financing

HM Treasury has updated its advisory notice on money laundering and terrorist financing controls in higher risk jurisdictions under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 to take into account the statements of the Financial Action Task Force (FATF) on 21 June 2019 identifying jurisdictions with strategic deficiencies in their anti-money laundering (AML) and countering the financing of terrorism (CFT) regimes (reported in an item above).


PSD2 and Strong Customer Authentication requirement 

The FCA has published a statement in response to the European Banking Authority’s (EBA) Opinion of 21 June 2019 addressing concerns about the preparedness and compliance of some actors in the payments chain with the requirements on strong customer authentication (SCA) under the revised Payment Service Directive (EU) 2015/2366 (PSD2). The Opinion allows the FCA to give some firms extra time to implement SCA. The FCA will aim to agree with stakeholders a migration plan for compliance and readiness, along with key milestones and targets for delivery. The FCA will not take enforcement action against firms if they do not meet the relevant requirements for SCA from 14 September 2019 in areas covered by the plan.


Regulating financial innovation 

Christopher Woolard (Executive Director of Strategy and Competition at the FCA) has delivered a speech on regulating financial innovation. Among other things, Mr Woolard addressed the prospect of Facebook’s planned cryptocurrency, a so-called ‘stablecoin’, which he said the FCA considered not to be a distinct category of cryptoassets and “could sit within or outside of our regulatory perimeter”. Also discussed was the value of early engagement with innovative firms for monitoring, supervisory and policy purposes.


Safeguarding customer funds for non-bank PSPs 

The FCA has published the findings of its multi-firm review of 11 nonbank payment service providers (PSPs) to assess how well they meet the requirements for safeguarding service users’ funds in the Payment Services Regulations 2017 and Electronic Money Regulations 2011. Alongside the review, the FCA has published a ‘Dear CEO’ letter requiring all electronic money institutions and authorised payment institutions to review their current safeguarding arrangements to make sure they fully meet the requirements.