September Regulatory Update

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The FCA fines Tullett Prebon £15.4 million

The Financial Conduct Authority (FCA) has fined Tullett Prebon (Europe) Limited (Tullett Prebon) £15.4 million for failing to conduct its business with due skill, care and diligence, failing to have adequate risk management systems and for failing to be open and cooperative with the FCA.

Tullett Prebon, now part of TP ICAP, is an electronic and voice inter-dealer broker, acting for institutional clients transacting in the wholesale financial markets, typically investment banks. The Rates Division of Tullett Prebon carried out ‘name passing’ broking which comprised a significant part of Tullett Prebon’s overall business, employing many brokers and generating significant revenues for the firm.

Following an FCA investigation, the FCA found that, between 2008 and 2010, Tullett Prebon’s Rates Division had ineffective controls around broker conduct. Lavish entertainment and a lack of effective controls allowed improper trading to take place, including ‘wash’ trades (a ‘wash’ trade involves no change in beneficial ownership and has no legitimate underlying commercial purpose) which generated unwarranted and unusually high amounts of brokerage for the firm.

Tullett Prebon agreed to resolve this matter and therefore qualified for a 30% discount under the FCA’s settlement discount scheme. Without this discount, the fine would have been £22 million.

UK Finance publishes report on SM&CR

UK Finance published a report in partnership with law firm Ashurst on the Senior Managers and Certification Regime (SMCR), the rules introduced over three years ago to improve governance and culture at banks post the financial crisis. It is the most in-depth study conducted by the industry to date of the practical implications of the SMCR, drawing on the responses of more than 25 banking institutions and hearing directly from almost 60 senior managers.

You can view the full report here.

FCA steps up efforts to ensure firms are getting ready for a no-deal Brexit

The Financial Conduct Authority (FCA) is stepping up its efforts to ensure firms are aware of what they need to do to prepare for the potential of a no-deal Brexit. Firms who have not prepared appropriately may risk an impact on their business.

To help firms prepare, the FCA will be running a series of digital adverts signposting to the FCA Brexit webpages, and has set up a dedicated telephone line (0800 048 4255).  This is the most recent phase of the regulator’s preparations for a no-deal. The FCA is urging all firms to consider the implications of a no-deal exit and finalise their preparations.

In the event of no-deal there will be a number of changes to the FCA Handbook, the Temporary Permissions Regime will come into force, and the FCA will become responsible for Credit Ratings Agencies and Trade Repositories. Firms should take note of these changes in advance.

European Commission publishes FAQs on PSD2

The European Commission has published FAQs on the strong customer authentication (SCA) requirements entering into force under the revised Payment Services Directive (EU) 2015/2366 (PSD2). The FAQs address: (i) what the SCA requirements are; (ii) how the SCA requirements will apply; and (iii) how the introduction of PSD2 may affect the payments market.

The SCA requirements entered into force on 14 September 2019. However, the FCA intends not to take enforcement action against firms failing to satisfy the SCA requirements in card-not-present e-commerce transactions by 14 March 2021, in areas covered by an agreed industry plan, where there is evidence that they have taken the necessary steps to comply with the plan.

European Commission FAQs on strong customer authentication under PSD2

MiFID II – FCA publishes multi-firm review of research unbundling reform

The FCA has published the findings of its multi-firm review of the unbundling requirements introduced in January 2018 by the Markets in Financial Instruments Directive (2014/65/EU) (MiFID II). The unbundling reforms require asset managers to pay for third-party research separately from execution services, and either charge clients transparently or pay for research themselves. The reforms also require brokers to price and supply execution services separately from research or other services.

The FCA’s review, drawing on responses from 40 buy-side firms, 10 buy-side and sell-side firms and 5 independent research providers, indicates that the new rules have improved accountability regarding costs and price transparency. Among other matters, the report also found that:

  • the new rules have increased the scrutiny of research and execution costs within buy-side firms, with most choosing to absorb research costs themselves, resulting in an estimated £70 million of savings for investors
  • there was no evidence of a material reduction in firms’ research coverage and a finding that buy-side firms, including small and medium enterprises (SMEs), can still access the research they need;
  • asset managers’ research valuation models have differing levels of sophistication with regards to evaluating the quality of research. The FCA expects firms to refine their valuation models to ensure that they are acting in the best interests of the client;
  • there is a broad spectrum of sell-side research pricing levels, which the FCA intends to monitor for potential competition concerns; and
  • in certain cases, firms have found the application of the new rules ambiguous, in response to which the FCA has provided additional clarification.

The FCA intends to undertake further work on the implementation of the unbundling reforms in 12 to 24 months’ time, as firms continue to develop their arrangements in respect of the new rules and as a market for separately priced research continues to emerge.

FCA multi-firm review of the implementation of research unbundling reforms introduced by MiFID II

EIOPA publishes report on cyber risk 

The European Insurance and Occupational Pensions Authority (EIOPA) has published a report assessing the potential challenges and opportunities of cyber risk for insurers. In light of insurers’ increasing use of dig data, cloud computing and the escalating prevalence of cyber security threats, the report analyses cyber risk from two distinct perspectives: (i) cyber risk as an element of a firm’s operational risk profile; and (ii) the growth of the cyber insurance market in Europe. The report draws on responses from 41 large (re)insurance groups across 12 European countries.

The report highlights the need to undertake action to develop and strengthen a sound cyber resilience framework for insurers. EIOPA suggests that developing clear and comprehensive requirements on cyber security governance as part of operational resilience would help ensure the safe provision of insurance services. This includes a consistent set of definitions and terminology on cyber risks to enable a more structured and focused dialogue between the industry, supervisors and policymakers.

The report also finds that, whilst still relatively small in size, the European cyber insurance market is growing rapidly, with gross written premiums increasing by 72% to €295 million from 2017 to 2018. However, non-affirmative cyber exposures (where cyber risk is neither explicitly included nor excluded within an insurance policy) remain a source of concern which requires further attention in order to address the issue of potential accumulation risk and to provide clarity to policyholders.

EIOPA suggests that enhanced data collection on cyber incidents by insurers would allow firms to price policies more effectively and the creation of a European-wide cyber incident reporting database could be considered.

EIOPA report on the challenges and opportunities of cyber risk for insurers

MEPs urge member states to speed up implementation of AML rules

Members of the European Parliament have adopted a resolution urging member states to implement already agreed anti-money laundering (AML) rules into national law. This includes the Fourth Money Laundering Directive (EU) 2015/849 (4MLD), which was required to be implemented by June 2017, and the Fifth Money Laundering Directive (EU) 2018/843 (5MLD), required to be transposed by January 2020.

MEPs suggest that a lack of cooperation and information-sharing between national authorities, as well as ‘minimum standards legislation’ are the main causes for the poor implementation of the AML rules and that the European Commission should assess whether, for any future revision of the AML legislation, a Regulation would be more appropriate to increase harmonisation.

Press release: MEPs urge national authorities to implement AML rules

Sustainable finance – Commission TEG publishes report on climate benchmarks and benchmarks’ ESG disclosures 

The European Commission Technical Expert Group on Sustainable Finance (TEG) has published a report on climate benchmarks and benchmarks’ environmental, social and governance (ESG) disclosure requirements. The Commission TEG is a stakeholder group designed to assist the Commission in developing green finance policy.

The report advocates the implementation of a set of minimum technical requirements for the methodology of EU climate benchmarks to help investors make informed decisions about climate- conscious investment strategies. It also recommends certain ESG disclosure requirements for benchmark administrators, including disclosure on the alignment of benchmarks with the Paris Agreement. The Commission intends to use the report to inform its preparation of delegated acts in respect of the proposed Regulation amending the EU Benchmarks Regulation (EU) 2016/1011 (BMR). The proposed Regulation is intended to introduce low carbon and positive carbon benchmarks and the delegated acts would introduce two new categories of climate benchmark to sit under these carbon benchmarks: (i) the EU Climate Transition Benchmark; and (ii) the EU Paris- Aligned Benchmark. The Commission intends to publish the proposed Regulation later in 2019.

Commission TEG report on EU climate benchmarks and benchmarks’ ESG disclosures

FCA Policy Statement PS19/24: Illiquid assets and open-ended funds 

The FCA has published a Policy Statement (PS19/24) and an accompanying appendix setting out its final rules and guidance in relation to illiquid assets and open-ended funds, following its Consultation Paper (CP18/27) on this matter in October 2018. The new rules and guidance apply to non-UCITS retail schemes (NURSs) which invest in inherently illiquid assets, and they aim to reduce the potential harm for investors investing in NURSs by addressing three main areas of concern: (i) the suspension of dealing in units; (ii) the quality of liquidity risk management strategies; and (iii) disclosure requirements.

The rules, which will amend the Collective Investment Schemes sourcebook (COLL) and the Conduct of Business sourcebook (COBS), will require:

  • NURSs investing in inherently illiquid assets, such as property, to suspend dealing when an independent valuer identifies material uncertainty regarding the value of more than 20% of the fund’s assets; and
  • the introduction of a new category of fund into the FCA Handbook, ‘funds investing in inherently illiquid assets’ (FIIAs). This category will be subject to additional regulatory requirements, including the disclosure in financial promotions of the funds’ liquidity risk management strategies and the production of liquidity risk contingency plans by FIIA fund managers.

These new rules will be incorporated into the FCA Handbook and come into force on 30 September 2020.

FCA Policy Statement PS19/24: Illiquid assets and open-ended funds

Non-advised sales of annuities – FCA fines The Prudential Assurance Company Limited approximately £24m

The FCA has issued a final notice imposing a fine of £23,875,000 on The Prudential Assurance Company Limited (PAC) in connection with failures relating to non-advised sales of annuity products to existing customers between July 2008 and September 2017. The FCA found that the firm breached Principle 3 (Management and Control) and Principle 6 (Customers’ Interests) of the FCA’s Principles for Businesses by failing to provide fair, clear and not misleading information on non-advised sales of annuities to existing pension customers. The FCA found that the firm failed to take reasonable care to ensure that: (i) customers were sufficiently informed that they might receive a better deal if they shopped around to find annuity products from alternative providers; (ii) documentation used by call handlers was appropriate; and (iii) calls were adequately monitored.

PAC did not dispute the FCA’s findings and voluntarily agreed to conduct a review into its non- advised annuity business in order to identify any customers who may be entitled to redress. The firm has, as of 19 September 2019, offered approximately £110 million in redress to over 17,000 affected customers. In light of PAC’s acceptance of the FCA’s findings, the firm qualified for a 30% discount of the original fine of £34,107,200 under the FCA executive settlement scheme.

FCA final notice fining The Prudential Assurance Company Limited £23,875,000 for non- advised sales of annuities