November Regulatory Update

By Joseph Paice | Uncategorized | 0 Comments

Protection of whistleblowers

Directive (EU) 2019/1937 of 23 October 2019, which establishes new EU-wide standards on the protection of whistleblowers, has been published in the Official Journal of the European Union. Some of the main points the Directive covers includes the following:

  • protection for whistleblowers if they disclose information publicly in certain circumstances;
  • safeguards to prevent whistleblowers being suspended, demoted, intimidated or subjected to forms of retaliation
  • standards ensuring that whistleblowers have access to comprehensive and independent information, free advice on procedures and remedies, as well as legal aid during proceedings.

The Directive came into force on 16th December and EU member states must bring into force the laws, regulations and provisions necessary to comply with the Directive by 17 December 2021.

Protection of persons who report breaches of Union law

FCA publishes new Guidance on approving financial promotions of unauthorised persons

The FCA has published a new webpage setting out Guidance for firms that approve the financial promotions of unauthorised persons. It is based on existing requirements in Chapter 4 of the Conduct of Business sourcebook (COBS) and follows concerns around the promotion of unlisted debt securities, commonly called “mini-bonds”, as retail investments, which was also the focus of an FCA ‘Dear CEO’ letter, published in April 2019.

The Guidance deals with a range of topics, including how firms can ensure that a promotion is fair, clear and not misleading, that it complies with the financial promotion rules and reliance on information provided by unauthorised persons.

The FCA encourages authorised firms to read its temporary intervention rules on the marketing of speculative illiquid assets, which will apply from January 2020 to December 2020.

Marketing of speculative mini-bonds to retail investors – FCA publishes temporary product intervention measures

The FCA has published temporary product intervention measures banning the promotion of speculative mini-bonds to most retail investors, using its power under section 137D of FSMA. The measures will restrict the promotion of ‘speculative illiquid assets’ to ensure they can only be promoted to individual retail investors who have been pre-categorised as either sophisticated or high net worth and where the product has been initially assessed as likely to be suitable for them. They also mandate a specific and prominent disclosure on any marketing material on speculative illiquid securities.

The FCA defines speculative illiquid securities as unlisted debentures and preference shares, which have a denomination or minimum investment of £100,000 or less, where the issuer uses the funds raised to lend to a third party, invest in other companies, or purchase or develop property. The prohibition will not apply to the promotion of unlisted debentures or preference shares where a company uses the funds raised to buy or construct property used by them for their own commercial or industrial purpose, and investment vehicles that only invest in a single UK-based property.

The new requirements will apply to any promotion approved or communicated by an authorised firm from 1 January 2020, and will apply for 12 months. This ensures that the FCA’s rules are in place before the end of the current tax year in April 2020, when many retail customers will look for new ISAs or ISA-eligible investment opportunities. The FCA intends to consult on permanent rules in the first half of 2020.

FCA publishes questionnaire on cyber resilience

The FCA has updated its webpage on cyber resilience to publish a joint FCA and PRA self-assessment questionnaire on firms’ cyber resilience capability. The questionnaire consists of several multiple choice questions and aims to help firms understand their cyber capability at a high level.

FCA and PRA questionnaire on firms’ cyber resilience capability

The General Insurance distribution chain: Guidance for insurance product manufacturers and distributors

The FCA has published Finalised Guidance (FG19/5), which aims to clarify the FCA’s expectations of general insurance (GI) firms who manufacture, design or distribute insurance products. The Guidance seeks to ensure that GI products and distribution arrangements present good value to customers through both direct and intermediated sales.

In response to the feedback received to its consultation, the FCA has decided to implement the Guidance largely as consulted on, save for amendments to: (i) clarify the scope of the Guidance and how it links to existing Handbook rules; (ii) explain that value includes a range of factors, including price and quality; and (iii) revise the Guidance for manufacturers relating to their oversight of distribution arrangements and remind distributors of their obligation to provide manufacturers with relevant sales information on request.

FCA fines Henderson Investment Funds Limited £1.9 million

The FCA has published a Final Notice fining Henderson Investment Funds Limited (HIFL) £1,867,900 for failing to treat customers fairly, breaching Principle 3 (Management and Control) and Principle 6 (Customers’ Interests) of the FCA’s Principles for Businesses.

In November 2011, HIFL’s appointed investment manager, Henderson Global Investors Limited (HGIL), decided to reduce the level of active management in two of its Japanese and North American funds. While HGIL informed nearly all affected institutional investors of the change, including offering to manage the funds without charge, HGIL did not inform its 4,700 retail investors of the change in investment strategy. In breach of Principle 6, the firm failed to treat its customers fairly by continuing to charge the affected retail investors the same level of fees until August 2016, amounting to approximately £1.8 million.

In addition, the FCA found that the firm had breached Principle 3, between November 2011 and March 2017, by failing to take reasonable care to oversee, organise and control the management of the two funds responsibly or effectively, including failing to implement adequate risk management systems.

The firm qualified for a 30% discount under the FCA’s executive settlement procedure, without which the FCA would have imposed a penalty of £2,668,547. HIFL has now disclosed the matter to all affected customers and compensated them for any additional costs.

Regulatory fees and levies: FCA policy proposals for 2020/21

The FCA has published a Consultation Paper (CP19/30) on its policy proposals for regulatory fees and levies in 2020/21.

The consultation period closes on 13 January 2020. The FCA intends to publish its feedback and final rules in a Handbook Notice in either February or March 2020.

Record amount of Suspicious Activity Reports (SARs) submitted

The National Crime Agency (NCA) has published its annual report on suspicious activity reports (SARs) for the period April 2018 to March 2019. According to the report, the UK Financial Intelligence Unit (UKFIU) received and processed a record number of SARs (478,437) and an increased number of requests for a defence against money laundering (DAML) (34,543).

The Home Office is leading the SARs reform programme as part of its Economic Crime Plan, published in July 2019. The reform programme aims to improve the regime by upgrading IT infrastructure and increasing information-sharing between supervisors.

Equivalence in financial services

The Department for Exiting the European Union (DExEU) has updated its webpage on the European Commission’s July 2019 Communication on equivalence in the area of financial services. This update adds the letter from John Glen MP (Economic Secretary to the Treasury) to Sir William Cash (Chair of the House of Commons European Scrutiny Committee) confirming the government’s position on equivalence in the area of financial services post-Brexit.

In response to the Committee’s October 2019 report on the UK’s access to EU financial services markets after Brexit, the letter confirms that the government did not seek any amendments to the text of the revised political declaration between the UK and the EU in relation to financial services. Mr Glen confirms that the government is seeking an equivalence decision under EU law in the area of financial services post- Brexit and that the UK and EU have committed to start assessing equivalence as soon as possible after the UK’s withdrawal from the EU. Mr Glen states that such assessments aim to be completed by June 2020. The letter does not identify which specific pieces of legislation the government intends to prioritise for equivalence.

Letter from HM Treasury to the European Scrutiny Committee on equivalence in financial services post-Brexit

PRA publishes ‘Dear CEO’ letter on areas of regulatory focus General insurance firms

The PRA has published a ‘Dear CEO’ letter from Gareth Truran (Acting Director of Insurance Supervision at the PRA) to the CEOs of PRA-regulated general insurance firms setting out the PRA’s current priorities and areas of supervisory focus for such firms in light of its recent supervisory work. The letter outlines several areas of focus, including: (i) the adequacy and governance of, and controls around, reserving; (ii) underwriting conditions, strategies and controls; (iii) exposure management; and (iv) culture and support for control

PRA ‘Dear CEO’ letter on areas of supervisory focus for UK general insurance firms

FCA secures confiscation order totalling £291,070 against convicted fraudster

A confiscation order of £291,070.36 was made against Mark Barry Starling in Southwark Crown Court. This confiscation order follows the FCA prosecution in which Mr Starling was sentenced to 5 years’ imprisonment for defrauding investors of just under £3m in relation to unauthorised investment schemes he operated between 2008 and 2017.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:

‘The FCA will continue to take steps to ensure that proceeds of criminal activity are confiscated from the criminals we prosecute so that victims can be compensated as far as possible.’

The Court found that Mr Starling had derived a benefit of £3,010,982.18 from his criminal conduct, but that the total realisable assets for confiscation was £291,070.36. Mr Starling had spent the rest of the victims’ monies maintaining his comfortable lifestyle.

The monies will be used to compensate the 14 victims of his crimes who lost around £1.8 million in total. If Mr Starling doesn’t pay the confiscation order on time, he is liable to spend a further 2.5 years in prison.