March Regulatory Update

By Rosie Bileva | Uncategorized | 0 Comments

Outsourcing in the life insurance sector

FCA Published Findings from а review of outsourcing and third-party service providers

The review is of interest to:

  • life insurers who outsource key business functions
  • outsourced service providers (OSPs)

To ensure life insurers meet the requirements in the existing rules and guidance, they are encouraged to consider whether the findings and examples set out in this paper are relevant to them, and to review their systems and controls where appropriate.

While no evidence of widespread failure and risks to customers, arising from outsourcing, was found, there are areas for improvement.

The FCA encourages firms to review their current systems and controls in light of the regulator’s findings and good and poor practice examples, where relevant to their particular characteristics and the nature, scale and complexity of their activities. Where firms identify shortcomings, they should take prompt remediation action. More information the case studies could be found on the FCA page here.


FCA Published Amendment of COBS 21.3 – final rules and feedback to CP18/40

This Policy Statement (PS) sets out FCA’s response to the feedback received to Consultation Paper (CP) 18/40, Consultation on proposed amendment of COBS 21.3 permitted links rules in Conduct of Business (COBS) sourcebook. It also sets out the final rules and guidance FCA are publishing following the consultation. The new rules seek to address any unjustified barriers to retail investors investing in a broader range of long-term assets in unit-linked funds, while maintaining an appropriate degree of investor protection. They follow recommendations by the Law Commission and engagement with the Treasury’s Pension Scheme Investments Taskforce regarding potential regulatory barriers to investment in some less liquid or illiquid assets. This includes, for example, investment in infrastructure, loans secured on infrastructure assets and some less liquid securities. This PS will affect those who have an interest in investing in illiquid or higher risk assets via unit-linked funds. It will therefore be of interest to:

  • pension scheme operators and trustees
  • operators and investment managers of unit-linked funds
  • life assurance companies with exposure to illiquid assets such as property, either by direct investment or through holdings in investment funds
  • intermediaries, such as platform service providers, wealth managers or financial advisers, whose retail clients invest in funds holding illiquid assets
  • firms communicating to retail clients financial promotions relating to unit-linked funds making significant investments in illiquid assets (these firms will be subject to the requirement in COBS to include a risk warning)
  • investors who have direct or indirect investments in these funds
  • managers of other types of fund such as undertakings for collective investment in transferable securities (UCITS), qualified investor schemes (QIS) or unauthorized schemes which may be affected by the proposals
  • insurance and investment trade bodies

Proposed amendments to COBS 21.3:

The FCA Handbook specifies (in COBS 21.3) 12 categories of assets in which firms may invest to provide linked benefits in unit-linked life policies sold to retail customers. The relevant rules are known as the ‘permitted links’ rules. They are designed to ensure that, where a natural person is holding the investment risk, the assets underlying unit linked life policies are appropriate for retail investors. There are five existing categories of permitted links most relevant to long-term capital investment in illiquid assets:

  • Category 1 – Permitted land and property (COBS 21.3.1R (2) (d))
  • Category 2 – Permitted unlisted securities (COBS 21.3.1R (2) (c))
  • Category 3 – Permitted scheme interests (COBS 21.3.1R (2) (g))
  • Category 4 – Permitted loans (COBS 21.3.1R (2) (e))
  • Category 5 – Approved securities (COBS 21.3.1R (2) (a))


FCA Consultation Paper – CP20/4: Quarterly Consultation Paper No 27

FCA are proposing on the following:

  • Minor amendments to the Decision Procedure and Penalties manual and the Enforcement Guide to implement the Money Laundering and Terrorist Financing (Amendment) Regulations 2019
  • Consequential changes to the Financial Crime Guide to reflect provisions in the Money Laundering and Terrorist Financing (Amendment) Regulations 2019
  • Propose to add the Institute of Financial Accountants (IFA) to the list of bodies whose members can provide a statement of high net worth to individuals in order for certain credit and consumer hire agreements with them to be exempt from regulation
  • Minor amendments to the Decision Procedure and Penalties manual to reflect the OPBAS Regulations
  • Amendments to the notification form to amend firm details
  • Clarify notification procedures, include guidance, and make changes to the Directory persons report
  • Amendments to MiFID II relating to the tick size regime
  • Changes to the Glossary terms for ‘multilateral development bank’ and ‘designated multilateral development bank’

This CP applies to the groups which the above refers to. The CP closes on 1 October 2020 and comments should be submitted by the same date. One can submit opinion in the Online Response Form.


Accessing and using wholesale data – Call for Input

FCA are asking for firms’ input as they explore the changing use and value of data in wholesale financial markets. The Call for Input (CFI) looks at the change this has brought to wholesale markets and will continue to bring, transforming business models, competitive dynamics, and even how financial markets function.

The CFI is focusing on 2 areas:

FCA consider the use and supply of market data, with a particular focus on trading data, benchmarks and market data vendors. Firms use these data to trade, make investment decisions, to evaluate positions and to provide other products and services.

Given the importance of market data, the regulator aims to understand whether users have concerns with the way these data are being sold.

FCA also invite comments about the access to and changing use of data and analytical techniques across all wholesale financial markets. This will help to understand where this is having – or may in the future have – an impact on wholesale markets.

FCA want to identify possible issues caused by the changing use and value of data and decide whether they need to do further work to assess or address harm.

The UK watchdog also wants to understand any benefits these changes may bring, to ensure that their regulation does not impede beneficial innovation.

Who this applies to:

The CFI will be of interest to stakeholders across the wholesale sector, in particular:

  • suppliers of data, and related products and services within wholesale financial markets
  • buyers of data, and related products and services within wholesale financial markets
  • users of data, and related products and services within wholesale financial markets
  • any other stakeholders who interact with wholesale market participants, may indirectly be affected by topics covered in this review and/or may have views on how competition is working in wholesale financial markets

Market participants are invited to share opinion by 1 October 2020. This can be done by the online response form.


FCA Published a CP 20/5: Open-ended Investment Companies – Proposals for a more proportionate Listing regime

This consultation sets out how the regulator proposes to make the necessary changes to the Listing Rules, to create a more proportionate listing regime for OEICs in standard listing, whilst ensuring existing investor protections are maintained.

This consultation paper is of interest to:

  • investors, including retail investors, who own shares in premium-listed OEICs or are considering investing in them
  • OEICs that already have a premium listing of their shares or are considering applying to the FCA for a listing
  • fund managers of OEICs
  • advisors to the above, including FCA-approved sponsor firms

The FCA propose to change the Listing Rules applicable to OEICs to dis-apply or amend existing requirements that:

  • are disproportionate because they prescribe transparency and safeguards, including rights to shareholders, that are already present in underlying funds regimes under which the OEIC is already authorised or recognised; or
  • are not relevant or are inoperable for OEICs because they don’t take account of the specific features of OEICs’ business models or structures.

The regulator also wants to make consequential changes which will align the FCA’s listing requirements for OEICs more closely with standard listing for shares in LR14 Standard listing (shares). The CP closes on 9 June 2020 and comments should be submitted by the same date.


FCA summary of cyber co-ordination group insights

The FCA published on its website on 11 March 2020 the latest insights from its cyber co-ordination groups that were first introduced back in 2017. These groups meet every quarter and allow firms to share knowledge and experience, and discuss best practices in their approach to cyber security.

Each quarter the CCGs discuss various topics of cyber risks. In 2019, these sub-sector groups came from: Insurance, Fund Management, Investment Management, Retail Banking, Retail Investments and Lending, Brokers and Principal Trading firms, and Trading Venues and Benchmark Administrators. Firm participation has grown from 175 in 2018, to over 185 firms in 2019.

The regulator aims to outline and share output from these conversations to a wider financial industry audience. The insights cover broad cyber risks, that span sector priorities, in addition to 4 themes (cyber risk, identity and access management, malicious emails, third parties and supply chains) that were discussed in depth by some or all of the CCG groups.

This is not an FCA Guidance. It does not set out expectations for systems and controls that firms should have in place to comply with the regulatory requirements.


FCA Published a New User Guide: registering for its new data collection platform

As announced in July 2019, FCA are improving the way they collect data from firms and will move to a new platform for data collection, which will replace Gabriel. As part of the move to the new platform, the regulator is simplifying how firms will access it. In the future, companies will use the same login credentials for the new data collection platform and Connect. From 2 April, when users next log into Gabriel, they will be asked to register for the new platform. Once registered, they will continue to use Gabriel with their existing Gabriel username and password until they have been moved to the new platform.

This user guide provides a step-by-step instructions on how to register for the new data collection platform via Gabriel.


FCA requests a delay to the forthcoming announcement of preliminary financial accounts

The FCA announced on 22 March 2020 that it would be sending a letter to companies, it was aware, that were going to publish preliminary financial statements in the next few days to delay their planned publications. The FCA strongly request all listed companies to observe a moratorium on the publication of preliminary financial statements for at least two weeks.

The FCA state that the pandemic means that the basis, on which companies are reporting and planning, is changing rapidly and that companies need to give due consideration to events in preparing their disclosures. Observing timetables, set before the pandemic, may not give companies the necessary time to do this.

In addition, listed companies and the audit profession are facing unprecedented practical challenges during the Coronavirus crisis. The FCA believe the practice of issuing preliminary financial statements in advance of the full audited financial statements is adding unnecessarily to the pressure on companies and the audit profession at this moment.

The regulator reminds companies that the Market Abuse Regulation remains in full force and listed companies are still required to announce inside information to the market as soon as possible unless a valid reason to delay disclosure under the regulation exists.

This statement does not apply to AIM companies. Further information on the scope of the announcement is published on the regulator’s website.


Dear CEO Letter to firms providing services to retail investors about coronavirus (Covid-19)

 In light of the situation with COVID-19 which develops rapidly, the FCA have published a Dear CEO Letter for those firms which provide services to retail clients.

Highlights of the letter are:

  • Client identify verification needs to continue, but firms have flexibility within the rules
  • Supervisory flexibility over best execution until the end of June – FCA have worked closely with ESMA, who have published further details on best execution.
  • Supervisory flexibility over 10% depreciation notifications until the end of September (1 October 2020)
  • FCA Policy and implementation – pause on implementation of investment pathways and other measures


FCA’s expectations on financial resilience for FCA solo-regulated firms

FCA issued a statement on the 26 March 2020 outlining its expectations in terms of financial resilience to solo-regulated firms.

  • FCA encourages firms to continue operating in this challenging period and the regulator is helping them by providing flexibility in this difficult situation
  • Capital and liquidity buffers should be used in times of stress. Firms who have set buffers can use them to support the continuation of the firm’s activities.
  • Firms should be planning ahead and ensuring the sound management of their financial resources. If the firm needs to exit the market, planning should consider how this can be done in an orderly way, while taking steps to reduce the harm to consumers and the markets.
  • Government schemes to help firms through this period can be part of a firm’s plans for how they will meet debts as they fall due.
  • If a firm is concerned, it will not be able to meet its capital requirements, or its debts as they fall due, they should contact their FCA supervisor with its plan for the immediate period ahead.
  • Firms that are prudentially regulated by the Prudential Regulation Authority (PRA) should consider the PRA’s requirements and discuss their concerns with them. Those firms should also keep the FCA notified of any significant developments.


New Data Collection Platform – Registering via Gabriel

FCA have published instructions on how to create a new Connect user or link an already existing account to Connect.


Work-related travel – responsibilities of Senior Managers

The FCA published a statement to all FCA-regulated firms across the UK, including in Scotland, Wales and Northern Ireland. This statement clarifies how to prioritise who should travel to the office and the Senior Management’s responsibilities in doing so.

All firms should be clear that coronavirus (Covid-19) constitutes a public health emergency. The regulator strongly supports the UK Government’s efforts to protect the public by ensuring only those workers who cannot work from home, continue to travel to and from work.

Each firm’s designated Senior Manager or equivalent person is responsible for identifying which of their employees are unable to perform their jobs from home and have to travel to the office or business continuity site.

The UK Government has made clear that employers and employees should discuss their working arrangements, and employers should take every possible step to facilitate their employees working from home, including providing suitable IT and equipment to enable remote working. For instance, the following would not be expected to go into work or meet face to face:

  • financial advisers, as they can offer their services online or by phone
  • staff who can safely and securely trade shares and financial instruments from home
  • business support staff, such as those in IT where they can solve issues from home, unless they are looking after specific equipment or technology
  • claims management companies and those selling non-essential goods and credit

The number of exceptions to the above are expected to be minimal.

Firms should continue to follow the Government’s guidance closely and take the recommended steps.


Statement of Policy: Delaying annual company accounts during the coronavirus crisis

 Companies and their auditors currently face unprecedented challenges in preparing audited financial information as a result of the coronavirus pandemic. In response to the current situation, the FCA, FRC and PRA announced on 26 March 2020 series of actions to ensure information continues to flow to investors and support the continued functioning of the UK’s capital markets.

  • A temporary relief was announced for listed companies facing the challenges of corporate reporting during the coronavirus crisis.

This temporary relief permits listed companies which need the extra time to complete their audited financial statements an additional 2 months in which publish them. Currently, under the Transparency Directive, companies have 4 months from their financial year end in which to publish audited financial statements. Under the temporary relief – the regulator forbears from suspending the listing of companies if they publish financial statements within 6 months of their year-end.

  • Utilisation by companies of the additional time – the coronavirus pandemic is causing companies of all types to re-think and re-plan almost all aspects of their business and operations.
  • Market practice on reporting calendars more broadly – all types of companies are advised to significantly adjust their business and operations. Listed companies will inevitably have to re-think their financial calendars. Business is strongly recommended that listed companies review all elements of their timetables for publication of financial information, in order to make appropriate use of the time available within regulatory deadlines to ensure accurate and carefully prepared disclosures.
  • Moratorium on preliminary statements of account – on 21 March 2020 FCA published a statement, requesting companies to observe a moratorium of at least 2 weeks on the publication of their preliminary statements of account (‘prelims’).
  • Policy details – Issuers subject to DTR4 are required to publish their annual financial reports within 4 months of their financial year-end (DTR 4.1.3R).  If they do not meet this deadline, the regulator expects issuers to request a suspension of their listed securities.  Should the request not be forthcoming, the FCA is able to impose a unilateral suspension if the smooth operation of the market is, or may be, temporarily jeopardised or it is necessary to protect investors (section 77 FSMA and LR 5.1.1R). Under the FCA forbearance, provided the audited annual financial reports are published within six months, issuers will not be expected to request a suspension of their securities if they breach DTR 4.1.3R.  Nor will the FCA take any steps to unilaterally suspend the listing for breach of DTR 4.1.3R (though they reserve the right to take this action if necessary for other reasons).

There is a Q&A section available on the FCA’s website.

The statement could be found here. When the disruption abates the FCA will announce how the policy will be ended in a fair, orderly and transparent way.


FCA sets out new guidance for mortgage providers and for lenders taking part in the Coronavirus Business Interruption Loan Scheme

On the 20 March 2020 FCA published new guidance for mortgage lenders and administrators, and small business lenders, which came as continuation to the announcements made by the Chancellor earlier the same week.


The new guidance makes clear that firms should:

  • Grant customers a payment holiday for an initial period of 3 months, where they may experience payment difficulties as a result of coronavirus (Covid-19) and where they have indicated they wish to receive one.
  • Ensure that there is no additional fee or charge (other than additional interest) as a result of the payment holiday.

The guidance also sets out the steps firms should take to ensure that the payment holiday does not have a negative impact on the customer’s credit score.

The FCA has also made it clear that in the current circumstances, it does not consider that repossession will be in the best interests of the customer.

Small business lenders

The FCA have issued new guidance to firms participating in the Government’s Coronavirus Business Interruption Loan Scheme.

The Scheme, announced by the Chancellor on Tuesday, supports lending to small and medium-sized enterprises (SMEs) impacted by coronavirus of up to £5 million. However, loans of up to £25,000 to sole traders and unincorporated enterprises can fall within the scope of FCA regulation.

The FCA has issued guidance on the information and circumstances that are relevant when assessing the affordability of such loans. The fact that the customer may, at the time of the application, be temporarily experiencing exceptional financial pressures does not mean that the firm is prevented from making the loan.

The guidance says that:

  • Lenders may take into account appropriate evidence, including historic trading figures as well as future forecasts.
  • If forecast income does not materialise, lenders should consider deferring repayments until it does.

The FCA will continue to review these measures as the situation develops and update the guidance appropriately.


FCA sets out expectations for general insurance firms during coronavirus (Covid-19) pandemic

The FCA provided information on 19 March 2020 on a few topics, including: travel, motor and home, and private medical insurance. It also provides clarification in relation to suspension of products and policy renewals.

Firms are expected to be fair, professional and not misleading whenever they communicate with their customers.

Insurance firms should recognise the situation their customers are in and treat them fairly, recognising the circumstances customers may face.


FCA’s approach to ensuring firms treat vulnerable customers fairly

The important points to notice are:

  • FCA to provide firms with greater clarity and explain what, under their Principles for Businesses, firms need to do to ensure that vulnerable consumers are treated fairly and consistently across financial services sectors.
  • Embedding of the Guidance in firms’ culture, processes and practices. The regulator’s supervisors will be supporting firms to do this and they will expect to see them demonstrating how they are complying with the Principles in respect of the treatment of vulnerable consumers.
  • FCA will aim to see not only a proof of box-ticking but firms stepping back to ask what their vulnerable customer’s needs are, and how they are then responding to deliver good outcomes.
  • Consultation on revised Guidance will be provided in Spring this year with a view to finalising it later in the year.


FCA announces delay to launch of directory for certified and assessed persons

Following the coronavirus (Covid-19) outbreak, the FCA have delayed the publication of the directory of certified and assessed persons, which was due to be published on the FS Register by the end of March, for at least a month. The timing of the launch is now under review, details are to follow.


FCA Handbook Notice 75

The FCA published On 27 March 2020 its Handbook Notice 75.

The Board of the Financial Conduct Authority (FCA) made the relevant changes to the Handbook as set out in the instruments listed below:

  • Handbook Administration (No 52) Instrument 2020;
  • Financial Services Compensation Scheme (Management Expenses Levy Limit 2020/2021) Instrument 2020;
  • Listing Rules (Contents of Circulars) (Amendment) Instrument 2020; and
  • Listing Rules (Disclosure of Rights of Securities) Instrument 2020.


ESMA clarifies position on call taping under MIFID II

ESMA reminds firms, of the MiFID II requirements, of call recordings. ESMA also recognises that, considering the exceptional circumstances created by the COVID-19 outbreak, some scenarios may emerge where, notwithstanding steps taken by the firm, the recording of relevant conversations required by MiFID II may not be practicable. If firms, under these exceptional scenarios, are unable to record voice communications, ESMA expects them to consider what alternative steps they could take to mitigate the risks related to the lack of recording.

Firms are expected to deploy all possible efforts to ensure that the above measures remain temporary and that recording of telephone conversations is restored as soon as possible.

ESMA, in coordination with national competent authorities, continues to monitor developments in financial markets, including the application of relevant EU requirements by market participants, as a result of the COVID-19 situation and is prepared to use its powers to ensure financial stability, orderly functioning of EU markets and investor protection.