May Regulatory Update

By Kayne Osbourne MCSI | Uncategorized | 0 Comments

FCA Published Letter to mortgage lenders and administrators managing closed mortgage books

The FCA published a letter, in light of the Coronavirus circumstances, addressed to firms with customers who took out mortgages, with higher risk characteristics before the financial crisis, to review the interest rates charged to such customers as a matter of urgency. This is to ensure that, in line with the FCA Handbook requirements, such as PRIN 6 and MCOB 12.5, customers on variable rates of interest are being treated fairly.

Where a firm holds the power to set rates for mortgages it administers, they should ensure their exercise of that power is consistent with their duty to treat customers fairly. Where the responsibility for setting rates is with an unauthorised firm, companies should draw their attention to this letter. Such firms must still comply with general consumer protection law including the Consumer Protection from Unfair Trading Regulations 2008.

The FCA signed administrative arrangements with regulators all over the world for the transfer of personal data

• The FCA signed administrative arrangements with the Australian Securities and Investments Commission (ASIC)
• The FCA signed administrative arrangements with the United States Commodity Futures Trading Commission (CFTC)
• The FCA signed administrative arrangements with the United States Securities and Exchange Commission (“SEC”)

The Authorities are committed to having in place appropriate safeguards for the processing of personal data in the exercise of their respective regulatory mandates and responsibilities. Each Authority confirms that it can and will act consistent with this Arrangement and that it has no reason to believe that existing applicable legal requirements prevent it from doing so. These arrangements are intended to supplement existing information sharing arrangements or memoranda that may exist between the Authorities, and to be applicable in different contexts, including information that may be shared for supervisory or enforcement related purposes.

The FCA are setting out the planned regulatory initiatives for the next 12 months

This forum was launched to strengthen coordination between members. It is made up of representatives of the Bank of England, Financial Conduct Authority, Prudential Regulation Authority, Payment Systems Regulator and the Competition and Markets Authority, with HM Treasury as an observer member.

The FCA will publish this Grid at least twice a year to help manage the operational impact on firms of implementing initiatives from the Forum members.

This will help in any case, but it is especially necessary during the current coronavirus (Covid-19) crisis. The Forum members have worked closely with firms to coordinate their response and part of this has been to cancel or delay several initiatives to reduce operational burdens on firms. This is illustrated in the Grid.

Coronavirus and customers in temporary financial difficulty: FCA guidance for insurance and premium finance firms

This guidance builds on Principle 6 which requires a firm to pay due regard to the interests of its customers and treat them fairly, and ICOBS 2.5.-1R which requires a firm to act honestly, fairly and professionally in accordance with the best interests of its customer. It sets out the regulator’s expectations for firms to consider the fair treatment of existing customers, and in particular those customers experiencing or reasonably expecting to experience temporary financial difficulties due to circumstances arising from coronavirus (‘qualifying customers’).

The aim of the guidance is to prompt firms to help qualifying customers, where possible, to:

• Reduce the impact of temporary financial distress.
• Ensure that customers continue to have insurance that meets their demands and needs.

Who this applies to?

This guidance applies to regulated firms operating in the insurance and premium finance markets. This includes:

• insurers
• insurance intermediaries (including appointed representatives)
• premium finance lenders that provide credit to fund the payment of insurance premiums in instalments
• premium finance brokers that carry on regulated activities relating to credit granted for the purposes of financing insurance premiums in instalments
• debt collectors
• other firms that may be involved in insurance arrangements and/or in relation to the provision of premium finance

All insurance firms should also consider the FCA’s draft guidance on assessing product value in light of coronavirus.

This guidance applies to all non-investment insurance contracts, i.e. general insurance and protection contracts. It does not apply to re-insurance products.

The elements of the guidance that apply to insurers and insurance brokers only apply to eligible complainants as defined in DISP 2.7.3R. This includes natural persons and small business customers.

For premium finance credit agreements, this guidance is not intended to capture lending for business purposes. As such, regulated lending for business purposes such as non-exempt lending to a sole trader would not be within scope of this guidance. However, firms should remember that the Principles, including the obligation to treat customers fairly, extend to all business customers within the scope of the consumer credit regime. For more information on the actions firms should take and deferrals, please refer to the guidance here.

The FCA published Handbook Notice 77

This Handbook Notice describes the changes to the Handbook and other material made by the Financial Conduct Authority (FCA) Board under its legislative and other statutory powers on 13 May and 21 May 2020. The changes relate to the instruments listed below:

• COVID-19 Premium Finance Instrument 2020
• Payment Services Regulations 2017 (Payment Account) Instrument 2020
• Supervision Manual (Reporting No 14) Instrument 2020

The FCA published its Market Watch 63

In this Market Watch, the regulator set out their expectations of market conduct in the context of increased capital raising events and alternative working arrangements due to coronavirus.

The FCA has been working with partners nationally and internationally to keep markets open and orderly, help firms continue to operate, protect consumers and small businesses, and to maintain high standards of conduct. Although there is uncertainty created by the coronavirus crisis and operational challenges arising from the public policy on social distancing, the regulator still expects all market participants, including issuers, advisors and anyone handling inside information to continue to act in a manner that supports the integrity and orderly functioning of financial markets. This includes complying with all their obligations under relevant regulation including the Market Abuse Regulation (MAR). In response to the crisis, many issuers are anticipated to seek additional capital, leading to an increase in primary market activity. This, coupled with alternative working arrangements, will make it as important as ever that the right controls around market abuse, conduct, and managing conflicts of interest are in place. Attention should be paid to:

• ensuring inside information continues to be appropriately identified and handled by all persons involved in the information chain, so that it is not misused for insider dealing or for commercial advantage
• ensuring inside information is appropriately disclosed by issuers so that investors are not misled
• maintaining robust market surveillance and suspicious transaction and order reporting (STORs) by relevant market participants, in the context of changes in market conditions and the current use of alternative working arrangements
• meeting the transparency and short position covering requirements under the Short Selling Regulation (SSR) for market participants to support the effective functioning of the market
• identifying and managing conflicts of interest by market participants that may arise around capital raising events

The regulator will continue to use their range of powers to monitor, make enquiries, investigate, and if necessary, take enforcement action to protect the integrity and orderly functioning of the market.

Digital sandbox – coronavirus (Covid-19) pilot

FCA are collaborating with key strategic partners and the industry, to pilot a ‘digital sandbox’. This will provide enhanced regulatory support to innovative firms tackling challenges caused by the coronavirus (Covid-19) pandemic. Initial expressions are welcomed as the pilot is being developed and plans are to open applications later in the summer.

This would enhance some key features of the innovation services of the regulator, allowing innovative firms to test and develop proofs of concept in a digital testing environment. There is also an important convening role for the FCA to play, helping to enable greater collaboration to solve complex industry-wide problems.

Therefore, the FCA have accelerated their plans and are working towards piloting aspects of the digital sandbox on a modular basis, to provide support to innovative firms during the crisis.

FATF published report on COVID-19-related Money Laundering and Terrorist Financing

This report identifies challenges, good practices and policy responses to new money laundering and terrorist financing threats and vulnerabilities, arising from the Covid-19 crises. Some of the key findings are:

• The increase in Covid-19 related crimes, such as fraud, cybercrime, misdirection or exploitation of government funds or international financial assistance, is creating new sources of proceed for illicit actors.
• Measures to contain Covid-19 are impacting on the criminal economy and changing criminal behaviour, so that profit-driven criminal may move to other forms of illegal conduct.
• The Covid-19 pandemic is also impacting government and private sectors’ abilities to implement anti-money laundering and counter terrorist financing (AML/CTF) obligations from supervision, regulation and policy reform to suspicious transaction reporting and international cooperation.
• These threats and vulnerabilities represent emerging money laundering (ML) and terrorist financing (TF) risks. Such risks could result in:
• Criminals finding ways to bypass customer due diligence measures;
• Increased misuse of online financial services and virtual assets to move and conceal illicit funds;
• Exploiting economic stimulus measures and insolvency schemes as a means for natural and legal persons to conceal and launder illicit funds;
• Misuse and misappropriation of domestic and international financial aid and emergency funding;
• Criminals and terrorists exploiting Covid-19 and the associated economic downturn to move into new cash-intensive and high-quality lines of business in developing countries.
• AML/CTF policy responses can help with support of the swift and effective implementation of measures to respond to Covid-19, while managing new risks and vulnerabilities. These include:
• Domestic coordination to assess the impact of Covid-19 on AML/CTF risks and systems;
• Strengthened communication with the private sector;
• Encouraging the full use of a risk-based approach to customer due-diligence;
• Supporting electronic and digital payment options.

Reporting from FATF members, observers and open sources indicates the criminals have attempted to profit from the Covid-19 pandemic through increased fraudulent activities. The primarily activities include:

• Impersonation of officials
• Counterfeiting, including of essential goods (such as medical supplies and medicines)
• Fundraising of fake charities
• Fraudulent investment scams

There has been a sharp rise in social engineering attacks, specifically phishing emails and mobile messages through spam campaigns. These attacks use links to fraudulent websites or malicious attachments to obtain personal payment information.

• Email and SMS phishing attacks
• Business email compromise scams
• Ransomware attacks

For full information on the report, please click here.

Financial crime systems and controls during coronavirus situation

FCA’s expectations on how firms should apply their systems and controls to combat and prevent financial crime during this crisis were published on the 6^th of May.

Maintaining the integrity of the financial market is a key objective for the FCA. In the current climate, it is important for firms to maintain effective systems and controls to prevent money laundering and terrorist financing.

Criminals are already taking advantage of the coronavirus (Covid-19) pandemic to carry out fraud and exploitation scams through a variety of methods, including cyber-enabled fraud. Those seeking to launder criminal proceeds or finance terrorism are likely to also exploit any weaknesses in firms’ systems.

The FCA are already working with partners in law enforcement such as the National Economic Crime Centre (NECC) to share information on Covid-19 related financial crime, and will continue to do so as new risks emerge or as criminals change their approach.

It is important that firms remain vigilant to new types of fraud and amend their control environment where necessary to respond to new threats. This should include the timely reporting of Suspicious Activity Reports (SARs) of any new threats.

However, the regulator recognises that, while continuing to operate within the legislative framework for anti-money laundering and counter terrorist financing, firms may need to re-prioritise or reasonably delay some activities. These could include ongoing customer due diligence reviews, or reviews of transaction monitoring alerts.

The FCA will consider such delays reasonable as long as:

• the firm does so on a risk basis (for example, reviews for high risk customers should not be delayed unless absolutely necessary)
• there is a clear plan to return to the business as usual review process as soon as reasonably possible

The challenges of detecting terrorist financing remain, and firms must not weaken their controls to detect such high-risk activity.

Firms are expected to notify the regulator of any material issues that are impacting the effectiveness of their financial crime controls or causing significant delays to remediation plans.

Firms continue to comply with their obligations on client identity verification. The MLRs and Joint Money Laundering Steering Group guidance are already there to assist firms with their client onboarding.

Period to cover absent Senior Managers extended due to coronavirus (Covid-19)

The FCA has extended the maximum period firms can arrange cover for a Senior Manager without being approved, from 12 weeks to 36 weeks, in a consecutive 12-month period.

The modification by consent to rule SUP10.3.13R is available to all solo regulated firms. It aims to provide flexibility to firms managing their governance arrangements during the coronavirus pandemic.

It also allows firms to allocate an absent Senior Manager’s prescribed responsibilities to the individual covering the role (a modification to SYSC 24.1.2).

Firms can apply for the modification by consent as a precautionary measure, in advance of actually needing it.

The modification by consent will take effect from the date the firm applies for it, and will end on 30 April 2021.

For further information, to apply to take advantage of this modification by consent, and for a list of firms that have applied visit: https://www.fca.org.uk/firms/waivers-modifications/consent

The FCA update their Covid-19 information for firms

The regulator works closely with the Government, the Bank of England, the Payment Systems Regulator and firms to ensure customers are protected and markets continue to function well. Dedicated teams have been set up and the situation is being overseen by the executive committee.

The FCA update their dedicated webpage on Coronavirus constantly.

ESMA reminds firms of conduct of business obligations under MiFID II

The European Securities and Markets Authority (ESMA) issued a Public Statement on the risks for retail investors when trading under the highly uncertain market circumstances due to the COVID-19 pandemic. ESMA also reminds investment firms of the key conduct of business obligations under MiFID when providing services to retail investors.

Several National Competent Authorities (NCAs) have recently noticed a significant increase in retail clients’ trading activity. The financial market turmoil, following the COVID-19 pandemic has led to high market volatility and an increase in market, credit and liquidity risks. ESMA has highlighted the risks to retail investors when trading under these unprecedented market circumstances.

Firms are seen to have even greater duties when providing investment or ancillary services to investors, especially when these investors are new to the market, or have limited investment knowledge or experience. ESMA therefore reminds firms of their obligation to act in accordance with the best interests of their clients, and points to the most relevant conduct of business obligations under MiFID II, namely product governance, information disclosure, suitability and appropriateness.

ESMA, in coordination with NCAs, will continue to monitor retail clients’ involvement in the financial markets, and firms’ compliance with the conduct of business requirements. ESMA remains prepared to use its powers to ensure financial stability, orderly functioning of EU markets and investor protection.

FCA Published Statement on how firms should handle post and paper documents

The FCA expects firms to comply with the requirements for post and paper-based processes (both incoming and outgoing), even though it could be difficult to comply fully in the current circumstances. Where this is the case, firms are expected to notify the regulator as soon as possible at: firm.queries@fca.org.uk

Firms should try to ensure that all customers are not disadvantaged because of delays and make particular efforts to contact customers who do not use online services. Firms are expected to send communications in a timely manner.

Firms should demonstrate any steps they have taken to mitigate the impact of non-compliance with postal and paper processes and then return to full compliance as soon as practical. Firms could, for example, collect post and process paper-based work as frequently as they can, if this is not possible daily; and ensure they return client funds promptly, where they are unable to proceed with a transaction due to a delay and/or change in situation.

Firms are supposed to provide general updates on how they will treat incoming and outgoing post, and cheques, through its website and other public channels (such as social media). These communications should update customers on market conditions, explain how customers can check their financial statements (which may arrive late) and invite customers to contact the firm if they wish.

For suitability assessments, face-to-face meetings are not possible for the time being. In such circumstances, firs are expected to use other methods to conduct a suitability assessment, such as phone calls and relevant due diligence checks online. Firms then need to send out the assessment without delay, whether online (for those customers that use online or email services) or by post.

Firms should ask those who have sent instructions or cheques which have not been processed to contact the firm urgently by telephone or electronic means. Where a customer has made a payment by cheque which has not been processed, firms are expected to consider the potential harm caused by not being able to cash the cheque on a case-by-case basis and ensure, where possible, they receive the services/cover they require (for example, retrospective cover). Where the uncashed cheque represents client money under the Client Assets Sourcebook (CASS) regime and the firm provides the service/cover without cashing the cheque, firms must consider whether proceeding in this way might breach CASS and expose other clients to the risk of a client money shortfall. For more details, please visit: https://www.fca.org.uk/firms/client-assets-coronavirus .

Allowing individuals to carry over Continuing Professional Development (CPD) because of coronavirus

During the current pandemic, firms are expected to continue to demonstrate that relevant individuals remain competent to carry out their work. This includes employees as referred to in the Training and Competence sourcebook and employees carrying on insurance distribution activities as referred to in SYSC 28.2 and TC 4.2. Effective and consistent CPD is an essential part of this. But in the exceptional circumstances the FCA are also allowing firms to defer individuals’ CPD to the next CPD year.

Most individuals will be able to continue completing CPD whilst on furlough or working from home. CPD activities can include e-learning and other content that can be completed at home.

Firms most likely to be affected by continuing CPD requirements

There could be exceptional circumstances when individuals may have difficulty completing the required minimum CPD hours. Firms who could be most impacted:

• they must ensure their retail investment advisers complete the required minimum 35 hours of CPD and get independent verification from an accredited body that the firm has met this requirement
• carrying on insurance distribution activities, who must ensure that each relevant employee completes a minimum of 15 hours of professional training or development in each 12-month period

The FCA will temporarily allow firms to let individuals in exceptional circumstances carry over any uncompleted CPD hours to the next CPD year, i.e. the next 12-month period in which to complete the relevant CPD. This applies to CPD years ending before 1 April 2021.

Conditions for carrying over CPD hours to the following 12-month CPD period

Firms can allow this when an individual, due to the current exceptional circumstances, will not be able to complete their CPD hours in their current CPD period.

The individual must then complete the carried-over CPD hours within the next CPD period. The carried over hours will be treated as part of the required CPD hours of that next CPD year on top of the hours already required. For example, if an adviser who is required to complete a minimum of 35 hours of CPD, has completed 25 CPD hours and has 2 months left of the current CPD year, the firm may allow them to transfer 10 hours to their next CPD year. This means that in the next CPD year the adviser will need to complete 45 CPD hours. This can be structured and/or unstructured learning, depending on the make-up of the outstanding CPD.

Where a firm, in accordance to this guidance, has made the decision to carry over uncompleted CPD hours to the next CPD period, the regulator will treat the firm as having complied with the requirements for the current CPD period.

Which circumstances can count as ‘exceptional’

• When individuals during the current pandemic:
  • are needed to carry out extra duties to manage risks, and/or to provide support, to consumers and businesses during the current situation
  • have caring responsibilities, such as having to care for a partner, child, parent, grandparent or sibling
  • have difficulties accessing CPD material, for example, due to technical difficulties or unavailable material, and
• Where it is not realistic to expect the individual also to fulfil the CPD requirements.

The FCA remind firms that there are rules in place for long-term illness implications, as described in TC 2.1.17.

What firms will need to take into account?

Firms will need to take into account the following:

• the individual’s role and responsibilities
• the individual’s knowledge and skill development, (including any relevant Covid-19- related training) during the current CPD year and their continued competence
• the number of CPD hours they intend to carry over
• the individual’s circumstances during the current situation
• the reasons why the individual is unable to complete the relevant CPD

Firms should record their decision and the reasons for it, including the number of CPD hours the individual is carrying over to the next CPD year, but do not need to report this to the FCA.

Independent verification and statement of professional standing (SPS):

To get independent verification for the adviser, the firm will need to confirm to the accredited body that the adviser is and remains competent for the purposes of TC2.1.1R.

In these cases, an accredited body may verify compliance with TC 2.1.15R and this will not be considered as a breach.