February Regulation Update
By Kyte Ekstrom | Compliance, FCA Regulation, FinTech, Head of Compliance, MLRO | 0 Comments
GENERAL REGULATION
FCA Publishes Policy Statement – PS21/3 Building operational resilience
In December 2019, the FCA, in partnership with the Bank of England (BoE), and PRA consulted on proposed changes to improve the operational resilience of the UK financial sector. From their findings the Bank then published a ’shared Final Policy Summary’. The new FCA rules and guidance will come into force on 31 March 2022.
This will apply to:
banks
- building societies
- PRA-designated investment firms
- insurers
- Recognised Investment Exchanges
- enhanced scope SM&CR firms
- entities authorised and registered under the Payment Services Regulations 2017 or Electronic Money Regulations 2011
By 31 March 2022, firms must have identified their important business services, set impact tolerances for the maximum tolerable disruption and carried out mapping and testing to a level of sophistication necessary to do so. Firms must also have identified any vulnerabilities in their operational resilience.
Policy Statement: PS21/3 – Building Operational Resilience
BoE – Shared Policy Statement
House of Lords European Affairs Committee Announces Inquiry – UK-EU Financial Services
The House of Lords European Affairs Committee (the Committee) has announced the launch of a new UK-EU financial services inquiry. The Committee notes that the UK-EU Trade and Cooperation Agreement (TCA) contains only limited provisions on financial services trade between the UK and the EU. Since the TCA was signed, the EU has only granted the UK two equivalence decisions for financial services, both of which have been limited and one of which has since expired. In contrast, the UK has granted equivalence to EEA member states in 28 of the 32 areas identified for the equivalence process.
The inquiry will consider:
- The impact so far on the UK financial services sector of the UK’s departure from the EU single market.
- The impact of the absence of a functioning framework for UK-EU regulatory cooperation.
- The future of cross-border UK-EU financial services trade in the absence of equivalence.
- The impact of regulatory divergence and agreements with third countries on UK-EU financial services trade.
The Committee indicates on its accompanying webpage that there will be an oral evidence session on 8 February 2022.
The Committee expects to report by May 2022.
Inquiry page: UK-EU relationship in financial services
Press release
FCA Publishes Speech – The Future of UK Financial Regulation
The speech on the FCA’s role and priorities on enhancing the UK’s financial services sector, given by Sarah Pritchard, Executive Director of Markets at the FCA, was given at the City and Financial Global’s Future of UK Financial Regulation Summit.
Ms Pritchard noted that, since the FCA’s CEO, Nikhil Rathi, set out the FCA’s vision for change and the future in July 2021, the FCA has taken steps towards delivering the outcomes that are needed to protect consumers and ensure a well-functioning market, through “being innovative, assertive and adaptive”.
These steps include:
- HM Treasury consulting on giving the FCA significant new rule-making powers, through the Future Regulatory Framework (FRF).
- How the FRF is a critical opportunity to adapt the regulatory system ensuring that it continues to enhance the attractiveness of UK capital markets.
- The announcement the the FCA will be making the Regulatory Sandbox permanent.
- Supporting investment in assets, such as infrastructure and private equity with the implementation of the Long Term Asset Fund regulations enabling open-ended funds to invest more efficiently in long-term illiquid assets.
- Changes to the Listing Regime, aiding UK public markets to remain an attractive and trusted place to list companies.
- The first successful prosecution under the Money Laundering Regulations against NatWest Bank for failing to have adequate Money Laundering systems and controls.
- The ‘Regulatory Permissions ‘use it or lose it,’ pilot, seeking to remove permissions from firms who do not use them.
- The proposed introduction of new rules to embed diversity and inclusion across financial services, and in listed markets.
- The steps taken to implement the recommendations of the Taskforce for Climate Related Financial Disclosures.
Looking to the longer term, Ms Pritchard welcomes the government’s vision for the Future Regulatory Framework (FRF) as “an opportunity to create a rulebook which meets the specific needs of the UK market, while still remaining anchored by the high international standards which the UK has done so much to shape.”
On ESG, Ms Pritchard highlights that the FCA expects ESG and sustainable finance to grow as an area of interest, noting that the FCA will “need to redouble work on [its] innovation agenda, to support the data and technology solutions which underly [sic] ESG integration”.
Finally, Ms Pritchard turns to future developments in 2022, highlighting that the FCA will publish their overarching consumer and market strategies, detailing future priorities. She further explained that the strategies should provide “a continued focus on the elements covered above, but with a focus also on the outcomes [the FCA is] seeking, and how progress will be measured.”
Ms Pritchard also touches on the FCA’s current recruitment drive, highlighting the arrival of new senior leaders as well as senior leader vacancies.
FCA Publishes Guidance – Head of Compliance and MLRO Applicant Competency and Capability
The new webpage, published by the FCA, states that authorised and registered firms should have heads of compliance and money laundering reporting officers (MLROs) who are suitably competent and capable of effectively performing the roles, and should carefully consider how individuals can demonstrate this ahead of seeking regulatory approval.
The guidance focuses on four key areas:
- Training – outlining necessary requirements for heads of compliance and the level of skills and knowledge required. As well as expectations for ongoing training and CPD courses.
- Experience – the FCA states that Individual applicants do not need to have held head of compliance and MLRO positions before, but suggest the type of candidate suitable for the role.
- Support from third parties – while it is not a necessary requirement for an applicant firm to have external compliance support, the FCA notes that it may be a helpful addition to the firm’s own in-house arrangements.
- Capacity – the FCA note that the time commitment to the role must be proportionate and sufficient to the size of the company, and that the physical location of the head of compliance and/or MLRO is a relevant factor when deciding if the applicant will be effective in their role
Even if an applicant believes they have sufficient experience or training, the FCA note that they may still request an interview to test competence and capability.
New webpage: Heads of compliance and MLRO applicant competency and capability
FCA Publishes Webpage – Financial Promotions Data 2021
The webpage analyses the latest data, from January 2021 to 31 December 2021, resulting from action taken against authorised firms breaching financial promotion rules and referrals and investigations into unregulated activity. The data relates to financial promotions across all sectors. 1,686 financial promotions carried out by authorised firms from multiple sources were reviewed.
Key points emerging from the analysis include:
- Last year saw an increase in approx. 300 amends/withdrawals of promotions (for authorised firms)
- Some of the most common breaches were in the retail lending sector, in particular claims management companies (CMCs) and retail finance promotions.
- The retail investment sector’s use of social media influencers on various platforms to market investments is increasingly becoming a concern.
- The FCA issued 1,410 alerts about unauthorised firms and individuals in 2021, an increase of 18% from 2020.
- In relation to illegal financial promotions by unauthorised persons, last year saw an overall increase of 10% of total reports received compared with 2020:
- There has been a significant reduction in non-compliant paid for advertisements by unauthorised entities on Google since the FCA’s engagement and implementation of Google’s new financial services advertisement policy.
34,244 reports were received about potential unauthorised business. The number of alerts issued about unauthorised firms and individuals totalled 1,410, an increase of 18% from 2020.
New webpage: Financial promotions data 2021
Office of the Complaints Commissioner Publishes Final Report on FCA’s Oversight – London Capital & Finance Plc
The Office of the Complaints Commissioner has published a final report on the FCA’s oversight of London Capital & Finance plc (LC&F). The report divides the 440 complaints that it has accepted about the regulation of LC&F into the following categories:
- dissatisfaction with the FCA’s oversight of LC&F:
the Complaints Commissioner agrees with most of the particular allegations that have been upheld by the FCA about its oversight of LC&F and welcomes the FCA’s approach. However, it does not agree with the FCA’s stance on an allegation focused on the FCA Register being misleading. The FCA is urged to make amendments to its Register to make its warning message about regulated firms providing unregulated products or services more prominent; - a request that the FCA should offer complainants an ex gratiacompensatory payment for its regulatory failings in its oversight of LC&f:
the Complaints Commissioner considers that the FCA’s approach to compensation in LC&F cases is unjustified and does not stand up to scrutiny. The Complaints Commissioner recommends that the “sole or primary cause” test be abrogated, and the position under the complaints scheme be restored; and - dissatisfaction with aspects of the FCA’s complaint handling process:
the Complaints Commissioner believes that the FCA’s guide to ex gratia payments for distress and inconvenience caused as a result of the FCA’s delay in complaint handling should be publicly available. The Complaints Commissioner has not seen, however, any broad based concerns about the quantum of ex gratia payments offered by the FCA for its complaint handling delays. The FCA is given a further period before the Complaints Commissioner decides whether there is a need for systemic improvement in its complaints function.
The FCA has published a statement on its website explaining that it will respond to the report by 15 March 2022. Complainants will be able to make complaints to the FCA about its handling of LC&F until 17 March 2022.
The Complaints Commissioner’s Final Report into the Financial Conduct Authority’s Oversight of London Capital & Finance (LCF)
FCA webpage
INVESTMENT SERVICES
HM Treasury Publishes Summary of Responses to Call for Input – UK Funds Regime
HM Treasury has published the summary of responses (the Summary) to their January 2021 call for input in relation to the government’s review of the UK funds regime (the Review). The Summary outlines the feedback received on the call for input, the Treasury’s conclusions, and which measures will be progressed or explored further. Overall, the Summary highlights that respondents were supportive of the scope and ambition of the call for input.
The government announced the Review at Budget 2020 to consider tax and relevant areas of regulation. The call for input set out the scope and objectives of the Review and invited stakeholders to provide views on which reforms should be taken forward and how these should be prioritised. As part of the Review, the FCA has introduced rules for Long-Term Asset Funds (LTAFs) and the government has included legislation for a new tax regime covering Asset Holding Companies in the Finance Bill 2021-2022.
The Summary sets out the further steps the government, and the FCA, intend to take, including to:
- Make the taxation of funds simpler and more efficient, including in relation to the genuine diversity of ownership requirement, Real Estate Investment Trusts and solutions to deal with the tax efficiency of multi-asset authorised funds.
- Expand the range of investment products available in the UK, including in relation to authorised fund structures that are permitted to distribute capital, and a new type of fund structure – an unauthorised contractual scheme – aimed at professional investors.
- Explore opportunities to support the wider funds environment, including by providing additional information on the fund authorisation process and by promoting the UK funds regime abroad.
- Consult on options to simplify the VAT treatment of fund management fees.
- continue ongoing work to facilitate the rollout of the LTAF, including: (i) the continued work of the Productive Finance Working Group; (ii) a planned FCA consultation on potentially changing the restrictions on the promotion of LTAFs to allow distribution to a broader range of retail investors; and (iii) continued assessment of the case for any further changes to the way LTAFs are taxed.
The government welcomes further representations from industry.
HM Treasury: Review of the UK funds regime: a call for input: Summary of responses
Webpage
FCA Publishes Consultation Paper – Pensions Dashboards
Consultation Paper (CP22/3) on proposed rules requiring FCA-regulated pension providers to connect and supply information about personal and stakeholder pensions to pensions dashboards.
Pensions dashboards will enable consumers to find and view all their pensions savings – including state, workplace and personal, all in one place. By bringing together this data to show how much individuals have saved and also the projected value of their pensions at the time of retirement. The FCA’s proposals require pension providers to be ready to receive requests to find pensions and search records for data matches, as well as supply specified information for consumers to view on their chosen dashboard.
The FCA proposes an implementation deadline of 30 June 2023 for pension providers for personal and stakeholder pension schemes, although a transitional provision is available for smaller firms that rely on third-party integrated solution providers.
The deadline for responses to the consultation is 8 April 2022, and the FCA intends to confirm the final rules in autumn 2022.
FCA Consultation Paper: Pensions dashboards: proposed rules for pension providers (CP22/3)
Webpage
Press release
CONSUMER CREDIT
FCA Publishes Statement on Amended Buy-Now-Pay-Later Product Terms
The FCA has published a statement summarising changes made by four buy-now-pay-later (BNPL) firms to the terms of their unregulated BNPL products, along with guidance for firms on matters to consider when reviewing existing terms or drafting new ones.
The changes were made in response to concerns raised by the FCA. Despite the type of BNPL agreements offered by the four firms not yet being regulated, the FCA was able to use the Consumer Rights Act 2015 to assess the fairness and transparency of the terms.
The FCA was concerned about the risk of harm to consumers as a result of the way the following types of terms were drafted:
- Terms setting out what happens if a consumer cancels the contract for purchases funded by a BNPL loan.
- Terms enabling the Firms to terminate and/or suspend a consumer’s account or access to services.
- Terms on rights of set-off.
- Continuous payment authority terms.
As well as changes to their terms, the FCA highlights some of the firms have offered to refund consumers who have in the past been inappropriately charged fixed late payment fees for instalments that were stated to be due after they cancelled their entire online purchase with the retailer. Other than this, the FCA notes that it did not see evidence of actual harm resulting from how the firms applied the terms in practice.
FCA Statement: FCA drives changes to Buy Now, Pay Later (BNPL) firms’ contract terms
Press release
FINANCIAL ADVISORS
FCA Publishes Statement – Funeral Plan Provider Applications
In the statement on funeral plan provider authorisation applications the FCA sets out that firms will only be authorised if they meet the following standards:
- Firms sell products which offer fair value, meet consumer needs and are sold fairly.
- Firms are well run, adhere to high conduct standards and have sufficient resources and risk transfer arrangements.
- Consumers have enough time and all the information they need to make well informed decisions when choosing between different products and whether a funeral plan is right for them.
The FCA is also imposing new rules to ensure that consumers are properly protected. These include banning cold calling and all commission payments to intermediaries to ensure that products offer fair value
The FCA reminds firms to plan for the new regulatory regime or prepare to leave the market in an orderly manner before 29th July 2022 when regulation for funeral plan providers comes into effect.
FCA Statement on funeral plan provider applications
CRYPTO-ASSETS
FSB Publishes Report on Updated Assessment of Risks to Financial Stability – Cryptoassets
The FSB has published an updated financial stability risk assessment of crypto-assets. The report examines developments and associated vulnerabilities relating to three segments of the crypto-asset markets: unbacked crypto-assets (such as Bitcoin); stablecoins; and decentralised finance (DeFi), and other platforms on which crypto-assets trade.
The FSB concludes that cryptoassets markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system. The rapid evolution and international nature of these markets also raise the potential for regulatory gaps, fragmentation or arbitrage. In light of this, the FSB highlights a number of areas for ongoing vigilance, including:
- a potential increase in bank sector involvement in the cryptoasset ecosystem, especially where activities involve risk of balance sheet exposure to cryptoassets not captured by (or not in compliance with) appropriate regulatory treatment;
- institutional investors increasing their exposures to cryptoassets relative to the size of their portfolios. Risks could increase further if such exposures employ high levels of leverage, including through the use of derivatives referencing cryptoassets.
- accelerated adoption of cryptoassets for payments. This could happen via partnerships with established payment firms or retailers and social networks.
- a rapid growth of DeFi in the absence of clearly identifiable intermediaries or parties responsible for governance and associated challenges to core financial (stability) regulatory and supervisory disciplines and doctrines.
The report highlights that the FSB will continue to monitor development and risks in cryptoasset markets, including with respect to cryptoasset trading platforms, based on the framework published in 2018. It will also explore potential regulatory and supervisory implications of unbacked cryptoassets. Finally, the FSB will also continue to work towards the effective implementation of its high-level recommendations for the regulation, supervision and oversight of ‘global stablecoin’ arrangements.
FSB report: Assessment of Risks to Financial Stability from Crypto-assets
Webpage
Press release
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