FCA Updates & Developments

The Financial Conduct Authority (FCA) has published Handbook Notice No 64 that describes the changes to the Handbook, Binding Technical Standards and other material made by the FCA Board under legislative and other statutory powers.

The FCA has published policy statement PS19/11 that sets out its final position and Handbook rules to permanently prohibit the sale, marketing and distribution of binary options to retail consumers by firms that carry out activity in, or from, the UK. The statement summarises the feedback the FCA received in response to earlier consultation and the rules came into force on 2 April 2019. The FCA website contains information on what firms are required to do if they carry out this activity.

The FCA and the Securities and Exchange Commission (SEC) have signed two updated Memoranda of Understanding (MoUs) for reaffirming their commitment to continuing close cooperation and information sharing in the event of the UK’s withdrawal from the European Union (EU). The first MOU, originally signed in 2006, is a comprehensive supervisory arrangement covering regulated entities that operate across the national borders. The second MOU, which is required under the UK Alternative Investment Fund Managers Regulations, was originally signed in 2013.

The FCA has also signed MoU with the Australian Securities and Investments Commission (ASIC). They have agreed two Memoranda of Understanding to ensure there is continuity once the UK leaves the EU. The MoUs cover trade repositories and alternative investment funds (AIFs).

In a consultation paper published on 7 December 2018, the FCA proposed to make permanent, ESMA’s currently temporary product intervention measures for retail CFDs in the UK. However, the FCA is still considering the consultation feedback and now plans to publish a Policy Statement and any final Handbook rules in Summer 2019.

Firms must continue to comply with ESMA’s temporary restrictions on CFDs to retail clients. Should EU law cease to apply before ESMA’s notice expires, the notice will continue to apply through UK law.

The FCA has published its business plan 2019/20 setting out its main areas of focus for the year. The FCA has identified its priority cross-sector work for the year ahead in the following areas:

  • Firms’ culture and governance
  • Operational resilience
  • Financial crime (fraud, scams) & Anti-Money Laundering (AML)
  • Fair treatment of existing customers
  • Innovation, data and data ethics
  • Demographic change

The FCA has identified a list of priorities and activities for the coming year for firms which provide asset management, advice, and customer and investment administration services. It identifies for this sector the relevance of operational resilience, value of products and stewardship.

The specific activities include the following:

  • Asset Management Market Study remedies
  • Stewardship
  • Investment firm prudential regime
  • Illiquid assets
  • Evaluating the Packaged Retail and Insurance-based Investment Products (PRIIPs) review

For firms requiring guidance and advice on the FCA’s agenda for the coming years, and how this focus should impact compliance activity, please contact CCL.

PRA Updates & Developments

The Prudential Regulation Authority (PRA) has published consultation paper (CP8/19) ‘Supervising international banks: Revision of the Branch Return’. The paper sets out proposals for changes to the format and content of the Branch Return Form (the Return) and offers additional guidance to assist firms in completing it.

The PRA has published a consultation paper setting out its proposal to amend its policy on settlement of enforcement action.
The consultation proposes that the PRA retains the 30% discount at stage 1 of its settlement but remove all subsequent discounts available in stage 2 and 3. The document further looks to clarify its settlement procedures on notification, without prejudice meetings, senior staff’s involvement and the settlement process.

The consultation will close on Monday 15 July 2019.

EU Regulatory Updates

The Basel Committee on Banking Supervision (BCBS) has published a consultative document on a consolidated Basel framework and launched a new section of its website that sets out a consolidated version of its global standards for the regulation and supervision of banks. The consolidated framework aims to improve the accessibility of the Basel Committee's standards and to promote consistent global interpretation and implementation. The consultation is open until 9 August 2019.

The European Banking Authority (EBA) has published its final draft Regulatory Technical Standards (RTS) setting out conditions to allow institutions to calculate capital requirements of the securitised exposures (KIRB) in accordance with the purchased receivables approach, as laid down in the amended Capital Requirements Regulation (CRR). The draft aims to find a right balance between the need to acknowledge the specific circumstances under which institutions calculate capital requirements in the context of a securitisation transaction and the need to maintain appropriately safe and prudent requirements on the internal modelling of capital requirements.

The European Central Bank (ECB) has published an interim update on the Targeted Review of Internal Models (TRIM) project. TRIM is a multi-year project aiming to assess the internal models currently used by significant institutions in the Single Supervisory Mechanism (SSM), and the reliability and comparability of their results. The update sets out the overarching results TRIM has achieved and the project is planned to be completed in 2019.

The European Securities and Markets Authority (ESMA) has published an updated Q&A on the application of the Undertakings for the Collective Investment in Transferable Securities (UCITS), the Directive Alternative Investment Fund Managers Directive (AIFMD), and an update on the scope of firms subject to the Market Abuse Regulation (MAR) provision.

ESMA has published a press release with updated Q&A on the implementation of investor protection topics under the Market in Financial Instruments Directive and Regulation (MiFID II/ MiFIR). It provides responses and clarity to questions posed by the general public, market participants and competent authorities in relation to the practical application of MiFID II and MiFIR. ESMA has also issued a press release in relation to two updated Q&A documents regarding market structure and transparency topics.

ESMA has opened a public consultation and issued a press release regarding draft supervisory technical standards (RTS) under the European Long-Term Investment Fund (ELTIF) Regulation. ESMA is seeking responses to various subjects that are critical to the implementation of the ELTIF Regulation, including criteria use of derivative instruments, life length of ELTIF, assets, costs disclosure and facilities available to retail investors. The consultation is open for feedback until 29th June 2019.

ESMA has published the framework and the associated press release for its third EU-wide Central Counterparties (CCPs) stress test. ESMA, as mandated under the European Markets Infrastructure Regulation (EMIR), initiates and coordinates this exercise to assess the resilience and safety of European CCPs to adverse market developments and to identify any potential shortcomings. The new stress test exercise has four components: credit stress, liquidity stress, concentration risk and reverse credit stress.

ESMA has issued its first annual report on sanctions imposed by national competent authorities (NCAs) under the Undertakings for Collective Investments in Transferable Securities (UCITS) Directive. The report provides an aggregated overview of the penalties and measures issued under the UCITS Directive for 2016/2017, based on data submitted to ESMA by NCAs.

ESMA has published an updated version of its supervisory briefing on MiFID II appropriateness requirements. This supervisory briefing considers the new version of ESMA’s guidelines on suitability with respect to aspects also relevant to the appropriateness rules.

The European Supervisory Authorities (ESA) published two pieces of Joint Advice in response to requests made by the European Commission in its March 2018 FinTech Action Plan:

ESA has published additional Q&As on the Key Information Document (KID) requirements for Packaged Retail and Insurance-based Investment Products (PRIIPs). The Q&A aims to promote common supervisory approaches and practices based on ongoing work to monitor the application of the KID.

ESMA has updated its Q&As on data reporting under MiFIR. The Q&A provide clarifications in relation to the requirements for submission of reference data under MiFIR, and in particular, they relate to reporting obligations for trading venues operating on the basis of a specified list of instruments.

The European Parliament have agreed to lay down new standards to protect whistleblowers who reveal breaches in a wide range of areas, not limited to financial services, money laundering, public health, consumer and data protection. The rules will look to ensure whistleblowers or potential whistleblowers will remain safe, confidential and safe from reprisals.

The next step will require EU ministers to approve the law which will then allow member states two years to comply with the rules.

ESMA has renewed the temporary restriction on marketing, distribution or sale of contract for differences to retail clients. The decision took effect from 1 May 2019 for a period of 3 months.

Financial Crime

The Financial Action Task Force (FATF) has published its report to the G20 Finance Ministers and Central Bank Governors Meeting in April 2019. The report provides an overview of the FATF’s recent and future work in the areas of countering the money laundering and terrorist financing.

The FCA director of enforcement and market oversight, Mark Stewart, has given a speech on areas of the partly contested case process, the pipeline and AML investigations. It highlighted that partly contested cases avoid a ‘deal-making’ approach to the imposition of penalties and sanctions, giving subjects an opportunity to test and challenge the FCA’s penalties before the Regulatory Decisions Committee (RDC), an independent FCA Board committee, without losing any cooperation benefit. It also emphasised that firms will be accountable for foreseeable harm, and also highlighted that currently, the FCA conducts ‘dual track’ AML investigations where suspected breaches of the Money Laundering Regulations give rise to either criminal or civil proceedings.

HM Treasury has published a consultation paper on steps the Government should take to meet the UK’s obligation to transpose the directive into national law. In its paper, the Treasury takes into account the UK’s approach to implementation in relation to the Government’s withdrawal agreement and implementation period.

Below are some of the areas in which the Treasury is seeking consultation:

  • Expansion of the Directive’s scope
  • CDD exemptions to e-money products
  • Electronic identification processes
  • Obligated entities checking registers
  • Risks to defining business relationship or transaction involving a high-risk third country

The consultation closes on 10 June 2019.

Enforcement Action

The FCA has published a decision notice on fining Standard Chartered Bank (Standard Chartered) £102,163,200 for AML breaches. The decision follows FCA investigations into two areas of Standard Chartered’s business identified by the bank as higher risk: its UK Wholesale Bank Correspondent Banking business and its branches in the United Arab Emirates (UAE). The FCA found serious and sustained shortcomings in Standard Chartered’s AML controls relating to customer due diligence and ongoing monitoring. Standard Chartered failed to establish and maintain risk-sensitive policies and procedures and failed to ensure its UAE branches applied UK equivalent AML and counter-terrorist financing controls.

The FCA Board has released a statement about commencement of an investigation by an independent person into the issues raised by the failure of London Capital & Finance (LC&F). The investigation will cover questions in two areas:

  1. Whether the existing regulatory system adequately protects retail purchasers of mini-bonds from unacceptable levels of harm
  2. The FCA’s supervision of LC&F

The Board decided that the FCA should ask the Treasury to use its formal powers to direct the FCA to commission this review, as this will ensure that the review has a broad and comprehensive remit. HM Treasury and European Secretary to the Treasury, John Glen, have also released an announcement., regarding the investigation. See also our earlier coverage in our March Regulatory Update.

The ESMA has issued a public notice and has fined three credit rating agencies (CRAs) belonging to the Fitch Group. The fines, totalling €5,132,500, relate to a series of infringements in which the CRAs negligently failed to comply with requirements of the Credit Rating Agencies Regulation (CRAR) and related to conflicts of interest that entered into force on 20 June 2013.

The Serious Fraud Office (SFO) has released a statement with details on the sentencing to imprisonment of Carlo Palombo and Colin Bermingham, to 4 years and 5 years respectively, for manipulating the Euro Interbank Offered Rate (EURIBOR) at the height of the financial crisis. Palombo, former Barclays Vice President of Euro Rates and Bermingham, former Managing Director at Barclays, conspired together with former Principal Trader at Deutsche Bank, Christian Bittar and former Barclays Director Phillipe Moryoussef to submit false or misleading EURIBOR submissions to change the published rate and benefit their positions. Both will face a further hearing to determine costs and proceeds of crime action.

The UK’s Upper Tribunal (the Tribunal) has published its first decision in a partly contested case ‘Linear Investments v Financial Conduct Authority (FCA)’. Linear Investments reached an agreement with the FCA but disputed the amount of penalty for breach of Principle 3 of the Principles for Business. The breach comprised a failure to take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems, in relation to the detection and reporting of potential instances of market abuse between 14 January 2013 and 9 August 2015. The Tribunal upheld the FCA’s decision on the size of the penalty of £409,300.

EU Exit

The Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 2) Regulations 2019 have been laid before Parliament for approval by resolution of each House of Parliament. The website contains both statutory instrument (SI) and explanatory memorandum.

ESMA has published its decision on recognition for three UK central counterparties (CCPs) and the Central Securities Depository (CSD) in the event of a no-deal Brexit and without an extension to the Article 50 of the Treaty of European Union. The effect of the recognition decisions is that the three CCPs: LCH Ltd, ICE Clear Europe Ltd and LME Clear Ltd and the CSD: Euroclear UK and Ireland Ltd will be recognised if the UK leaves the EU on a no-deal basis on 12 April 2019.

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