FCA Updates & Developments

The Financial Conduct Authority (FCA) has updated its webpage with information on the scope of the Client Dealing Function (CDF) under the Senior Manager and Certification Regime (SM&CR).

The CDF covers roles that include dealing in, or arranging investments with, retail and professional clients. It also includes individuals giving advice in relation to designated investment business or acting in the capacity of an investment manager.

The webpage sets out interim arrangements and clarifies the scope of the Client Dealing function activities in the table in the FCA’s Handbook. From 12th December 2018 this table can be found in Chapter 27 of Senior Management Arrangements, Systems and Controls Sourcebook (SYSC 27.8.19), replacing the earlier Chapter 5 (SYSC 5.2).

The rules will apply to banks’ current implementation of the certification regime and to insurers’ implementation of it after 10th December 2018, and to solo-regulated firms’ preparation for the certification regime.

The FCA has updated its information on ‘Preparing your firm for Brexit’.

The webpage provides information on how regulated firms may be affected by Brexit and possible actions to take. The key areas are:

  • Contract continuity
  • Execution of firms’ contingency plans
  • Data sharing
  • Customer communications

Two consultation papers have been published by the FCA:

  • Product intervention for retail binary options (CP18/37)
  • Restricting contract for difference (CFD) products sold to retail clients and a discussion of other derivative products (CP18/38)

In the (CP18/37), the FCA proposes permanent rules to prohibit the sale, marketing and distribution of binary options to retail consumers by creating new rules in COBS Sourcebook. This is explained by the high level of difficulty in the valuation of binary pay-off structures, which raises concerns in relation to investor protection.

The deadline for comments is 7 February 2019.

In the CP18/38, the FCA proposes permanent rules to restrict the marketing, distribution and sale of CFDs and CFD-like options to retail customers. The proposed measures are similar to those of ESMA and include:

  • requirements in limiting leverage ratios
  • enforcing the closing of customer positions when their funds fall to 50% of the margin required to maintain their open positions
  • provision of protection and guarantee that clients will not lose more than the total funds in their trading account
  • stopping inducement cash offers to entice retail customers
  • provision of a standardised risk warning disclosing percentage of retail accounts that make losses.

In addition, the FCA is seeking feedback about risks to retail consumers on exchange traded futures and similar over the counter products.

The feedback deadline for CFD and CFD-like options is 7 February 2019, with feedback on other retail derivatives products due by 7 March 2019.

The policy statement and final Handbook rules in respect to both consultations will be published by March 2019.

PRA Updates & Developments

The Securitisation Regulations 2018 (SI 2018/1288) reflecting the application of the EU Securitisation Regulation in the UK, were laid before Parliament by Her Majesty’s Treasury. These regulations harmonise and reform existing rules on due diligence, risk retention, disclosure and credit-granting that will apply in a uniform way to all securitisations, securitising entities and all types of EU regulated institutional investors.

They also create a new framework for simple, transparent and standardised (STS) long-term securitisation and asset-backed commercial paper programmes.

The Securitisation Regulations apply in the UK from 1st January 2019.

The Prudential Regulation Authority (PRA) Policy statement (PS 32/18) provides the PRA’s final Statement of Policy (SoP): ‘The PRA’s approach to the implementation of the systemic risk buffer’. This statement follows Consultation Paper (CP 29/18) ‘The systemic risk buffer: Updates to the Statement of Policy’.

The policy statement is particularly relevant to ring-fenced bodies within the meaning of section 142A of the Financial Services and Markets Act 2000 (FSMA) and large building societies that hold more than £25 billion in deposits (where one or more of the account holders is a small business) and shares (excluding deferred shares) – jointly called ‘systemic risk buffer (SRB) institutions.

In the CP 29/18 the PRA made proposition to make minor changes and did not receive responses, therefore the draft policy is left largely unchanged.

The Prudential Regulation Authority (PRA) published a Policy Statement (PS30/18) with final policy in response to consultation paper CP16/18, relevant to banks, building societies, PRA-designated investment firms and dormant account fund operators, containing:

  • the PRA’s final rules (Appendix 1)
  • updated Supervisory Statement (SS) 34/15 ‘Guidelines for completing regulatory reports (Appendix 2)
  • updated SS32/15 ‘Pillar 2 reporting, including instructions for completing data items FSA071 to FSA082, and PRA 111(SS32/15) (Appendix 3)
  • a mapping table, outlining templates and instructions in SS32/15 and in SS34/15 (Appendix 4)
  • specific changes to the RFB004 template (Appendix 5).
EU Regulatory Updates

The European Securities and Markets Authority (ESMA) announced plans to renew the restriction on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients from 1st February 2019.

The current temporary intervention measure in relation to CFDs started to apply on 1st August 2018 and was renewed in November 2018.

ESMA considered the need to extend the intervention measure currently in effect and decided that a significant investor protection concern to the offer of CFDs to retail clients should continue to exist.

The renewal covers the following:

  • Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which can vary for volatility of underlying instrument
  • A margin close out rule on a per account basis
  • Negative balance protection on a per account basis. This provides an overall guaranteed limit on retail client losses
  • A restriction on the incentives offered to trade CFDs
  • A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts

The Basel Committee on Banking Supervision (BCBS) published a consultation paper entitled Revisions to leverage ratio disclosure requirements.

Banks must always meet the standard Basel III leverage ratio of 3% and report the leverage ratio on a quarter-end basis or, subject to approval by national supervisor, report a measure based on averaging of exposure amounts based on daily or month-end values.

The proposed amendments are caused by the heightened volatility in various segments of money markets and derivatives markets around key reference dates (e.g. quarter-end dates) raising concerns for potential regulatory arbitrage by banks, leading to ‘window-dressing’ of leverage ratios. In October 2018, the Committee published a newsletter in which it indicated that the ‘window-dressing’ by banks is unacceptable and undermines the policy objectives of the leverage ratio requirements and risks disrupting the operations of financial markets.

This consultative document seeks comments on potential revisions to the disclosure requirements for the leverage ratio, to be submitted by 13th March 2019.

BCBS has published updated Pillar 3 disclosure requirements. Pillar 3 of the Basel promotes market discipline through regulatory disclosure requirements. The updates are made to the following areas:

  • Credit risk, operational risk, the leverage ratio and credit valuation adjustment (CVA) risk
  • Risk-weighted assets (RWAs) as calculated by the bank’s internal models and according to the standardised approach
  • An overview of risk management, RWA and key prudential metrics.

In addition, the updated framework sets out new disclosure requirements on asset encumbrance and, when required by national supervisor at the jurisdictional level, on capital distribution constraints.

The implementation deadline for the disclosure requirements related to Basel III is 1 January 2022; for the disclosure requirements for asset encumbrance – end of 2020.

Aiming for more uniform protection of cross border investors, the European Parliament's Committee on Economic and Monetary Affairs (ECON) published draft reports on the European Commission’s proposed legislation on the cross-border distribution of the EU-regulated alternative investment funds (AIFs) and undertakings for collective investment in transferable securities (UCITS), which gather assets from small investors and pool them to buy bonds, shares or other financial products.

It covers aspects such as marketing and pre-marketing (when a fund testing the waters in a new country before it starts its marketing activities), exiting national market (cease of activities in a host member) and exemption from Key Information Document to be prolonged for further two years.

The EU member states reached a compromise position on how EU and third country clearing houses should be supervised in the future, particularly with the effects of Brexit. The Council of the EU leads the trilogue negotiations for amending the European Markets Infrastructure Regulation (EMIR) in regard to the procedures and authorities involved for the authorisation of central counterparties (CCPs).

There are currently 16 CCPs established and authorised in the EU. An additional 32 third-country CCPs have been recognised under EMIR’s equivalence provisions, allowing them to offer their services in the EU. Following Brexit, the three CCPs based in the UK (LCH Ltd, LME Clear Ltd and ICE Clear Europe Limited) will de facto become third-country CCPs.  

Financial Crime

The FCA has published a Finalised Guidance ‘(FG18/5): Guidance on financial crime and controls: insider dealing and market manipulation’.

This document aims to enhance firms’ understanding of the FCA’s expectations of systems and controls in the area of financial crime. It provides practical help and information to firms of all sizes on actions they can take to counter the risk that they might be used to further financial crime.

This guidance would be of interest to firms that are subject to the financial crime rules in Senior Management Arrangements, Systems and Controls Sourcebook (SYSC 6.1.1R) and who also arrange or execute transactions in financial markets.

The Statutory Instrument (SI) ‘The Money Laundering and Terrorist Financing (Miscellaneous Amendments) Regulations 2018’ has been published by HM Treasury. These regulations amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) in order to implement minor amendments to Directive 2015/849/EU and to specify fully the appeal rights under the MLRs.

They also amend the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulation 2017 in relation to the disclosure of information by the Financial Conduct Authority, including an amendment to ensure that the Law Society of Scotland can act effectively as an anti-money laundering supervisor.

The regulations came into force on 10th January 2019.

The Financial Action Task Force (FATF) published its mutual evaluation report on the UK’s anti-money laundering and counter-terrorist financial (AML/CTF) system, which provides a comprehensive review of its effectiveness and provides recommendations. Although the UK has found to be effective in its aggressive strategy to combat financial crime, the report suggests that it needs to strengthen and harmonise its supervision across all relevant sectors and to enhance its financial intelligence unit.

HM Treasury published and laid before Parliament a draft report “Exiting the European Union. Financial Services” with amendments to the Market Abuse (EU Exit) Regulations 2018.  This addressed deficiencies in retained EU law in relation to market abuse arising from the withdrawal of the UK from EU and aims to ensure that the relevant legislation continues operating effectively after the UK leaves the EU.

The amendments do not alter the policy approach of the current market abuse regime. The principal amendment is to provide that financial instruments admitted to trading or traded on UK venues, as well as on EU venues, continue to be within the scope of regulation in the UK after leaving the EU.

In a ‘no deal’ scenario this will ensure the FCA maintains the ability to prohibit, investigate and pursue cases of market abuse related to financial instruments which affect UK markets and reputation, thereby maintaining the integrity of UK markets. This, as an example, could be taking action against abuse of a UK firm’s debt instruments which are admitted to trading on EU trading venues.

Enforcement Action

The FCA issued a Final Notice in which it imposes a financial penalty of £32,817,800 on Santander UK plc (Santander). This amount includes 30% discount as Santander agreed to settle at early stage of the FCA’s investigation.

Santander failed the fundamental guiding principle of the UK’s financial services industry that regulated firms treat their customers fairly. The penalty was imposed for serious failings in Santander’s ‘probate and bereavement process’, in which the bank did not have in place an effective process for dealing with a deceased customer’s accounts and investments from notification of death, to the transfer of funds to those who are entitled to receive them. Santander breached Principle 3 (management and control), Principle 6 (customer’s interests) and Principle 11 (relations with regulators).

The FCA issued a Final Notice prohibiting Angela Burns from performing a CF2 (non-executive director (NED)) function and imposes a financial penalty of £20,000.

Ms Burns was an experienced UK investment professional and chief executive of her own investment consultancy. Between January 2009 and May 2011, she was a NED at two mutual societies (Marine and General Life Assurance Society and Teachers Provident Society) and failed to declare the conflict of interest with consultancy work for Vanguard Asset Management Limited (Vanguard).

Ms Burns breached the Authority’s Statement of Principle 1 by abusing her position of trust and failing to declare her conflicts of interest to the Mutual Societies when she participated in discussions about using Vanguard as an asset manager at the Mutual Societies, but failed to disclose to the Mutual Societies that she was concurrently soliciting a NED position and consulting work from Vanguard; and solicited work from Vanguard by referring to her NED positions at the Mutual Societies while she was providing them with what they believed was impartial advice.

Angela Burns appealed the Tribunal’s decision to the Court of Appeal, but her appeal was dismissed. Later Ms Burns applied for permission to appeal the Court of Appeal’s decisions to the Supreme Court, but her application was refused. Consequently, the FCA published its final notice against Ms Burns.

The FCA has decided to fine Mohammad Ataur Rahman Prodhan, the former CEO of the Sonali Bank (UK) Limited (SBUK), £76,400 for failing to act with due skill, care and diligence in managing the business of the firm for which he was responsible in his accountable function (breach of Statement of Principle 6) and being knowingly concerned in SBUK’s failure (Principle 3) to maintain effective AML systems.

The FCA explains that during a 2-year period from 2012 to 2014, Mr Prodhan failed to appreciate the need to give sufficient focus to regulatory compliance and to take reasonable steps to ensure the adequacy of SBUK’s AML systems and control to prevent financial crime.

Mr Podhan has referred the Decision Notice to the Upper Tribunal. The Tribunal’s decision will be made public on its website.

Three years after it was initially imposed,  the UK’s first DPA between the Serious Fraud Office (SFO) and Standard Bank ended on 30 November 2018. The DPA required Standard Bank to pay nearly $26m in fines and disgorgement of profits, and to pay $6m in compensation to the Government of Tanzania. Under the DPA terms, Standard Bank was required to commission an external consultant to report on its anti-bribery and corruption controls, policies and procedures, and to recommend improvements to strengthen its controls, with regular reports issued to the SFO.

EU Exit

Her Majesty’s Treasury have prepared Amendments to the OTC derivatives, CCPs and TRs (Amendment, Transitional Provision) (EU Exit) Regulations 2018 and laid before Parliament for approval by resolution of each House of Parliament. The amendments address deficiencies in retained EU legislation, including the European Market Infrastructure Regulation (EMIR), and aims to ensure that the UK continues to have an effective regulatory framework for Over the Counter (OTC) Derivatives, Central Counterparties (CCPs) and Trade Repositories (TRs) after the UK has left the EU.

The amendments transfer functions, which are currently carried out by EU bodies, to UK bodies, e.g. certain European Commission functions are transferred to HM Treasury and certain ESMA functions are transferred to the relevant UK regulator. This will create the temporary ‘intragroup regime’, the transactions of which will be exempt from the requirements in EMIR before exit day for a transitional period, allowing time for a permanent equivalence determination. 

 HM Treasury issued the Draft Statutory Instrument (SI) The Long-term Investment Funds (Amendment) (EU Exit) Regulations 2019 and laid before Parliament. The amendments address the deficiencies in retained EU law in relation to European Long-Term Investment Funds (ELTIFs), arising from withdrawal of the UK from the EU and ensure that the legislation continues to operate effectively after exit day.

This SI relates to the ELTIF Regulation (EU 2015/760) which covers a sub-category of Alternative Investment Funds (AIFs) that direct investment towards long term investments, such as small and medium sized businesses and the development and operation of infrastructure, public buildings, social infrastructure, transport, sustainable energy and communications.

As part of contingency planning in the event that the UK leaves the EU without a deal, HM Treasury prepared the amendments to the Collective Investment Schemes (CIS) Regulations 2019 which were then laid before Parliament. The amendments ensure that the regime established under the Undertaking for Collective Investment in Transferable Securities (UCITS) IV Directive (2009/65/EC) for investment funds and their managers continues operating effectively after Brexit.

This instrument also amends the commencement provisions in the Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018.

The regulations will come into force on exit day.

Ensuring the legislation continues to operate effectively at the point of the UK leaving the UK, HM Treasury published the Short Selling (Amendment) (EU Exit) Regulations 2018 (SI 2018/1321) with an explanatory memorandum.

The original regulation on short selling and certain aspects of credit default swaps (CDSs) (Council Regulation (EU) 236/2012) (the SSR), applies to financial instruments admitted to trading or traded on an EEA trading venue. It also applies to debt instruments issued by EU sovereign issuers and related CDSs.

This new amended instrument addresses the deficiencies of the SSR to make clear that financial instruments admitted to trading on UK venues, UK sovereign debt and UK sovereign CDS would be subject to the retained short selling regulation. Financial instruments admitted to trading on EU venues will no longer be in scope of UK regulation, in line with the current treatment of third country instruments. Market participants either in the UK or outside the UK will be allowed to use UK sovereign CDSs to hedge correlated assets and liabilities located anywhere in the world.

This instrument also transfers functions from EU supervisory bodies to the FCA and from the European Commission to HM Treasury in setting notification thresholds for short selling positions.

The regulation will come into force on exit day.

The Treasury published and laid before parliament the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018 (SI 2018/1318) together with an explanatory memorandum. The amendment and explanatory memorandum address deficiencies in retained EU law and ensures that the UK’s legal framework for reporting derivatives trades to trade repositories (TRs) will continue to operate effectively after the UK withdrawal from the EU.

The regulations will largely enter into force on exit day.

As part of the contingency preparations for the withdrawal from the EU, and with purpose of reflecting the UK’s new position outside the EU rather than making policy changes, HM Treasury published the updated version of the draft Collective Investment Scheme (Amendment etc) (EU Exit) Regulations 2018.

The regulations make amendments to retained EU law of the Undertaking for Collective Investment in Transferrable Securities (UCITS) that is relevant for EEA fund managers operating UCITS authorised in the UK and fund managers marketing EEA UCITS into the UK and to UK legislation including the financial Services and Markets Act 2000 (FSMA).

The UCITS Directive sets out the common standards for investor protection for regulated investment funds that can be sold to retail investors in the EU, i.e. individual investors making investments for their savings or retirement. UCITS may also be sold to investors classified as ‘unsophisticated investors’, such as local governments.

Except for certain provisions, the regulations largely will come into force on exit day.

Addressing deficiencies in UK domestic law arising from the UK’s withdrawal from the EU and ensuring that the Bank of England’s constitution and functions continue to be clearly defined after exit day in a ‘no deal’ scenario, the HM Treasury prepared the Amendments to the Bank of England 9 (EU Exit) Regulations 2018: “Exiting the European Union. Banks and Banking”.

The regulations amend the provisions on the use of the BoE’s macro-prudential powers, the BoE’s information sharing and cooperation obligations with EU authorities.

The Deposit Guarantee Scheme (DGS) and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 have been made in order to address deficiencies in retained EU law in relation to the UK’s deposit guarantee scheme, the Financial Ombudsman Service (FOS) and certain inquiries and investigations arising from the withdrawal of the UK form the EU.

Parts 1 and 2 (amendments to the DGS Regulations 2015) will come into force on 5 December 2018. Part 3 (amendments to Financial Services & Markets Act 2000 and Financial Services Act 2012|) and Part 4 (further amendments the DGS Regulation 2015) will come into force on exit day.

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