Financial services regulation: updates for FCA and PRA regulated firms

Important updates on financial services regulation including the latest PRA and FCA rules and guidance, changes to the Handbook and Rulebook and upcoming developments in UK and European regulation

18 November 2019

Welcome to our financial services regulation blog, a practical guide to legal and regulatory developments in the UK. The framework governing UK authorised firms is constantly evolving and we keep track of developments to help keep you informed as to what is happening and what is coming down the line. Below you will find our regular round up covering PRA, FCA and European level developments in respect of financial services regulation (including insurance, pensions, investments and payments). For further information or if we can assist, please contact Tom Dunn or Anna Davis.

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Financial services regulation

Update posted: 11 November 2019

By Christopher Walker

The FCA responds to the Work and Pensions Committee on its costs and transparency report

On 2 November, the House of Commons Work and Pensions Committee published the FCA’s response to the Committee’s report on 'Pension costs and transparency' (the ‘Report’), detailing the FCA’s replies to the Report’s recommendations.

The FCA’s responses are (non-exhaustively) summarised as follows:

  1. Pension scams: The FCA will consider and discuss whether it will expand its list of unauthorised firms into a widely publicised and regularly updated database to act as a co-ordinated early warning system, particularly acknowledging that whilst the current ‘Warning List is widely publicised’, consumers often use search engines as a first point of call.
  2. Advice and guidance: In relation to the Committee’s recommendation that individuals should ‘only be able to opt-out of guidance through an active decision communicated to an impartial body, such as the Money and Pensions Service’ (‘MAPS’), the FCA notes that legislation requires it to make rules setting out that, before proceeding with an application to access or transfer a consumer's pension savings, firms must ensure that the consumer has either received appropriate pensions guidance or has opted-out of receiving it. The relevant legislation allows the FCA to make rules about how and to whom a consumer indicates they have received or opted-out of pensions guidance. The FCA is currently working closely with MAPS, The Pensions Regulator and DWP on testing approaches, which will help inform the FCA’s approach to the rules on which it will then consult in accordance with its normal processes.
  3. Decumulation and investment pathways: As the investment pathways have not yet been implemented, the FCA does not know what the 'right' price for such pathways is, in spite of a recommendation of 0.75 per cent. Firms should challenge themselves on the level of charges. Given that 0.75 per cent has been set as a maximum fee for default arrangements in accumulation, the FCA will seek to closely review any fees above this level when it reviews charges following implementation.
  4. Independent Governance Committees (‘IGCs’): The FCA will proceed with its review of ICGs, which it expects to report on during Spring 2020; the FCA also intends to issue a policy statement setting out its final rules and guidance before the end of 2019 in relation to requirements for contract-based schemes to report on ESG factors, as referenced in its consultation on ‘Independence Governance Committees: extension of remit’.
  5. The Pensions Dashboard: the FCA notes that this is a government-led initiative but that it continues to work closely with DWP and industry stakeholders to ensure the dashboard can deliver good outcomes for consumers.
  6. Costs and charges disclosure: The FCA will monitor the ongoing efficacy of the Cost Transparency Initiative’s templates (‘CTI Templates’). If evidence emerges that there are problems with firms’ compliance with Principle 7, it will consider whether more detailed rules are necessary. The FCA will examine the creation of a public register of asset managers’ compliance records with reasonable data requests if necessary and proportionate in light of its ongoing review in this area. The FCA suggests there would be a stronger case for such intervention if there is evidence the CTI Templates have not been effective.

The FCA’s full replies to the Report’s recommendations can be found within Appendix two to the response publication.


Update posted: 11 November 2019

By Christopher Walker

General insurance firms receive notice of PRA priorities for the coming year

On 5 November, the PRA published its letter updating the CEOs of general insurance firms on the PRA’s priority areas of focus for the insurance sector for the forthcoming year, as well as feedback from supervisory activity from across the sector.

In summary, the PRA stated that areas of strategic focus will include:

  1. Reserve adequacy and associated reserving governance and controls, particularly in the light of emerging risk developments, including those in the U.S.
  2. The extent to which firms are demonstrating discipline in underwriting strategies, remediation activity and controls, notwithstanding recent rate rises in some specialty lines
  3. Emerging risk trends and experience in firms’ exposure management practices, including both natural catastrophe and man‐made accumulations
  4. Understanding UK retail general insurers’ responses to the FCA’s pricing practices review, once the review is finalised
  5. Ensuring firms develop and maintain a culture where staff feel able to speak up and raise concerns, with effective mechanisms in place to support them in doing so (including mechanisms to ensure access for control functions to non‐executive board members).

The letter sets out in more detail the issues which will be the priority areas of focus for the PRA across the sector in the coming year.

Firms are encouraged to assess the points in the letter and consider whether the issues raised are relevant to them. The PRA expects firms will discuss its letter at board-level, supported by more detailed analysis on the specific issues highlighted in the PRA’s Dear Chief Actuary Letter, in order to identify actions which should be taken by each firm.

Firms should expect the PRA to discuss these issues during their supervisory interactions with firms in order to understand what actions firms have decided to take in order to address these issues. 


Update posted: 21 October

By Christopher Walker

FCA publishes speech on the future of regulation

The FCA has published a speech delivered by Christopher Woolard, FCA Executive Director of Strategy and Competition, in relation to 'Regulation in a changing world'.

Mr Woolard’s speech focused on the current regulatory model’s resilience to change in the ten years following on from the 2008 Financial Crisis, as the FCA seeks to become an agile regulator in an evolving political and economic climate.

Mr Woolard points to the following three key factors changing the context in which the FCA operates:

  1. The completion of the first wave of post-crisis regulation – firms are better capitalised and the personal responsibility of their leaders is more embedded. Now is a good time to reflect on what worked well and what could be improved.
  2. The change in consumer need and attitude – long-term interest rates mean the search for return is stronger whilst the tolerance for loss lessens.
  3. Innovation has gathered pace – we are moving to a truly digital industry which draws on AI and machine learning, resulting in new products that can be sold to consumers directly over the internet.

Mr Woolard argues that the fundamental way in which the bulk of the population interacts with financial services is changing and we now live in a very different world to the one in which our rules were framed. It is therefore important to ask whether the current regulatory model is the right one and if it’s ready to respond to future changes. The FCA’s approach to this question must have the wider confidence and consent of both stakeholders and the public.

Mr Woolard announced that in the coming months the FCA would be engaging in a public conversation inviting thoughts and ideas from the industry and public as well as setting out some of the FCA’s ideas. This will involve publishing detailed papers, including an analysis of future market dynamics, a Discussion Paper about the FCA’s Principles and a Consultation Paper on the Duty of Care.

Whilst the FCA does not know where the conversation would take it, Mr Woolard believes it is moving away from a narrower compliance with the rules to a focus on delivering on outcomes for the users of financial services. Mr Woolard calls for a bold approach which makes full use of the toolkit given to the FCA by Parliament in order to ensure that it continues to deliver on its objectives of improving how markets operate, preventing harm from occurring and serving the public interest.

 


Update posted: 14 October 2019

By Christopher Walker

The Queen’s Speech announces the Financial Services Bill

The Queen’s Speech was made to Parliament on 14 October, outlining the government’s legislative objectives for the next parliamentary session.

The Financial Services Bill (the ‘Bill’) was one particular measure announced, and the government’s background briefing in relation to the Bill notes that its main elements are to:

  • simplify procedures allowing overseas investment funds to be sold in the UK
  • implement Basel standards to strengthen the regulation of global banks, in line with previous G20 commitments
  • deliver on the government’s commitment for long-term market access to the UK for financial services firms in Gibraltar.

The Bill will apply to the whole of the UK and aims to ensure that the 'UK maintains its world-leading regulatory standards and remains open to international markets after we leave the EU'.

 


Update posted: 11 October 2019

By Christopher Walker

FCA provides further Brexit update

The FCA published an update on 11 October 2019 as part of its communications with firms on preparations for a possible No Deal Brexit.

The update included key information that:

  • The FCA is aware that leaving the EU during the working week could present operational challenges for firms and will take a proportionate and pragmatic approach to supervising reporting around exit day in relation to post-exit MiFID transaction reporting and EMIR trade reporting requirements, so long as firms take reasonable steps towards compliance. Firms that are not able to comply fully with the regime at the point of UK Exit will need be able to back-report any missing, incomplete or inaccurate transactions as soon as possible following Exit Day.
  • FCA-registered trade repositories (‘TRs’) should be ready to receive EMIR reports from UK reporting counterparties and be in a position to share these with UK authorities. TRs must ensure the migration of outstanding trades and historic EMIR data, and that the details of any trades newly concluded, terminated or modified by UK reporting counterparties on 1- 3 November 2019 are embedded in their systems. These need to be available for UK authorities by 4 November 2019.
  • UK reporting counterparties should ensure details of derivative transactions that are concluded, terminated and/or modified on 30 and 31 October 2019 which cannot be reported before the point of exit, are reported to a TR by 4 November 2019 at the latest.
  • EEA passporting firms wishing to continue operations in the UK will need to notify the FCA by 30 October that they wish to enter the Temporary Permissions Regime (‘TPR’). Fund managers have until 16 October if they want to make a change to their existing notification.

 


Update posted: 7 October 2019

By Christopher Walker

FCA updates its Supervisory Statement on the Operation of the MiFID Transparency Regime in No Deal Brexit preparations

On 7 October, the FCA published its Supervisory Statement on how it will operate the pre- and post-trade transparency regime for the secondary trading of financial instruments if the UK’s withdrawal from the EU occurs under a No Deal Brexit scenario.

The FCA’s previous statement (from 14 March 2019) remains relevant and the new statement is only intended to cover changes. The statement takes into account the update that ESMA provided on 7 October 2019 to the statement that it issued on 5 February 2019.

Topics covered by the statement include:

  • FCA Financial Instruments Transparency Reference System ('FCA FITRS') – the FCA’s 5 March 2019 statement still applies, however, the FCA is now able to perform the first four-week calculations in relation to initial transparency estimates for new equities and expects to be replacing the initial estimates with those calculations six weeks after an equity is admitted to trading
  • Double Volume Cap ('DVC') – the FCA will publish details of any new DVC suspensions, where applicable, on 8 January 2020, with these taking effect from 13 January 2020. ESMA will not publish DVC calculations for the first two months following a No Deal Brexit, and during this time there will be no further suspensions in the UK for any equity instrument. Previous suspensions announced by ESMA will continue to apply in the UK post-Brexit until six months has elapsed from the date of the ESMA suspension
  • Equity transparency – ESMA’s annual instrument liquidity determination will continue to apply in the UK post-Brexit. The FCA expects to publish new annual determinations in relation to instrument liquidity from early March 2020 to apply from 1 April 2020. Post-Brexit, the most relevant market, in terms of liquidity, will be a UK trading venue – the details of this will be published in due course in FCA FITRS
  • Systemic Internalisers ('SI') – the FCA will not publish data for the purpose of SI calculations prior to 2020. Firms may continue to opt in to be an SI in particular financial instruments or classes of financial instruments
  • Tick sizes – those that apply in the EU will continue to apply in the UK post-Brexit, with an update to follow in early March 2020 on the new tick sizes which will apply from 1 April 2020.

You can read the FCA’s full update here.

 


Update posted: 7 October 2019

By Christopher Walker

ESMA provides a No Deal Brexit update

ESMA published a statement on 7 October 2019 (ESMA90-1-167) in relation to the UK’s withdrawal from the EU and planning for a No Deal Brexit scenario. The statement contains a detailed list of all Brexit related communications by ESMA up to 6 October 2019 and highlights three areas in which it has now issued updated statements.

The statement notes that where the final timing and conditions of Brexit change, ESMA will adjust the approach for its IT applications and databases and will communicate this to the public as soon as possible.

 


Update posted: 4 October 2019

By Christopher Walker

The FCA outlines possible consumer insurance market remedies

The FCA has published an interim report of its market study into the pricing of home and motor insurance.

According to the report, the FCA estimates that around 6 million policyholders pay high prices and are not getting a good deal on their insurance.

The report’s findings note areas of concern such as practices targeting high premiums at vulnerable consumers or those less likely to switch, as well as those activities by firms which raise barriers to switching.

The FCA is considering remedies to:

  • tackle high consumer premiums – banning or restricting practices such as raising prices for cirectly assessing the firms most active in this market throughout the remainder of 2019. It will also write to all firms where we have identified potential harm in their DB pension transfer advice from the data received, and we will set out our expectations and the actions firms should take. Depending on the outcome of the assessments in 2019 it will consider extending its assessments to take in a wider range of firms in 2020. In 2020 it will also roll out a series of events aimed at raising standards in the industry and engaging with a wider range of stakeholders.

    Return to the top of the page.


    Update posted: 26 July 2019

    By Anna Davis

    FCA Insight article suggests four questions firms and leaders can ask to create real and lasting cultural change

    On 24 July 2019, the FCA published an Insight article by Kate Coombs (Senior Behavioural Scientist in the Insight team at the Banking Standards Board) in which Ms Coombs suggests four questions that organisations and leaders may wish to ask to help develop a successful strategy for fostering a culture of speaking up:

    • What do your employees currently find it easy or difficult to speak up about?
    • Who do you need to target to change the culture?
    • How do you want your employees to be able to speak up?
    • How will you know what you are doing is working?

    The article summarises findings from the The Banking Standards Board (BSB) Speaking up and Listening survey, which researched over 70,000 employees across 26 UK banks and building societies and found that one quarter of employees with concerns don’t raise them.


    Update posted: 24 July 2019

    By Paschalis Lois

    FCA to extend the use of its temporary transitional power

    On 25 July 2019, the FCA confirmed that it intends to extend the duration of the directions it had issued under the temporary transitional power (the 'TTP'). The TTP stems from legislation issued by the Treasury on 23 March 2019 that, among other things, empowers the FCA and PRA to make transitional provisions in the event of a no-deal Brexit so as to ensure a minimum disruption in the UK financial markets.

    The FCA had originally outlined its intention to use the TTP back in February 2019 when it issued its main transitional directions, which sit in parallel to the temporary permissions regime for EEA inbound firms.

    The FCA noted its intention to extend the transitional directions to take into account the extension of the Brexit date. However, in its press release, the FCA repeated that this does not affect certain obligations that entities will have to start preparing for ahead of Brexit such as in relation to MiFID II/EMIR reporting obligations, or EEA Issuers that have securities traded or admitted to trading on UK Markets.


    Update posted: 24 July 2019

    By Paschalis Lois

    FCA fines Standard Life £30,792,500 for breaching principles in selling non-advised annuities

    The FCA fined Standard Life Assurance Limited (SL) for breaching Principle 3 (Management and Control) and Principle 6 (Customers’ interest) of the FCA’s Principles for Businesses, when selling non-advised annuities. SL’s approach to selling non-advised annuities to existing customers included higher risk incentives that placed pressure to sell on front line staff. When combined with poor systems and controls and the complex nature of a product that was sold to potentially vulnerable consumers, this led to some customers being treated unfairly and created a significant risk of consumer detriment.


    Update posted: 24 July 2019

    By Anna Davis

    FCA guidance consultation on fair treatment of vulnerable consumers

    The FCA published the first stage of consultation on draft guidance on the fair treatment of vulnerable consumers (GC19/3) on 23 July 2019.

    The draft guidance sets out the FCA’s view on what firms should do to ensure they treat vulnerable consumers fairly. Firms should:

    • understand the needs of vulnerable customers
    • ensure their staff have the right skills and capability to meet the needs of vulnerable customers
    • take practical action (e.g. in their product and service design, customer service and communication
    • embed their interpretation of this Guidance into their businesses as an ongoing process of continuous action involving learning and improvement through effective monitoring.

    The FCA is taking a two stage approach as follows:

    First stage: the publication of GC19/3 and seeking feedback by 4 October 2019 on 3 particular areas

    Second stage: in the light of the feedback received, the FCA will consult on revised draft guidance and if it considers further interventions are necessary, it will consult on those in the second stage.

    Update: On 4 September 2019, the FCA updated its webpage to confirm that, rather an issuing a response in Autumn 2019, it will now do so in H1 2020.


    Update posted: 23 July 2019

    By Anna Davis

    The RDR and FAMR evaluation rumbles on

    On 22 July 2019, the FCA updated its webpage summarising the findings from its May 2019 call for input on evaluating the RDR and FAMR.

    Somewhat unsurprisingly, the main themes arising from responses to the call for input and a number of stakeholder events include:

    • Access - not all consumers have appropriate access to services to help them with their financial planning, particularly those with smaller amounts of money to invest. This issue has got worse in recent years and regulatory costs have contributed to it.
    • Regulatory perimeter – the boundary between providing guidance services and regulated advice is not clear. Some firms feel unable to provide potentially useful information to consumers if they feel there is a risk that it will be perceived as advice.
    • Consumer engagement – education in financial planning issu20Brexit scenario.

    The statement contains a detailed list of all Brexit related communications by ESMA up to 6 October 2019 and highlights value face-to-face advice and alternatives (including online services) are less popular. More needs to be done to incorporate2C in relation to 'Regulation in a changing world'.

    Mr Woolard’s speech focused on the current regulatory model’s resilience to change in the ten years following on from the 2008 Financial Crisis, as the FCA seeks to become an agile regulator in an evolving political and economic climate.

    Mr Woolard points to the following three key factors changing the context in which the FCA operates:

    1. The completion of the first wave of post-crisis regulation – firms are better capitalised and the personal responsibility of their leaders is more embedded. Now is a good time to reflect on what worked well and what could be improved.
    2. The change in consumer need and attitude – long-term interest rates mean the search for return is stronger whilst the tolerance for loss lessens.
    3. Innovation has gathered pace – we are moving to a truly digital industry which draws on AI and machine learning, resulting in new products that can be sold to consumers directly over the internet.

    Mr Woolard argues that the fundamental way in which the bulk of the population interacts with financial services is changing and we now live in a very different world to the one in which our rules were framed. It is therefore important to ask whether the current regulatory model is the right one and if it’s ready to respond to future changes. The FCA’s approach to this question must have the wider confidence and consent of both stakeholders and the public.

    Mr Woolard announced that in the coming months the FCA would be engaging in a public conversation inviting thoughts and ideas from the industry and public as well as setting out some of the FCA’s ideas. This will involve publishing detailed papers, including an analysis of future market dynamics, a Discussion Paper about the FCA’s Principles and a Consultation Paper on the Duty of Care.

    Whilst the FCA does not know where the conversation would take it, Mr Woolard believes it is moving away from a narrower compliance with the rules to a focus on delivering on outcomes for the users of financial services. Mr Woolard calls for a bold approach which makes full use of the toolkit given to the FCA by Parliament in order to ensure that it continues to deliver on its objectives of improving how markets operate, preventing harm from occurring and serving the public interest.


    Update posted: 23 July 2019

    By Anna Davis

    National general good rules under IDD

    EIOPA has published a report analysing national general good rules under the Insurance Distribution Directive ((EU) 2016/97) (IDD).

    Helpfully, Annex I lists the IDD options which allow member states to introduce general good rules in the territory, and Annex III to the report sets out a country-by-country analysis of national general good rules. Overall, a useful resource for those currently carrying on insurance distribution in other states in the EU.


    Update posted: 22 July 2019

    By Anna Davis

    FCA publishes feedback statement on fair pricing in financial services

    Following the publication of its October 2018 Discussion Paper (DP18/9) oonsumers who renew year-on-year or requiring firms to automatically move consumers to cheaper equivalent deals

  • stop practices discouraging switching – including restrictions on the ways firms use automatic renewal practices
  • make firms be clearer and transparent in their customer dealings - including improvements in customer communications and potentially whether firms should publish information about price differentials between their customers
  • harness the benefits of innovation in the longer term – to ensure general insurance markets benefit from technological developments such as Open Finance.

The FCA intends to publish its final report and consultation on remedies in Q1 2020.

You can read the FCA’s press release in full here.

 


Update posted: 26 September 2019

By Christopher Walker

FCA Temporary Transitional Power for post-Brexit regime updated

The FCA published an update to its Temporary Transitional Power ('TTP') in relation to post-Brexit regulatory requirements on 26 September.

The key updates relate to:

  • an extension of the duration of the directions issued under the TTP from 30 June 2020 to 31 December 2020
  • updates to the provisions relating to prudential requirements in the directions to reflect new HM Treasury legislation and FCA exit instruments published since 29 March 2019
  • the revocation of certain directions in relation to payment services, provided by EEA credit institutions in the financial services contracts regime – these are no longer required due to amendments made by the Financial Services (Electronic Money, Payment Services and Miscellaneous Amendments) (EU Exit) Regulations 2019
  • the application of a standstill direction to allow EEA Central Banks and the ECB to continue to rely upon their exempt persons status during the transitional relief period until 31 December 2020.

The FCA has said that it does not expect to make any further significant changes to the draft directions in advance of exit day.


Update posted: 24 September 2019

By Christopher Walker

FCA publishes key points from unit-linked funds’ governance review

The FCA has published an update to its review of firms’ governance practices in relation to unit-linked funds (which follows ifs policy statement PS18/8) setting out its key findings on the value provided by unit-linked funds.

The performance of unit-linked funds have a direct impact upon the benefits due to the holders of unit-linked insurance contracts.

The update states that the FCA has found:

  • How firms think about value is sometimes too limited – for example, some firms only consider performance net of fees and charges, with limited assessment of how active the manager of a unit-linked fund has been in achieving net performance
  • Firms often do not compare fund fees with others in their range – firms typically do not compare the fees and charges of different funds within their unit-linked fund range, even where funds have similar mandates
  • Firms share scale economies with funds only to a limited extent – for example, where firms identify scale economies and other opportunities to achieve efficiency gains, they often only pass benefits on to unitholders through reduced fees where they are contractually obliged to do so. The FCA also found that where firms appoint asset managers within the same corporate group to manage unit-linked funds, less-extensive efforts are taken to negotiate asset management fees as the funds grow in size
  • Firms comply with regulatory interventions but tend not to go further – for example, firms have passed on the benefits of default workplace pension fund fee caps to unit-linked funds within the scope of the cap, but did not typically consider whether they should run other, similarly managed funds in their range at the same rates to provide better value to customers
  • Firms were unable to show the FCA how product features other than asset management were good value – in some instances, asset management charges accounted for a very small percentage of the total product charges, however, in such cases, there was little evidence of substantial assessments of whether other product benefits and services offered good value
  • Firms check their competitors’ prices but not with the apparent aim of competing on price – generally the FCA found that firms compared their unit-linked fund fees and charges with those of other firms in order to ensure their pricing structure was within the standard ranges in the market, rather than to undercut their competitors
  • Institutional customers often drive 'hard bargains' - they may therefore have less need of the investor protection afforded by fund governance
  • The impact of independent governance bodies has been positive if limited – whilst some of the IGC members the FCA spoke to said they had been successful in tackling ‘quick wins’ the extent of such improvements, however, was limited.

The FCA will now review whether further remedies are required, assessing these findings alongside its work on non-workplace pensions, the governance of unit-linked mirror funds and the effectiveness and scope of independent governance committees.

 


Update posted: 19 September 2019

By Christopher Walker

FCA works to improve the suitability of financial advice

On 19 September, the FCA published a speech by Debbie Gupta, FCA Director of Life Insurance and Financial Advice Supervision, in relation to the FCA’s work on improving the suitability of financial advice.

In her speech, Ms Gupta notes that according to the FCA’s Assessing Suitability review in 2017, 93 per cent of advice was considered suitable and that, for the vast majority of relatively simple advice (such as ISA investments or straightforward pension accumulation) advisers were giving suitable advice.

However, the rate of suitable advice is lower for more complex issues and the FCA’s findings from its DB work shows that only around 50 per cent of advice given on DB transfers is suitable. The FCA is concerned that the potential for consumer harm is far too high.

Ms Gupta refers to the following four broad areas of improvement in this area:

  1. Improving standards – the FCA continues to develop and improve standards. The latest consultation paper covers the areas which the FCA feels needs further action, including conflicts of interest and banning contingent charging for the majority of consumers as well as encouraging greater engagement from consumers with the advice process
  2. Tackling firms that cause the most harm – the FCA is striving to be more effective with better use of data and intelligence to identify firms which cause harm to consumers and damage the reputation of the sector
  3. Supportingconsumers – Ms Gupta refers to the FCA’s recent work with those affected by the British Steel Pension Scheme restructure and the importance it gives to gaining valuable insights into the customer experience. The FCA is broadening its approach to reach more consumers and has just launched a video to help consumers understand what they should expect from pension transfer advice
  4. Supporting financial advisers – Ms Gupta give the following 2 specific areas where the FCA has observed shortcomings in suitable advice:
    1. Fact finding and recording clients’ needs and objectives
    2. Evidencing the correlation between the firm’s recommendation and its client’s attitude to risk.

The speech contains further practical examples of what firms should and should not be doing in these areas (particularly in relation to addressing the issues outlined in ‘supporting financial advisers’); these examples give useful, informal guidance as to the FCA’s expectations in relation to how firms should approach advising their clients.

 

 


Update posted: 5 August 2019

By Molly Horton

FCA publishes stocktake report on SMCR in the Banking sector

The FCA has conducted a revi20regarding these arrangements, particularly how they would support the continued operation of the Card Programmes during a disruptive event. The absence of such processes exposed the bank and its customers to a serious risk of harm. As the bank was unaware of the risk, it could take no steps to manage or mitigate it.

This was not the first time the bank was fined for similar failings on risk management of critical outsourced functions; the bank was fined £1,278,165 by the PRA in 2015. This was reflected in the level of the fines levied.


Update posted: 31 July 2019

By Anna Davis

Further FCA pension reform

The FCA has published a package of further pension-related proposals including the following:

  • Final rules on investment pathways and on the final tranche of remedies arising out of the retirement outcomes review (PS19/21). The new rules and guidance will come into force on 1 August 2020.
  • Proposed measures to change how advisers manage and deliver pension transfer advice, particularly for DB to DC transfers, and the banning of contingent charging (
  • new guidance to clarify firms’ obligations to travel insurance consumers with PEMCs
  • the introduction of a package of proposals to achieve optimal outcomes setting out the results of data obtained from firms on the size and value of the DB pensions advice market.

Although the data is not an assessment of the suitability of advice, the FCA is still concerned that, despite its clear expectation that advisers should start from the position that a pension transfer is unlikely to be suitable for their client, 69 per cent of the 234,951 total members seeking advice had been recommended to transfer. What is more concerning is that 1,454 firms of the total 2,426 firms providing transfer advice during this period (60 per cent) had recommended 75 per cent or more of their clients to transfer.

The FCA will be dn fair pricing in financial services, the FCA has published its feedback statement (FS19/4).

As well as outlining the FCA’s planned next steps, FS19/4 summarises the main themes in the responses it received to DP18/9, including feedback on the six question 'Framework' the FCA has developed in order to be transparent about how it things about the issue of fair pricing for retail consumers. Where the FCA has concerns about the fairness of a given pricing practice, it will use the Framework to make an assessment, before considering the wider effects of the practice and then deciding upon an appropriate intervention (if any).

The first application of the Framework will be in the General Insurance Pricing Practices Market Study; findings will be published later this year.


Update posted: 17 July 2019

By Anna Davis

FCA consults on a package of measures to help those with pre-existing medical conditions access travel insurance

On 15 July the FCA published CP19/23 proposing measures to help consumers with pre-existing medical conditions ('PEMCs') have better access to travel insurance.

The consultation seeks views on the following proposed changes:

  • a new ‘signposting’ rule requiring firms, in certain circumstances, to give consumers details of a dirs’ environmental, social and governance (ESG) and stewardship policies by the end of 2019, as well as proposed rule changes to facilitate investment in patient capital opportunities
  • publish a feedback statement in response to a joint discussion paper with the Financial Reporting Council on Stewardship setting out actions to address the most significant barriers to effective stewardship
  • challenge firms where the FCA sees potential ‘greenwashing’ (i.e. where a product is misleadingly marketed as producing positive environmental outcomes), clarifying its expectations and taking appropriate action to prevent consumers being misled
  • contribute to several important collaborative initiatives, including the Climate Financial Risk Forum, the Fair and Effective Markets Review working group, the government-led cross-regulator taskforce on disclosures and the European Commission’s Sustainable Finance Action Plan.

Update posted: 15 July 2019

By Paschalis Lois

FSCS finds London Capital & Finance liable for its agent’s promotions

The Financial Services Compensation Scheme ('FSCS') has given an update on London Capital & Finance plc ('LCF') a mini-bond issuer. Among other things, FSCS found that an unregulated agent ('Surge')’s promotion of the mini-bonds, which in its view amounted to advising, could be attributed to LCF (as Surge was acting on behalf of LCF and under its control) thus potentially bringing aggrieved investors within the FSCS’s protection. In reaching this conclusion, FSCS made some important observations:

  1. The limits of FSCS: FSCS reminded that in order to cover a defaulting entity, the entity must be regulated and the claim must concern a regulated activity. While the mini-bonds were a regulated investment, LCF’s activity of dealing in them as principal was not of itself a regulated activity. However, where Surge gave (on LCF’s behalf) regulated advice to investors in the mini-bonds, this would amount to a regulated activity and, following LCF’s authorisation in June 2016, can be protected by FSCS. In order to pay compensation, FSCS will have to be satisfied that a particular claimant received advice, relied on this when investing, and suffered financial loss as a result. Claims will also have to meet the usual requirements under FSCS’s COMP rules, e.g. as to eligibility of the claimant.
  1. Agent’s regulated activities can be attributed to the principal: in this case LCF used Surge Financial Limited administer the sale of the mini-bonds. Surge employed 40 staff who worked exclusively for LCF and used LCF email addresses and contact details. The issue in this case was that Surge at times went beyond administration and the provision of information to investors and made comments and value judgements that involved a significant element of evaluation and/or persuasion, i.e. they gave advice. In the opinion of FSCS, Surge was acting under the actual or ostensible authority of LCF and by extension the advice could be attributed to LCF.
  1. Mini-bonds cannot be considered collective investment schemes: FSCS noted that the mini-bonds did not fall within the definition of collective investment schemes; they are ‘instruments creating or acknowledging indebtedness’ which are excluded from being treated as collective investment schemes by law.

FSCS is currently designing their claims process. As LCF has not yet been declared in default, FSCS is not yet accepting applications for compensation.


Update posted: 11 July 2019

By James Green

FCA update on extension on SMCR regime to solo-regulated firms

The FCA have published a statement confirming that the extension of the SMCR regime to solo-regulated firms will come into force on 9 December 2019 as planned. The statement explains that the FCA have been working closely with HM Treasury on the commencement order that will be needed for the FCA to publish its policy statement setting out the final rules ahead of the extension.

The FCA have also confirmed that there will be a later commencement date for benchmark administrators (to be announced) following dedicated consultation.


Update posted: 27 June 2019

By Paschalis Lois

FCA publishes an undertaking from ETA Services Ltd provided under the Consumer Rights Act 2015

On 26 June, the FCA published a notice of undertaking regarding a bicycle insurance firm, ETA Services Ltd (ETA). The undertaking concerned terms in ETA’s policy that excluded claims for bicycle theft, and was given pursuant to the Consumer Rights Act 2015 (the CRA). ETA gave this undertaking on the backdrop of FCA concerns that the terms in its policy were contradictory, and not transparent.

The two terms in question related to circumstances where ETA could exclude claims for theft. The first term was a general exclusion and stipulated that ETA could reject claims when the bicycle had not been secured through its frame using an approved lock. The second, related to circumstances where the bicycle was left unattended in a communal building. ETA could reject a claim when the bicycle was not secured through its frame to an immovable object. The latter made no reference to the need of an approved lock.

The FCA, in applying the CRA, held that the terms were not transparent as they were not expressed in plain and intelligible language. In fact, the FCA found the terms contradictory as the former seemed to require the use of approved locks at all times, whereas the latter suggested that the use of an approved lock was not necessary in communal buildings. Indeed, in practice ETA had rejected claims in situations where consumers did not use approved locks when storing bicycles in a communal building although such a requirement was not strictly stated in the exclusion. In addition the FCA also underscored that where a consumer contract term could have different meanings then it must be applied in the most favourable way to the consumer.

In response to these concerns, the ETA confirmed that it would not be using the second term to exclude claims for existing policies when a consumer did not use an approved lock. At the same time, ETA amended the policy terms for new and renewed contracts entered into as of 1 April 2019, with provisions that made clear the need for an approved lock when securing the bicycle in a communal building.

In concluding its notice, the FCA brings attention to the importance of such undertakings. In particular the FCA notes that firms should remain alert to undertakings or court decisions as part of their risk management. Ensuring the fairness and transparency of terms h PEMCs with a view to improving consumer understanding.

The FCA plans to consult on its proposals beinal notices, the Authorities stressed that notwithstanding a regulated firm’s ability to delegate some of their tasks, they cannot delegate their regulatory obligations for which they remain fully accountable. This is the case whether the outsourcing occurs at intragroup level or to third parties.

The events that led to the fines occurred on 24 December 2015. An IT incident caused a complete failure on the Card Processor’s network leaving 3,367 of the bank’s customers unable to execute transactions for a total of eight hours. The aggregated value of failed transactions was &po20three areas in which it has now issued updated.w of the implementation of the senior managers and certification regime (SMCR) in the banking sector. The review will be of interest to all those within the regime, including solo-regulated firms in the midst of their own SMCR implementation.

SMCR was introduced in the banking sector in March 2016. The FCA wanted to understand how SMCR has embedded into the sector, and whether any issues warrant particular focus. To undertake the review, the FCA interviewed people at banking firms, trade associations, the Banking Standards Board, the FCA and the PRA. The review covered a range of themes including senior manager accountability, certification, regulatory references, conduct rules, impact on culture, unintended consequences, embedding and overcoming initial implementation issues.

Senior Manager accountability – The review found that Senior Managers were clear on what 'accountability' means, but some expressed concern about understanding the concept of 'reasonable steps' in the context of their business. The FCA pointed to guidance in the Decision Procedure and Penalties manual on some factors to be considered, but declined to give further guidance. The FCA wants to encourage managers to think broadly about “reasonable steps” to create an environment which minimises the risk of misconduct.

Certification – The FCA found that firms had implemented processes to oversee certification, but were not convinced that firms could demonstrate the effectiveness of their assessment approach. The FCA also noted that there had been limited change to performance assessment processes, and they were unclear as to the extent the certification regime is being used to evaluate the managers of certification staff.

Conduct rules – The FCA noted that whilst training was being given on the conduct rules, this was not being consistently tailored to individual job roles or mapped to firm values. The FCA noted that many firms were unable to articulate what a conduct breach looked like in the context of their business.

The FCA emphasised that conduct rules are 'a critical foundation for firms’ culture and the conduct of individuals'. The FCA has stated its intention to increase supervisory focus on the conduct rules as a result.

Unintended consequences - Encouragingly, the review found that there had not been widespread unintended consequences of SMCR implementation, and the fear of the regime that existed during the early stages had largely dissipated.

You can find the review here.


Update posted: 21 June 2019

By Anna Davis

Chancellor announces review of UK regulatory framework in 2019 Mansion House speech

On 20 June 2019, HM Treasury published the Mansion House given by Philip Hammond.

Amongst other things, Mr Hammond announced the plan is to launch a major, long-term review into the future of the UK regulatory framework, which will deliver a regulatory system that:

  • enables, rather than stifles, innovation
  • protects consumers
  • maintains the highest possible standards
  • is proportionate and policed by independent regulators
  • recognises that the EU will continue to be one of our major trading partners
  • lays the groundwork for the more global nature of our future financial services industry
  • manages the cumulative impact of regulatory change emanating from different sources.

While we wait for the future relationship with the EU to be clear, Mr Hammond says the first phase of this review will take action to improve coordination between the regulatory authorities – starting with a summit of all the relevant regulators at No11 in July, leading to a Treasury call for evidence before the summer.


Update posted: 21 June 2019

By Anna Davis

BoE speech on diversity and PRA's role as regulator

On 19 June 2019, the Bank of England (BoE) published a speech at the Insurance Insider Progress Network event, by Anna Sweeney, BoE Director of Insurance Supervision, on making impactful change on diversity across the financial services sector.

Among other things, Ms Sweeney comments on the role of the regulator in this area. In particular, she states that the PRA cares particularly about how 'groupthink' impacts the quality of decision-making, with the rules focussing on promoting diversity of skills and experience of the Board. She also noted that any allegations of sexual harassment or bullying would , if proven, speak to personal integrity and could impact the PRAs view of the fitness and properness of individuals in the SMCR regime and the PRA’s colleagues at the FCA have a strong interest in te culture as an indicator as to how firms could treat customers.


Update posted: 20 June 2019

By Anna Davis

FCA still concerned about standards in DB pensions advice market

On 19 June 2019, the FCA published a webpage including a package of potential measures to protect consumers who do not (or cannot) engage with their own investment decisions. Views are invited by 8 October 2019. The FCA plans to issue a consultation paper on simplification and disclosure in Q1 2020. During 2020 FCA will also carry out a review of IGC effectiveness and publish a discussion paper on VFM. A consultation may following if the FCA considers it should intervene in relation to charges.


Update posted: 19 June 2019

By Heather Musk

FCA perimeter report 2018/19

The FCA has published its first perimeter report. The report focuses on where perimeter issues are most likely to cause harm to UK consumers and markets. The FCA provides three reasons why it has decided to provide the report, 1) firms operating on the edges of the perimeter have recently caused serious harm to consumers, which in turn damages public trust in the industry; 2) the use of technology and data are quickening the speed of change; 3) the FCA perimeter is a patchwork of UK and EU level regimes. Post-Brexit there is the opportunity to create a simpler approach to the regulatory perimeter.

The intention is to provide this report going forwards on an annual basis. We can see that in a ‘post-Brexit’ ecosystem, the flux created by leaving the EU will raise more pressing questions around what is in or out of the regulatory perimeter.

The FCA also sets out how the RAO regime governing ‘regulated activity’ is not the only basis for regulatory responsibilities. For example:

  • The FCA are the UK’s listing authority. Most listed companies are not FCA authorised firms.
  • The market abuse regime applies to the behaviours of any person, irrespective of whether they are authorised by the FCA.
  • The FCA are responsible for regulating some entities or conduct under standalone legislation outside the FSMA framework such as the Payment Services Regulations.
  • Concurrent competition powers shared by the Competition and Markets Authority and other regulators.
  • Financial Promotions Regime. There is no need to seek FCA approval to communicate or approve financial promotions.
  • The FCA can enforce provisions of the Consumer Credit Act 1974, even against unauthorised persons.

Products which are identified as being on the edge of the perimeter are: pre-paid funeral plans, unregulated introducers (e.g. those contacting consumers to offer free pension reviews), unregulated mortgage book purchasers, investment consultants and proxy advisers and cryptoassets.

The FCA recognised that the complexity of the perimeter makes it difficult for consumers to understand which FCA protections apply in what circumstances, and what compensation they may be eligible for. It aims to:

  1. make its role clearer and explain the protections available
  2. continue to monitor activity outside the perimeter that may cause consumer harm and require the perimeter to be widened
  3. horizon scan to anticipate future market developments.

Update posted: 8 June 2019

By James Green

FCA publishes checklists for solo-regulated firms implementing SMCR

The senior managers and certification regime (SMCR) comes into force for FCA solo-regulated firms on 9 December 2019. There are three categories of firms within the regime (core, limited and enhanced) and each are subject to particular requirements, reflecting the differing size and complexity of each category. To help firms prepare, the FCA has published checklists detailing the steps each category of firm will need to take to get ready for implementation.

Those include:

  • identifying Senior Managers and certified staff
  • allocating prescribed responsibilities and preparing statements of responsibility
  • reviewing and amending HR policies to accommodate fitness and propriety checks
  • implementing the regulatory reference regime
  • training staff on the Conduct Rules.

You can find the checklists here.


Update posted: 5 June 2019

By Heather Musk

FCA sets out requirements on loan based and investment based crowdfunding platforms

The FCA has issued its policy statement on loan based and investment based crowdfunding platforms: feedback to CP18/20 and final rules (PS19/14).

For the most part this policy statement brings into fruition the rules consulted on in CP18/20, with the exception of a few modifications. The changes that will be introduced under the policy statement include:

  • More explicit requirements to clarify what governance arrangements, systems and controls platforms need to have in place to support any outcomes that they advertise. In particular, these will need to focus on credit risk assessment.
  • Improving the rules on the wind down of a P2P platform.
  • Setting out the minimum information that P2P platforms must provide to investors.
  • If no advice has been given to an investor, then the rules introduce a requirement that an appropriateness assessment (on the investor’s knowledge and experience of P2P investments) needs to be undertaken.
  • Applying marketing restrictions to P2P platforms, designed to protect new or less experienced investors.

Most of the rule changes won’t be implemented until December 2019, with the exception of some changes that are being made to MCOB and the operation of some peer to peer (P2P) platforms, which apply with immediate effect.


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Read earlier updates from February to May 2019.

Financial services regulation updates - February to May 2019

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