The regular monthly update on UK regulation relating to securities laws, is provided by Emma Radmore, Legal Director, Womble Bond Dickinson (UK) LLP, and covers UK regulatory developments during September 2019.
Regulatory Requirements and Consultations
FCA makes new rules. The Financial Conduct Authority (FCA) has published its latest Handbook Notice with new rules. Most of the changes are minor, and update terminology and cross-references. FCA is also making changes to:
- The Senior Management, Systems and Controls Sourcebook (SYSC) and the Supervision Manual (SUP), including adding a new Annex to SUP, to ensure solo-regulated and firms that benefit from the optional exemption from being “investment firms” under the EU Markets in Financial Instruments Directive (MiFID) can continue to comply with MiFID and Capital Requirements Directive requirements once the Senior Managers and Certification Regime (SMCR) takes effect;
- various parts of the Handbook but mainly the Collective Investment Schemes Sourcebook (COLL), to reduce the risks to investors in Non-UCITS retail schemes that hold inherently illiquid assets. The changes take effect on 20 September 2020.
Investment Association (IA) guidance on authenticity of electronic instructions. The IA has published guidance for operators of UK-authorised collective investment schemes on ‘reasonable steps’ that may be taken to ensure the authenticity of electronic instructions for the purposes of COLL 4.4.13R of the FCA Handbook and para. 4C of Schedule 4 of the Open-Ended Investment Companies Regulations 2001.
CMA consults on amending Retail Banking Market Investigation Order 2017. In the light of the forthcoming FCA rules on overdraft notifications, the Competition and Markets Authority (CMA) is consulting on a provision decision to vary the Retail Banking Market Investigation Order 2017, to remove provisions in Part 6 that are duplicative of those new FCA rules. Responses to the consultation are invited by 15 October 2019.
FCA updates SMCR resources. FCA has updated its checklists for firms preparing for the SMCR. It has added some text about the submission of Form K. It has also added a section for sole traders to its guidance on conversion from the Approved Persons regime.
PRA consults on update to PIN process. The Prudential Regulation Authority (PRA) is proposing amendments to its Pre-Issuance Notification regime for capital instruments within the scope of Capital Requirements Regulation (CRR). The proposed amendments reflect changes arising from the revised CRR, and also the PRA’s experience to date of this process, aiming to make it more risk-sensitive and proportionate. Responses to Consultation Paper 20/19 are invited by 9 December 2019.
FCA updates on consultations and feedback. The latest Policy Development Update highlights a number of papers due before the end of 2019:
- feedback on the investment platforms market study remedies;
- policy proposals on regulatory fees and levies;
- permitted links in relation to Patient Capital review;
- possible policy statement on general insurance value measures reporting;
- policy statement on overdraft pricing remedies and competition remedies as part of the high cost credit review
- consultation on price discrimination in the cash savings market; and
- policy statement on illiquid assets and open-ended funds
FCA postpones wholesale market data Call for Input. FCA has announced it is postponing the Call for Input planned for Q2 2019/20, in the light of the impact of Brexit preparations on firms, and in particular on those individuals in firms that would be likely to prepare responses to such a Call. The FCA is however committed to issuing a Call for Input in the future, to focus on the use of data by wholesale market participants, as well as attendant opportunities and risks.
FCA publishes quarterly consultation. FCA’s latest quarterly consultation covers a number of minor changes to the rules that will be made only if there is a no-deal Brexit on 31 October, and also other miscellaneous amendments including:
- minor changes to Alternative Investment Fund Managers Directive forms;
- amendments to COLL;
- seeking views on whether the Lending Standards Board’s Standards of Lending Practice for business customers meet FCA’s Codes Recognition criteria;
- modifications to the “wake up” pack and annuity information prompt rules because the rules as drafted did not properly reflect FCA’s policy intention;
- changes to regulatory reporting requirements for payment service providers and debt management firms subject to the Client Assets Sourcebook; and
- changes to the list of qualifications in the Training and Competence Sourcebook.
Comments on some proposals are due by 4 October and on others by 1 November.
FCA publishes Directory entry form. FCA has published forms and guidance for firms that need to submit data for the new Directory of certain individuals working for financial services firms. The guidance explains what FCA considers to be “customer engagement roles” and which it does not. It says customer engagement roles are the current FCA controlled functions of client dealing and functions that require qualifications, and also sole trader or appointed representative dealing with clients for which qualifications are required. Banks, building societies, credit unions and insurance companies can start submitting data from 9 September and must do so by 9 March 2020. All other firms can start on 9 December and must complete their entries by 9 December 2020. Ongoing, firms must submit any changes within 7 days of the change occurring.
OFSI publishes frozen asset review guidance. The Office of Financial Sanctions Implementation (OFSI) has published guidance on the annual frozen asset review reporting form. The guidance explains the requirement for all persons who hold or control funds or economic resources that belong to or are controlled by a designated person to provide OFSI with information on them in a standard form. This year, the deadline is 11 October. OFSI reminds firms of the possible penalties for failure to comply with sanctions legislation.
BSB publishes regulatory references good practice guide. The Banking Standards Board (BSB) has published its guidance on good practice for regulatory references. The guidance is based on the three key principles of proportionality, fairness and consistency. While the guidance was designed for the banking sector, its general principles should be of interest to all firms who are, or will be, subject to the SMCR. Interesting points include:
- considering whether individuals should be given a second opportunity to comment on past proceedings, particularly when they took place before the regulatory references requirements took effect;
- that firms should provide factual accounts of uninvestigated allegations that would have been pursued had the individual not left the firm;
- ensuring individuals are aware of the contents of a reference;
- considering excluding disciplinary information that is not relevant to a fit and proper assessment;
- having in place a clear policy and process on what information is recorded and included in references;
- ensuring all relevant units know of the need to escalate poor conduct allegations as they may lead to a need to revise the reference; and
- be consistent in messages to employees about what will be included in references.
The guidance also looks at how firms should treat requests for references and what should be in one, and practical advice on requesting and receiving references, and dealing with cases where references are not received.
Regulatory Speeches, Reviews and Enforcement Action
Newsletters, speeches and reviews
BoE reports on 2018 cyber simulation exercise. The Bank of England (BoE) has reported on the outcomes of its 2018 sector wide exercise (SIMEX), which tested how the UK finance sector would react to a prolonged and broad cyber attack. The exercise, which took place in real time, involved Treasury, BoE, PRA, FCA and 29 of the most systemically important firms and financial market infrastructures. It required participants to react during a “live” exercise day and also complete a post-exercise written report focusing on how they would respond to a lengthy operational outage of a Global Systemically Important Bank. The findings were largely positive, but significant improvements could be made in:
- risk tolerance: the significant divergence in risk appetite for suspending services may lead to significant knock-on effects to the market and real economy; and
- restoration: there are currently constraints in the way participants could support a paralysed bank, that stem from the different ways in which data is held.
The exercise showed that UK Finance’s incident management communications framework has greatly improved communications. There will be further work on industry guidelines on good incident communication practices and use of terminology, and on good practice for managing potential controlled suspension of services and system integrity risks.
Estimated £3.4m redress due to unclear interest term in mortgage agreement. The FCA has published an undertaking from the Co-operative Bank (t/a Platform), relating to a term in its mortgage agreement, and agreeing to amend the term on the grounds that it contravened the transparency requirement of the Consumer Rights Act. The term in question related to any additional borrowing allowed under the mortgage agreement, and stated that “[i]f we agree additional borrowing, it will be charged at the interest rate applicable at the time”. The FCA noted that this term is ambiguous in effect, as it does not make clear to customers what interest rate they would be charged. Platform agreed to amend the term to state that the interest rate charged for additional borrowing will be based on the firm’s range of additional borrowing rates, as set out on their website. The new term also explains that the applicable interest rate could be higher than the existing interest rate the customer is paying for their main mortgage account. Platform’s remediation exercise has to date led to an indication that approximately 1,200 consumers may have been affected by the unclear term, and consequently should be paid an estimated £3.4 million in redress.
Treasury approves JMLSG updates. Treasury has approved updated chapters in Part II of the Joint Money Laundering Steering Group (JMLSG) Guidance. The chapters now approved are:
- credit unions
- asset finance
- brokerage services to funds.
FCA announces next steps for unit-linked funds. FCA has published its findings and next steps on its review of governance practices covering unit-linked funds. It notes that its Asset Management Market Study found asset managers were not good enough at considering whether they deliver good value generally – but the package of remedies aimed at addressing this does not apply to unit-linked funds. Similarly, there are no specific rules at individual fund level that apply to insurers. FCA has now carried out a separate review and has found similarities between the fund and insurance sectors, and is particularly concerned about how unit holders’ interests are taken into account in decisions around fees and charges. It wants to see firms taking a wider view, to include consideration of the manager’s performance, how fees compare with similar funds and making best use of economies of scale. It also found that firms will comply with regulatory interventions but are unlikely to go further than required. FCA did not a positive, if limited, impact of independent governance bodies and will generally continue to monitor in this area alongside its work on non-workplace pensions, the governance of unit-linked mirror funds and the effectiveness and scope of independent governance committees.
Banking industry commits to climate change action. 130 international banks, representing one third of the global banking sector by Net Asset Value, have signed the new Principles for Responsible Banking. This initiative commits their firms to strategically align their business with the Paris Agreement on Climate Change and the Sustainable Development Goals, and step up action by delineating accountabilities and setting ambitious targets for their operations. The Principles for Responsible Banking are:
1. Alignment: to align business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks;
2. Impact & Target Setting: to continuously increase positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from banks’ activities, products and services. To achieve this, signatories will set and publish targets where they can have the most significant impacts;
3. Clients and Customers: signatories will work responsibly with their clients and customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations;
4. Stakeholders: to work proactively and responsibly consult, engage and partner with relevant stakeholders to achieve society’s goals;
5. Governance & Culture: to implement commitment to the Principles through effective governance and a culture of responsible banking;
Transparency & Accountability: to periodically review signatories’ individual and collective implementation of the Principles and to be transparent about and accountable for signatories’ positive and negative impacts and contribution to society’s goals.
The banks that have led the development of the Principles for Responsible Banking include Barclays, Citi, ICBC, Santander and Tridos Bank. Additional guidance, also published, gives examples of how banks might meet the standards.
FCA pleased with MiFID 2 unbundling effects. FCA has published the results of a multi-firm review looking at whether the research unbundling rules brought in under MiFID 2 have improved asset manager accountability over costs. FCA’s research has found that most asset managers now pay for research themselves, and do not charge clients for it. The changes have also had the effect of making firms look more closely at both research and execution costs, which has resulted in significant savings for investors. Other findings included that:
- firms’ research budgets have fallen by 20-30% yet firms are still getting the research they need
- firms use differing research valuation models, some very sophisticated but others focusing too much on quantity, with only limited evaluation of the product
- some managers have taken a cautious approach to accepting “non-monetary benefits”, sometimes not accepting things that they reasonably could
- controls over external services providers used for compliance services or portfolio management differ significantly and FCA found evidence of breaches of SYSC 8
- research pricing is still evolving.
FCA is monitoring competition impacts and research coverage of small and medium-sized enterprises, although there is no indication of a material reduction. FCA will carry out further work in 1-2 years’ time, to check how pricing and compliance has evolved.
UK Finance pledges support for UN responsible banking. UK Finance has pledged its support for the United Nations Environment Programme Finance Initiative’s ‘Principles for Responsible Banking’. The six principles show how the banking industry can make a real difference in helping the UN meet its climate targets by setting out a framework for a sustainable banking system. The six principles are:
- Alignment – consistency between individuals’ needs and society’s goals
- Impact & Target Setting – increasing positive impacts to people and the environment
- Clients & Customers – encouraging sustainable practices
- Stakeholders – proactively engaging
- Governance & Culture – implementing commitment to the principles
- Transparency & Accountability – reviewing and assessing the commitment and performance.
Responsible Lending Changes Implementation Group. The latest meeting of the responsible lending changes implementation group was held on 29 August 2019. This group discussed the feedback they had received to the consultation launched in March (on facilitating mortgage switches more easily for up-to-date customers). The meeting discussed communication strategies so that customers would be made aware of the new rules but it was decided that wider views would be beneficial. A further sub-group has therefore been set up to look at this.
PSR Updates on card-acquiring services. The Payment Systems Regulator (PSR) is currently undertaking a review into the supply of card-acquiring services. As part of its consultation, it published its proposed approach to the profitability analysis and set out two options – Gross Profit Margin (GPM) and Return on Capital Employed. Today, the PSR confirmed that it will be using GPM as the basis for the assessment.
Deprived of Cash? Which? report and PSR Response. On 18 September 2019, Which? published a report highlighting that poorer areas are worst hit by the rapid move to fee-charging cashpoints. In fact, the report notes that 9% of free cash points across the country closed or switched to fee-paying over a 17 month period and this is causing those customers to pay up to £2 per withdrawal. As a result, Which?’s chief exec, Anabel Hoult and Natalie Ceeney (chair of the independent Access to Cash Review) have written to the Government urging them to take action. On the same day, the PSR responded and welcomed the report. It reiterated that it was already looking at the structure of LINK fees for ATMs to see if that can help find a solution to the problem. They further noted that Banks must ensure that their customers can access cash when they need to.
FCA updates on Brexit preparations. In a recent speech, Andrew Bailey, the chief executive of the FCA, provided an update on the FCA’s state of preparation for Brexit, and in particular for a no-deal, no-transition Brexit scenario. However, while Mr Bailey noted the progress that had been made generally, he identified seven areas that the FCA considers require particular attention, whether at a UK or an EU level:
- the Share Trading Obligation,
- the Derivatives Trading Obligation,
- uncleared derivatives,
- data exchange,
- progress on contract repapering, and
- retail financial services preparation.
These issues arise from and relate to a range of underlying factors; consequently, Mr Bailey indicated, the FCA will “use forbearance generously but appropriately, to maintain market integrity and protect consumers and market uses,” and he reiterated the FCA’s commitment to open markets, subject to there being no undermining of market integrity.
FCA offers Brexit help. FCA has set up a dedicated phone line for firms needing to ensure they are prepared for a no-deal Brexit, and also worked to signpost all its online resources. It expects firms to have planned properly for it. It notes also the various transitional regimes it is aware of in other jurisdictions, under which firms will need to register to carry on their business there after a no-deal Brexit, and notes the deadline for registering for the Luxembourg transitional regime is 15 September.
PSR working on widening data access. In the PSR’s response to its Data in the Payments Industry discussion paper, the regulator heralds work with Pay.UK on opening up access to data in the UK’s new payments architecture. The aims of such a movement will include facilitating the development of new products and services, and improved payment reconciliation services. The regulator also calls on the industry to manage issues arising from such data, such as individuals’ privacy rights.
PSR update on LINK interchange fees. On 9 September 2019, the PSR published a document setting out (1) the responses it had received to its call for views on the structure of LINK interchange fees and (2) a summary of the roundtable event which discussed the call for views (and was held on 26 July). This piece of work sits alongside the call for views on cash access, use and acceptance on which the PSR intends holding a further roundtable in October. The outcome of this second event will be combined will all other research by the PSR to help shape their understanding and inform their work.
Government answers money laundering questions. In response to questions posed in Parliament, the Secretary of State for the Home Department confirmed that the UK has not opted in to the Directive on criminal sanctions for money laundering our legislation is already largely compliant with its provisions and, in terms of the offences and sentencing, goes further. As a result, it would not have been beneficial to sign up to it.
FCA speaks on skimmers and scammers. Charles Randell has spoken on FCA’s commitment to the Economic Crime Plan and the importance of embedding fraud prevention in the development of new savings and investment policies. He encompassed within “investment fraud” a spectrum of unacceptable behaviours, ranging from poor value products, whether promoted through incompetence or greed, through to financial criminals. He said FCA must be ready to use all its tools appropriately from “skimmers” to “scammers”. He moved on to discuss FCA’s role in not only authorising and supervising firms, but in taking administrative and criminal action where appropriate. He noted the huge scale of financial crime and the challenges for the supervisory and enforcement authorities. He suggested some initiatives that could help:
- whether policymakers embed thinking about the risks of skimming and scamming into their savings and investment policies;
- reducing the risk of confusion about what is regulated and what is not – including what is protected by the Financial Services Compensation Scheme (FSCS); and
- making the corporate enablers play their part in doing more to spot and block suspected scammers.
PRA writes to banks on money laundering risks. PRA has written a Dear CEO letter bringing banks’ attention to EBA’s opinion on the money laundering and terrorist finance risks in prudential supervision, and confirm it will continue to consider these concerns as part of its prudential assessment of firms. It reminds firms that members of their management bodies and senior management must at all times be fit and proper to perform their duties and that PRA’s General Organisational Requirements mandate that firms must have robust governance arrangements. It also notes the importance of allocating the senior manager responsibility for financial crime to an appropriate individual.
FCA publishes SCA webpage. As the official deadline approaches for secure customer authentication (SCA) implementation, albeit mitigated by the conditional extension agreed with UK Finance, the FCA has published an overview page setting out the state of play for industry participants.
FCA explains views on electoral polling and MAR. FCA has given guidance on how the Market Abuse Regulation (MAR) might apply to information gained from electoral polling, and how firms should handle any information that might be inside information. It gives the example of how, if an established polling firm is due to publish polling results, and on that publication the price of traded government bonds would be likely to be affected, than that could create an offence under MAR if the information were shared other than where necessary in the normal course of employment. Similarly, anyone in possession of the information could commit an offence if they traded on the basis of the anticipated movement. FCA also notes that if the inside information definition is not met, then there is no restriction on firms collecting or receiving polling information relevant to market prices, and that spot FX is of course outside the scope of MAR (but noting that firms should always comply with the Principles, and that spot FX trading may have an impact on instruments that are covered by MAR). In a letter to the Treasury Committee, Andrew Bailey explains the interaction between polling data and regulation, and the limitations of FCA’s remit. He suggests some of the wider concerns about sharing and use of polling data should be the subject of a government project.
Not POCA “acquiring” to receive monies obtained by fraud. The Court of Appeal, in the case of R v Haque, has allowed an appeal on the point of whether a person commits the offence under the Proceeds of Crime Act 2002 (POCA) of acquiring criminal property when it arrives into his bank account as a result of a fraudulent deception. In this case, a conspiracy to defraud, targeting elderly and vulnerable people in West Yorkshire had operated from mid 2014 to late 2015. Fraudsters would ring victims, pretending to be police officers investigating allegations of bank fraud, and instructing them to withdraw and hand over, or transfer to specified bank accounts, large amounts of money. The money of 2 victims had been transferred to an account in the name of the appellant and his wife and subsequently most of it was withdrawn or transferred. This hearing was solely about whether, by the transfers into the joint account, the appellant had acquired criminal property. The appellant claimed he did not know his co-accused nor did he know or suspect the monies were proceeds of crime. He said the payments were for clothing and he had used the money to buy stock for his clothing business. The judge looked at previous cases and affirmed the principle that the conduct that is itself the subject of indictment cannot of itself render the property criminal property – the property had already to be criminal at the time of the transfer, that is, it had already to be property obtained as a result of or in connecting with criminal activity separate from that which is the subject of the charge itself. So a thief does not “acquire criminal property” by the act of stealing it, but of course can then be guilty of the possessing, using, transferring and other offences relating to it once he has it. The question here was whether the money was (a) clean, as it was the lawful property of the complainants which the fraudsters had induced them to pay out (in which case the appeal should be allowed) or (b) dirty because it had been obtained as a result of fraudulent deception and therefore was criminal property by the time it reached the appellant’s bank account. In this particular case, and on the narrow point of whether the appellant had committed an offence under s329(1)(a) of POCA (which deals only with acquiring criminal property, and not possessing or using it), the court concluded it had to allow the appeal. It sounded a cautionary note about the importance of getting charges right in the first place.
Borrower can withhold payment because of risk of US secondary sanctions. The High Court has held that a UK borrower was entitled to withhold payments under a loan from an entity that was a US Blocked Entity for fear of possible consequences from US secondary sanctions that would significantly affect its business. Lamesa Investments Limited, a Cypriot company wholly owned by a BVI entity lent £30m to Cynergy Bank Limited, a UK retail bank. Cynergy has no links with the US except for a USD correspondent account with a US bank for its dollar-denominated business. It also has a number of FX swap contracts denominated in dollars and has long term service contracts with a number of US-based companies. Cynergy did not make repayments under the loan, on the basis that the BVI entity’s owner had been placed on the OFAC SDN list, and as a result Lamesa became a “blocked person”. Cynergy claimed that by making the repayments it would leave itself open to US secondary sanctions, which could be “ruinous” given the scale of its dollar-denominated business, and that there was a risk the payment of interest was a “significant financial transaction” and the possibility of a waiver being obtained was minimal. Lamesa said the finance agreement required Cynergy to show there was a legal provision that prohibited it from making the payment, and that the reason for refusal was not because there was a mandatory prohibition on payment but rather that there was a chance the secondary sanctions might bite. It was common ground both that the parties were aware at the time of entering into the transaction that the sanctions might be imposed and also that there was no question of primary sanctions offences applying. The judge held there was nothing in the behaviour of the parties to suggest the relevant clause would be interpreted solely to cover payments that were mandatorily prohibited, given they never would be. The other possible permutations for interpretation were that a party was entitled to act or refrain from acting in a way that would attract penalties, or in a way that could attract penalties. Cynergy was relying on the last interpretation. The Court held is was most unlikely the parties would have intended to exclude this last possibility, given the well-known attitude of the US authorities. Lamesa’s contention that to interpret the clause so broadly flew in the face of the UK’s policy of not giving extraterritorial effect to US policy was rejected. The judge said this was a contractual clause, and the parties were looking to manage their own positions.
FCA prosecutes for document destruction. FCA has brought its first prosecution for a destruction of documents offence under the Financial Services and Markets Act 2000. It has prosecuted Konstantin Vishnyak, who it was investigating for suspected insider dealing, for destroying documents which he knew or suspected were or would be relevant to an investigation. It alleges he deleted WhatsApp from his phone after being required to provide it. Mr Vishnyak pleaded not guilty and will appear at Southwark Crown Court on 4 October.
HMRC cracks down on ML breaches. Her Majesty’s Revenue and Customs (HMRC) has updated its list of actions against businesses that are not complying with the MLR and published details of a £7.8m fine levied on a money transmitter. It imposed the fine on Touma Foreign Exchange Ltd after the firm breached several parts of the Money Laundering Regulations, including on risk assessments, policies, controls and procedures, fundamental Customer Due Diligence measures and staff training. It also banned the owner from any management roles at a business covered by anti money-laundering legislation, after finding him not fit and proper to act as an officer. The action was part of a crackdown on money services businesses (MSB) that were at risk of being used for money laundering to fund organised crime and followed investigations by the Metropolitan Police and HMRC. The initiative also led to the imprisonment of an individual for trading as an MSB without registering with HMRC.
Tabernula defendant imprisoned. As a result of a conviction for money laundering following the “operation Tabernula” investigations, Richard Baldwin has been sentenced to 5 years and 8 months imprisonment. This follows convictions of other individuals for insider dealing. Mr Baldwin absconded and is still at large.
Emma Radmore (Legal Director) is a member of Womble Bond Dickinson (UK) LLP’s financial services team. Contact her on firstname.lastname@example.org.
© Womble Bond Dickinson (UK) LLP 2019. This publication is not designed to provide legal, financial or other professional advice and nothing in it should be construed as such. Please see www.womblebonddickinson.com for legal notices.