Market trading and reporting – FCA
On 27 May 2020, the FCA published Primary Market Bulletin Issue No. 28 which provides an update on temporary relief for the timing of the publication of half-yearly financial reports and statement on market practice on ‘going concern’ assessments and Market Watch 63: market conduct and discipline in the context of coronavirus.
As firms move to alternative sites and working from home arrangements, the FCA expects them to consider the broader control environment in these new circumstances.
Firms need to continue to record calls, however there are scenarios where this is not possible. The FCA therefore ask that firms make them aware if they are unable to meet these requirements. Firms need to consider steps they could take to mitigate outstanding risks if they are unable to comply with their obligations to record voice communications. This could include enhanced monitoring, or retrospective review once the situation has been resolved.
Firms may experience difficulties in submitting their regulatory data. The FCA expects a maintenance of records during this period and submission of the data as soon as possible. If firms have concerns.
The FCA expects all steps to prevent market abuse to continue. This could include enhanced monitoring, or retrospective reviews. They will continue their monitoring for market abuse and take any action where necessary.
On 2 June 2020, the Joint Money Laundering Steering Group updated parts 1, 2 and 3 of its guidance taking into account the feedback received to its earlier consultation on pooled client accounts.
You can find the link here.
ESMA draft guidelines on outsourcing to cloud service providers
On 3 June 2020, the European Securities and Markets Authority (ESMA) issued a consultation paper on guidelines on outsourcing to cloud service providers.
The purpose of the draft guidelines is to provide guidance on outsourcing requirements where cloud service providers are used. The draft guidelines are intended to help firms identify, address and monitor the risks that may arise from their cloud outsourcing arrangements (from making the decision to outsource, selecting a cloud service provider, monitoring outsourced activities to providing for exit strategies).
ESMA will consider the responses it receives to the consultation paper in Q3 2020 and expects to publish a final report and guidelines in Q4 2020/Q1 2021.
When finalised the guidelines will apply from 30 June 2021 to all cloud outsourcing arrangements entered into, renewed or amended on or after that date.
FCA policy development update
The FCA has published its latest policy development update which details information on its recent and upcoming publications. Its upcoming publications include:
- A consultation paper on high-risk investments: marketing speculative illiquid securities (including speculative mini-bonds) to retail investors, due for publication in Q2 2020;
- A consultation paper on driving value for money in pensions, due for publication in Q2 2020;
- A consultation paper on exit fees in investment platforms and comparable firms, due for publication in Summer 2020;
- A policy statement to CP20/5 on open-ended investment companies – proposals to facilitate standard listing, due for publication in Q4 2020;
- A policy statement to CP20/6 on FCA regulated fees and levies, due for publication in July 2020;
- A potential policy statement on general insurance value measures reporting, due for publication in Q2 2020; and
- A policy statement or feedback statement to CP20/1 on a single easy access rate, due for publication in Q4 2020.
The Financial Ombudsman Service (FOS) has published the latest edition of “Ombudsman news” (issue 152) which includes:
- A compilation of the FOS’ annual complaints and enquiries received and resolved, and the financial products and services involved;
- Commentary from the Chief Ombudsman and sector-by-sector insight into trends in complaints;
- Further details about the FOS’ objectives and plans for its future strategy, which will run until 2025;
- Data on the complaints received and resolved in relation to claims management companies in 2019/20 (the first year of handling complaints about these entities);
- Information on avoiding fraud and scams;
- Information for consumers about dealing with the impact of COVID-19 on finances; and
- Information for financial business about the FOS’ approach to complaints caused or affected by COVID-19.
ESMA provides guidance on the compliance function under MiFID II
The European Securities and Markets Authority (ESMA), published on the 10 June 2020 the final guidelineson the MiFID II compliance function. These guidelines replace the ESMA guidelines on the same topic issued in 2012 and include updates that enhance clarity and foster greater convergence in the implementation, and supervision, of the new MiFID II compliance function requirements. These guidelines are addressed to investment firms and credit institutions providing investment services and activities, investment firms and credit institutions selling or advising clients in relation to structured deposits, UCITS management companies and external AIFMs when providing investment services and activities in accordance with the UCITS Directive and the AIFMD.
While the objectives of the compliance function as well as the key principles underpinning the regulatory requirements have remained unchanged, the obligations have been further strengthened, broadened and detailed under MiFID II. The guidelines will enhance the value of existing standards by providing additional clarifications on certain specific topics, such as new responsibilities in relation to MiFID II’s product governance requirements, by notably detailing further the reporting obligations of the compliance function.
FCA Finalised Guidance 20/1: Our framework – assessing adequate financial resources (FG20/1)
FG20/1 follows ‘Consultation Paper 19/20: Our framework – assessing adequate financial resources’ in which the FCA consulted on the purpose of adequate financial resources, what the FCA looks for from firms and its expectations as to the practices firms should adopt within their assessments of adequate financial resources.
In FG20/1 the FCA explains the purpose of, and its approach to the assessment of adequate financial resources, for all FCA solo-regulated firms subject to threshold conditions and/or the Principles for Businesses. It also provides further guidance on the meaning of ‘adequate financial resources. It sets out:
- The role of assessing adequate financial resources;
- What the FCA looks for from firms when assessing adequate financial resources; and
- The FCA’s expectations as to the practices firms should adopt in their assessment of adequate financial resources.
FCA fines Commerzbank London £37,805,400 over anti-money laundering failures
The FCA found that Commerzbank London was aware of its AML weaknesses and failed to take reasonable and effective steps to fix them despite the FCA raising specific concerns about them in 2012, 2015 and 2017.
These weaknesses also persisted during a period when the FCA published guidance on steps firms could take to reduce financial crime risk as well as taking enforcement action against a number of firms in relation to AML controls. Despite these clear warnings, the failures continued.
FCA Executive Director of Enforcement and Market Oversight, Mark Steward, said:
‘Commerzbank London’s failings over several years created a significant risk that financial and other crime might be undetected. Firms should recognise that AML controls are vitally important to the integrity of the UK financial system.’
The FCA’s investigation identified failings in a number of areas, including Commerzbank London’s failure to:
- Conduct timely periodic due diligence on its clients, which resulted in a significant number of existing clients not being subject to timely know-your-client checks. By 1 March 2017, 1,772 clients were overdue updated due diligence checks. A material number of these clients were able to continue to transact with the bank’s London branch due to the implementation of an exceptions process, which was not adequately controlled or overseen, and which became ‘out of control’ by the end of 2016;
- Address long-standing weaknesses in its automated tool for monitoring money laundering risk on transactions for clients. For example, in 2015 Commerzbank London identified that 40 high-risk countries were missing, and 1,110 high-risk clients had not been added, to the transaction monitoring tool; and
- To have adequate policies and procedures in place when undertaking customer due diligence on clients.
The firm therefore breached Principle 3 of the FCA’s Principles for Businesses, which requires firms to have adequate risk management systems in place.
Commerzbank London has undertaken a significant remediation exercise to bring its AML controls into compliance. A Skilled Person has been testing the effectiveness of these enhancements, and their work is now complete.
It has also conducted an extensive look-back exercise to identify suspicious transactions during the period in question. It also voluntarily implemented a wide-ranging business restriction, which included temporarily stopping taking on new high-risk customers and suspending all new trade finance business activities.
Commerzbank London agreed to resolve the matter at an early stage of the investigation and therefore qualified for a 30% discount. Without the discount, the financial penalty would have been £54,007,800.
FCA Publicly Censures Redcentric PLC for Market Abuse
On the 29th June the FCA issued a public censure to Redcentric PLC for committing market abuse between 9 November 2015 and 7 November 2016. Redcentric has agreed to provide compensation to affected investors.
Redcentric issued unaudited interim results and audited final year results which materially misstated its net debt position and overstated its true asset position in circumstances where it knew, or ought to have known that the information was false and misleading. As a result, investors were misled and paid more when purchasing shares than they would have done had they known the true position.
Redcentric has now agreed to offer compensation to affected investors who purchased Redcentric shares between 9 November 2015 and 7 November 2016.
FCA discussion paper on Investment Firm Directive/Investment Firm Regulation (IFR/IFD)
On 23 June 2020, the FCA published Discussion Paper 20/2: Prudential requirements for MiFID investment firms (DP20/2).
The UK Government has supported the overall goals of the EU prudential regime IFR/IFD and in the Chancellor’s statement in the budget the Government confirmed its intention to legislate for a UK regime. The FCA proposes in DP20/2 to introduce a UK regime that will achieve similar intended outcomes as the IFR/IFD whilst taking into consideration the specifics of the UK market. DP20/2 is intended to help that analysis.
The FCA states that investment firms should be aware of the scale of the change the IFD/IFR represents. In addition to various less material changes compared to the existing prudential regime for investment firms, major changes described in DP20/2 include:
- An update to the initial capital required for authorisation;
- Changes to the rules on the definition of capital;
- New own funds requirements, including the introduction of the K-factor approach;
- New rules on prudential consolidation, group risk and concentration risk;
- Applying liquidity requirements to all investment firms;
- A new approach for investment firm’s internal risk and prudential assessments, and the supervision of those requirements;
- New requirements on remuneration policies; and
- Changes to reporting and disclosure requirements.
However, the FCA notes that considerable amounts of detail remain outstanding including the necessary UK legislation being in place to ensure that investment firms will be regulated under a new domestic regime similar to the IFR/IFD rather than the on-shored Capital Requirements Directive IV/Capital Requirements Regulation
The IFR/IFD contain mandates for regulatory/implementing technical standards and guidelines. The FCA states that in due course it might refer to the content of such measures in its rules depending on the Government’s approach to the UK regime.
The deadline for comments on DP20/2 is 25 September 2020.
EBA issues final draft RTS on criteria to identify material risk takers for CRD IV remuneration purposes
On 18 June 2020, the EBA published its final report on draft regulatory technical standards (RTS) on criteria to define all categories of staff whose professional activities have a material impact on an institution’s risk profile (‘risk takers’).
As mandated by the Capital Requirements Directives (CRD), the objectives of the draft RTS are to harmonise the criteria for the identification of material risk takers in order to ensure a consistent approach to the identification of such staff across the EU. Following its consultation on the draft RTS in December 2019 and subsequent feedback received the EBA has:
- Revised the qualitative criteria to enhance the application of proportionality;
- Revised its definition of managerial responsibility to take into account that institutions of different sizes have different layers of hierarchy;
- Clarified how the criteria should be applied on a consolidated, sub-consolidated and individual basis; and
- Added some flexibility in calculating the amount of remuneration for the application of the quantitative requirements.
FCA updated webpages on market abuse reporting
The FCA has updated its webpage on how to report suspected market abuse as a firm or trading venue (previously entitled ‘Suspicious transactions and other reports’) and published a new webpage on how to report suspected market abuse as an individual.
The webpage for firms and trading venues contains details on how to submit a suspicious transaction (STOR) and how to submit a market observation.
Details are provided of the number of STORs received in the past year and on the FCA’s Market Watch newsletters dealing with STORs and STOR supervisory visits.
With regard to individuals reporting suspicious activity, the FCA requests the following information:
- The name of the financial instrument which you believe has been used in or impacted by market abuse;
- The identity of any people or companies involved;
- Specific dates and times of any transactions which you believe amount to market abuse; and
- An explanation of reasons for believing that market abuse has been committed.
The FCA notes that individuals working for a listed or regulated firm can report suspicious market activity carried out by their firm to the FCA’s whistleblowing team. Individuals concerned about disclosures made by a listed company can also report to the FCA’s market integrity team.