August Regulatory Update
FCA Dear CEO letter: Non-discretionary investment firms to take action to prevent client harm
Over recent months, the FCA has published a raft of guidance for firms to help prevent consumer harm in light of the unprecedented COVID-19 pandemic and as such on 12 August the FCA wrote directly to CEOs of firms who provide non-discretionary investment services.
This Dear CEO letter was issued in response to a number firms who reported an increase (in some cases a significant increase) in client money balances in the half year to June 2020. This in part was due to clients rebalancing their portfolios to mitigate the recent market volatility.
The FCA is now requiring the firms it has contacted to undertake the following:
- Consider whether the firm needs to hold client money balances if they are unlikely to be reinvested or whether it would be in clients’ better interests to place these balances directly with their own current or savings account providers;
- Engage directly with these clients to determine whether these balances should be returned to them or continue to be held by the firm to facilitate further investment in the short term; and
- Where a client wishes for such client money balances to be returned, for this to be returned in a prompt manner.
The FCA has stated that it will continue to review client money balances through the regulatory returns processes over the coming period and follow-up with firms that report significantly increased balances. Firms should therefore be prepared for discussions with the FCA as to what action they have taken in response to this Dear CEO letter and how the actions they take are in clients’ best interests.
Capital market regulation and COVID-19
On 3 August 2020, Mark Steward, Executive Director of Enforcement and Market Oversight, delivered a webinar to discuss building market and investor confidence. The following points were highlighted:
- The FCA has introduced measures to address the difficulties faced by the capital markets during the pandemic. It continues to actively monitor these to ensure that the financial markets continue to operate well; and
- Its secondary market surveillance capability which provides visibility over trading, enabling the regulator to readily identify and probe potential suspicious activity and distortions in the market.
FCA announces proposals to update dual-regulated firms remuneration code
On 3 August 2020, the FCA published a consultation paper (CP20/14) with proposals to amend its dual-regulated firms remuneration code and relevant non-Handbook guidance in line with the Capital Requirements Directive V (CRD V). This follows the PRA’s own consultation on implementing CRD V.
The proposal’s aim to ensure that the FCA’s remuneration regime remains largely consistent with the PRA’s remuneration framework and supports their own conduct-based objectives.
The consultation paper proposes changes to:
- The dual-regulated firms remuneration code (SYSC 19D), including the rules on material risk takers, proportionality, deferral and clawback;
- The non-Handbook guidance, “General Guidance on Proportionality – the Dual-regulated firms Remuneration Code”; and
- The non-Handbook guidance “Remuneration Codes (SYSC 19A and SYSC 19D) – Frequently Asked Questions on remuneration”.
The consultation paper also aims to ensure that the amended remuneration requirements continue to work effectively at the end of the transition period following the UK’s exit from the EU.
SMCR: FCA Updates Expectations on Fitness and Propriety Assessments and Conduct Rules Training
On 14 August 2020, the FCA updated its website on the Senior Managers and Certification Regime (SMCR) for solo-regulated firms. The updates include tables setting out good and bad practice to training staff on the conduct rules as well as assessing the fitness and propriety (F&P) of Senior Managers and Certification staff.
Fitness and Propriety
Firms need to demonstrate they are making regular, thorough and consistent assessments of the F&P of Senior Managers and Certification Staff. As a guidance the FCA have highlighted the following as positive indicators and good practice in relation to F&P assessments:
- F&P checks identifying new issues with staff;
- Relevant Senior Management Functions (SMFs) actively overseeing the F&P process and ensuring appropriate reporting;
- Competence assessments demonstrating that thought has been given to each specific role (including managers);
- Development plans being in place;
- Ensuring managers are adequately trained in the firm’s approach to F&P;
- Integration of the F&P process into existing HR performance management processes;
- Ensuring firms have appropriate criteria and robust processes for identifying certification staff on an ongoing basis; and
- Timely production of regulatory reference disclosures on misconduct.
Small firms will need to interpret some of these indicators in a proportionate way, as well as bearing in mind the intention of the indicators.
The Conduct Rules set minimum standards of individual behaviour. When training staff on the conduct rules, the FCA highlights the following as positive indicators:
- Relevant SMFs can demonstrate appropriate involvement in, and oversight of training;
- Training is interactive and uses realistic scenarios;
- Examples and scenarios draw out nuances of how the rules apply to each type of role;
- Line managers are involved in training delivery;
- Training is reinforced regularly and built into on-boarding;
- Effectiveness of conduct rules training is assessed;
- Training is put in the context of the overall regime; and
- Conduct is linked to F&P and performance assessments
COVID-19: FCA extends submission deadline for complaints returns
On 28 August 2020 the FCA published an update to its website detailing changes to regulatory reporting during the COVID-19 pandemic.
The FCA has permitted extensions to complaints data returns in relation to the 31 August 2020 deadline required by the Dispute Resolution: Complaints Sourcebook (DISP) rule DISP 1.10A.3R(1).
Firms will be allowed to apply for a two-month extension to this deadline. Meaning that the summary data for complaints reporting required by DISP 1.10A.1R covering reporting periods ending between 1 January and 30 June 2020 must be published by firms no later than 31 October 2020.
ECB report on banks’ ICAAP practices
On 11 August 2020 the European Central Bank (ECB) published a report on banks’ internal capital adequacy assessment process (ICAAP) practices. ICAAP remains one of ECB Banking Supervision’s top supervisory priorities and this report summarises the results from a structure analysis of ICAAP practices in 2019. The report notes that many banks have made a considerable effort towards improving their ICAAPs and have made clear progress. For instance, the areas of risk identification, capital adequacy statements and conduct stress-testing, are broadly established. However, several areas are less developed, and the ECB explains that these all merit attention as weak practices in these areas could undermine the overall effectiveness of the ICAAP.
Amendments to the Packaged Retail Investment and Insurance based Products Regulation
On 31 July 2020 HM Treasury (HMT) published a policy statement on amendments to the retained EU law version of the Packaged Retail Investment and Insurance-based Products Regulation (PRIIPs Regulation). HMT intends to make the following changes to the UK PRIIPs Regulation:
- An amendment enabling the FCA to clarify the scope of the PRIIPs Regulation through their rules;
- An amendment to replace “performance scenario” with “appropriate information on performance” in the PRIIPs Regulation; and
- An amendment enabling HMT to further extend the exemption currently in place for Undertakings for the Collective Investment in Transferable Securities (UCITS) funds.
- HMT intends to legislate for these amendments when Parliamentary time allows.
FCA’s Primary Market Bulletin Issue No. 30
On 19 August 2020, the FCA published the 30th edition of the Primary Market Bulletin (PMB 30). It consists of general news and information including, the importance of the person discharging managerial responsibilities regime under the Market Abuse Regulation, the exemptions from the requirement to prepare a prospectus, changes to the prospectus annexes and clarity on the FCA’s approach to the Global Depository Receipt Facilities. PMB 30 also includes the outcome of guidance consultations in PMB 24 and changes to the Knowledge Base, as well as updated technical notes in relation to the Prospectus Regulation.
FCA consults on extension of annual financial crime reporting obligation
On 24 August, the FCA published a consultation paper setting out its proposals to extend the scope of firms required to provide the FCA with annual financial crime reporting (REP-CRIM) information. The proposed extension will include firms that carry on regulated activities that the FCA consider potentially pose higher money laundering risk and will be irrespective of a firm’s revenue threshold. The FCA estimates that an additional 4,500 firms will need to report annually.
The FCA requests all comments by 23 November 2020 and intends to publish a Policy Statement by Q1 202.
EBA response on an AML/CTF Action Plan
On 19 August 2020, the European Banking Authority (EBA) published a response to the European Commission’s public consultation on an anti-money laundering (AML) and countering terrorist financing (CTF) Action Pan and the establishments of an EU-level AML/CTF supervisor. The EBA supports the Commission’s aim to ensure the consistent and effective application of AML/CTF rules throughout the EU. The EBA states that a comprehensive assessment of the current framework is necessary and recommends that the Commission:
- Harmonise the EU’s legal framework to reduce the risk of gaps created by divergent approaches;
- Combine an ongoing role for national AML/CTF authorities with an EU-level AML/CTF supervisor in a hub and spoke approach that builds on national AML/CTF authorities’ expertise and resources; and
- Leverage on the EU’s existing AML/CTF infrastructure, including the EBA’s policy, data and information technology resources.
The Wolfsberg Group published a statement on 12 August 2020 on developing an effective AML and CTF programme. They outline five key steps to take:
- Assessing risk in defined priority areas;
- Implementing and enhancing controls;
- Prioritising resources;
- Engaging with law enforcement; and
- Demonstrating AML and CTF programme effectiveness.
It also published FAQs on 7 August 2020 on how financial institutions can identify, mitigate and manage money laundering risks by undertaking source of wealth and source of funds checks on relevant customers.
HM Treasury AML and CTF supervision report, 2018/2019
On 6 August 2020, HM Treasury (HMT) published its annual report for 2018-19 on AML and CTF supervision. The report includes self-reported data about activity undertaken across the UK’s AML/CTF regime. The report provides transparency about the performance of AML/CTF supervisors and fulfils the HMT’s obligation under the Money Laundering Regulations to ask all designated AML/CTF supervisors to provide information on their supervisory activity and publish a consolidated review of this information.