Regulatory Update September 2020
FCA call for input on the consumer investments market
The FCA has published a call for input (by 15 December 2020) to help shape its work on improving the consumer investment market. Reducing harm in the consumer investments market was identified as a priority in the FCA’s 2020/21 business plan.
The FCA seeks views on the following key questions:
- What more can the FCA do to help the market offer a range of products that meet straightforward investment needs?
- How can the FCA ensure that those who have the financial resources to accept the risks of higher risk investments can do so if they wish more effectively, but in a way that ensures they understand the risk they are taking?
- How can the FCA use the regulation of financial promotions to make it easier for people to understand the level of regulatory protections afforded to them when they invest?
- What more can the FCA do to ensure that when people lose money because of an act or omission of a regulated firm, they are appropriately compensated and that it is paid for fairly by those who cause the loss?
- How can people be better protected from scams?
- How does the FCA help this market to be competitive, with firms striving to offer better products and services?
New SM&CR annual reporting requirement
SM&CR introduces a new annual reporting requirement which firms must complete and submit using GABRIEL. The report is called REP008 and obliges firms need to say whether they have taken disciplinary action against individuals who are not Senior Managers for breaches of the Conduct Rules. A nil return is required if there have been no breaches resulting in disciplinary action.
The first REP008 is due on 02/11/20 for the period 09/12/19-31/08/20, unless the firm is a limited permission consumer credit firm.
For the first return, only certain individuals will be in scope.
FCA issues important guidance on listings of cannabis-related businesses
On 18 September 2020 the FCA published an important statement setting out its new approach to the listing of domestic and overseas medicinal cannabis companies on the Official List. This statement provides clarity for medicinal cannabis and cannabis oil companies that may be considering listing on the Main Market.
Although medicinal cannabis was effectively legalised in the UK in 2018 by the Government amending the cannabis-based products for medicinal use (CBPM) classification, there have continued to be concerns about the risk of technically committing money-laundering offences under the Proceeds of Crime Act 2002 (POCA) by investing in cannabis-related companies.
The latest statement from the FCA confirms that it will approach the listing of cannabis-related businesses as follows:
- Recreational cannabis companies: The proceeds from these companies, even when they are located in those jurisdictions that have legalised it, are proceeds of crime under POCA. The FCA will therefore not approve the listing of such a business to the Official List.
- UK-based medicinal cannabis companies: The legal position of purely UK-based medicinal cannabis companies and cannabis oil companies is clear. These companies can be admitted to the Official List if the company has the appropriate Home Office licences for its activities where they are required.
- Overseas-licensed medicinal companies: These companies are in a different position from purely UK-based medicinal cannabis companies. They may be admitted to the Official List provided the FCA is satisfied that POCA does not apply and the company otherwise satisfies the criteria for listing. As part of the vetting process, the FCA will carry out a review of the proposed issuer where it will need to satisfy the FCA as to the risk of contravening POCA. The company will need to satisfy the FCA that its activities would be legal if carried out in the UK. The FCA will also need to understand the legal basis of the company’s overseas activities, for example, the nature of the local licensing and the licences the company holds.
It is important to note that the latest statement from the FCA is pending a future consultation on further guidance, which will follow.
There is currently no specific guidance from the LSE in relation to the AIM market, however, it is hoped that AIM will also follow the approach of the FCA when considering applications from UK and non-UK medicinal cannabis and cannabis oil companies.
MONEYVAL publishes Covid-19 money laundering and terrorist financing trends
On 2 September 2020, MONEYVAL (the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism) published a report detailing the money laundering and terrorist financing trends.
MONEYVAL notes that during the pandemic, whilst the level of general criminal activity has remained constant, certain types of crime which generate criminal proceeds have increased (such as fraud and cybercrime). In addition, criminals have sought to capitalise on other aspects of the pandemic, such as a relaxation in controls to enable the delivery of personal protective equipment (PPE) and exploitation of relief measures introduced by tax authorities to support vulnerable members of the community. Based on feedback, MONEYVAL has identified 5 areas of potential money laundering threats directly stemming from the pandemic, which are: fraud; “medicrime” (crimes related to the provision of medical equipment/supplies); corruption; cybercrime; and late demand in moving illicit funds.
To support jurisdictions in responding to emerging and continuing risks, MONEYVAL provides a set of 7 recommendations which it urges that jurisdictions:
- Apply extra vigilance in complying with international standards set out by the Financial Action Task Force (FATF);
- Continue to support and communicate with the private sector, and not just credit institutions, to tackle risks identified;
- Adjust the application of a risk-based approach to adapt to the current and changing risk exposures;
- Encourage use of innovation to support supervisory and ongoing monitoring activities;
- Continue efforts to foster cross-border information sharing and transparency;
- Enhance domestic information sharing between national financial intelligence units (FIUs) and law enforcement authorities (LEAs) to both enhance investigations and share insights on new typologies and emerging trends;
- Continue to monitor the impact of Covid-19 on national anti-money laundering and counter-terrorist financing mechanisms and take measures as appropriate to mitigate risk; and
- MONEYVAL identifies that there have been a number of positive process and practice evolutions brought about by the pandemic. In particular, in the absence of site visits, regulators have adapted to using screen-sharing and secure electronic file sharing to continue monitoring activity. In addition, international cooperation has not been negatively impacted by the pandemic.
The UK Government and the FCA have acknowledged that criminals are taking advantage of the COVID-19 pandemic to carry out fraud and exploitation scams through a variety of methods, including cyber-enabled fraud and will seek to exploit any weaknesses in firms’ systems.
The FCA has stressed that it is important that firms remain vigilant to new types of fraud and amend their control environment where necessary to respond to new threats and any new threats should result in the a Suspicious Activity Report (SAR) being reported in a timely manner to the National Crime Agency (NCA).
Throughout the crisis, the FCA has been clear in their expectations on how firms should apply their systems and controls to combat and prevent financial crime. The FCA recognised that the current climate may give rise to operational challenges in respect of firms’ financial crime systems and controls, however they should not seek to address these issues by changing their risk appetite.
The FCA has recognised that firms may need to re-prioritise or delay some activities, such as ongoing customer due diligence reviews or reviews of transaction monitoring alerts, however this should be done in line with a risk based approach and firms should ensure that there is a clear plan to return to business as usual as soon as reasonably practicable.
FCA Market Watch
The FCA’s most recent edition of its newsletter on market conduct, Market Watch 65, contains cautionary tales for firms responding to an information request by the FCA or when submitting a suspicious transaction and order report (STOR). The FCA’s observations are made in the context of firms’ dealings with suspected market abuse, although they apply to communications with the FCA more generally. It discusses how inappropriate handling of information requirements issued by the FCA can hinder, or compromise, the FCA’s preliminary reviews of, and investigations into, suspected market abuse. The newsletter reminds market participants that material that could be subject to legal professional privilege should not be included in suspicious transaction and order reports or market observations submitted to the FCA and, if it is, participants run the risk that any claimed legal privilege may be regarded as waived or lost.
FCA publishes latest report as part of 5 Conduct Questions Programme
The FCA has published its latest feedback report as part of the 5 Conduct Questions Programme. The report reflects widening engagement with the FCA hosting Conduct Roundtable sessions in 18 wholesale banks.
Key messages in the report include:
- Conduct and culture change programmes are having a positive effect;
- While awareness of conduct risk is higher, skills to identify these risks must improve. This is especially important in the evolving Work from Home operating model in use;
- Psychological safety for day-to-day speaking up and challenge still needs attention from staff at all levels;
- Remuneration strategies that focus on the “how” as well as the “what” are a positive development, but more can be done to fully harness strategic benefits; and
- Corporate purpose and principles have become confused. CEOs and line managers can help clarify how these terms link to individual roles and responsibilities.
The FCA highlight that Covid-19 has created new and greater conduct risks and that it will be important for firms to engage with staff at home in the effort to identify potential sources of harm in their individual environments. The FCA also note that they will continue their supervisory engagement with firms on their change programmes and their effectiveness. The FCA will be focusing on new risks emerging from LIBOR transition and other market developments more generally.
FCA publicly censures former CEO for market misconduct
The FCA has published a final notice in respect of Conor Foley, the former CEO of WorldSpread Limited (WSL), and its holding company WorldSpreads Group plc (WSG), publicly censuring Mr Foley for market abuse and banning him. Previously, the FCA has published decisions against two other directors in relation to the same investigation.
The FCA imposed a financial penalty of £658,900 on Mr Foley on 3 July 2020, but now has given a public censure in lieu of the financial penalty in response to evidence of his serious financial hardship.
Mr Foley was involved in drafting admission documentation ahead of WSG’s flotation on the Alternative Investment Market of the London Stock Exchange in August 2007. These documents contained misleading information and omitted key information that investors would have needed to make an informed decision about the company. In particular, the documents did not mention that some WSG executives had made significant loans to WSG and its subsidiaries, or that subsidiaries hedged large positions internally with company executives.
In addition, large spread bets were carried out on two clients’ accounts by Mr Foley himself without the knowledge of the clients, which had the effect of giving the appearance of greater demand for WSG shares than in fact existed.
COVID-19 – FCA update on financial resilience survey
The FCA has updated its coronavirus webpage to announce that it will be repeating its COVID-19 impact survey after the first phase to understand the change in firms’ financial positions with time.
The FCA will email the survey to the relevant firms during the period of 16 to 22 September 2020 and the completion of the survey is mandatory. It will use the data provided, alongside existing data, to support their ongoing work and expect to repeat this survey in the future.
MiFIR review – ESMA consults on obligations to report transactions and reference data
The European Securities and Markets Authority (ESMA) has published a consultation paper reviewing the reference data and transaction reporting obligations under the Markets in Financial Instruments Regulation (MiFIR). ESMA proposes amendments to the transaction reporting and reference data regime based on its experience in implementing the MiFIR reporting regimes. The objectives are to simplify the current reporting regimes and enhance the quality of the data reported by ensuring consistency among various reporting and transparency requirements.
The consultation considers a wide range of issues, including:
- Revision of the “traded on a trading venue” concept;
- Revision of the scope of indices subject to the reporting obligation;
- Proposals to remove, replace or further clarify specific data elements that should be reported under the transaction reporting obligation; and
- Proposals to ensure further alignment between the European Market Infrastructure Regulation and MiFIR reporting regimes.
The consultation paper proposals are particularly relevant for trading venues, systematic internalisers, investment firms, data reporting services providers, and asset management companies.
The deadline for comments is 20 November 2020. ESMA intends to submit its final review report to the European Commission in Q1 2021.
MAR – ESMA review report
The European Securities and Markets Authority (ESMA) has published a review of the Market Abuse Regulation (MAR). The report concludes that MAR has worked well in practice and is fit for purpose.
In the report, ESMA makes recommendations on the following three issues:
- Market soundings: clarifying that the MAR requirements represent an obligation for disclosing market participants that, if complied with, will protect them from the allegation of having unlawfully disclosed inside information;
- Benchmark provisions and the interplay between the MAR and collective investment undertakings: clarifying the responsibility of management companies in relation to the disclosure of inside information; and
- Withholding tax (WHT) reclaim schemes: remove the legal limitations for national competent authorities to exchange information with tax authorities.
ESMA also suggests providing additional guidance for:
- Inside information and disclosure: ESMA will issue further guidance in relation to the application of the definition and for specific scenarios concerning delayed disclosure; and
- Pre-hedging: the report identifies factors which may be considered when assessing if a specific pre-hedging conduct poses risks of market abuse and of violation of conduct rules. ESMA may assess pre-hedging in the future, considering specific circumstances such as its importance for illiquid instruments or the consequences of pre-hedging activities on the markets.
The report also addresses other aspects of the MAR and states that further analysis of spot FX contracts is required before deciding whether they should be covered by the MAR.
In a separate report, ESMA has considered whether any potential solution to contribute to the detection and prosecution of WHT reclaim schemes could be achieved through an amendment to the MAR and included the outcome of such analysis in a dedicated section in its technical advice to the EU Commission on a potential review of the MAR.