In case you have missed the latest news from the Financial Conduct Authority (FCA), below is a summary of selected events.
Enforcement Actions – Speech by Mark Steward
On 4 April, Mark Steward, Director of Enforcement and Market Oversight, gave a speech to draw attention to recent investigations and speak to a number of issues including:
- Failure to prevent market abuse;
- Failure to protect personal data against a cyber-attack;
- Failure to take reasonable care to organise and control internal processes; and
- Suspected significant anti-money laundering system and control issues under the Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017).
His case review highlighted three key points:
- The FCA will hold firms accountable for foreseeable harm, like the case of Tesco Bank, and this is a consideration to be read in the context of ongoing debate around reform to UK law on corporate criminal liability;
- Reasonable systems and controls do not work well all by themselves, but need to be accompanied by strong escalation protocols, which include influential and visible senior management involvement;
- Poor escalation protocols and/or inadequate lines of sight into the heart of the business are inconsistent with the senior management obligation to take ‘reasonable steps’ to prevent a breach.
Mr Stewart made it clear that the FCA is prepared to bring either criminal or civil proceedings for breaches of anti-money laundering (AML) obligations, where it finds ‘strong evidence of egregiously poor systems and controls and what looks like actual money-laundering’. However, because it is more difficult (and requires extra time and resources) to find compelling evidence of wrongdoing, it is likely that the FCA will continue sanctioning firms under the current regime and for breaches of the principles of business and related rules, rather than making poor AML systems and controls a criminal offence, and starting criminal prosecutions.
FCA “Dear CEO” Letter: Firms’ Approvals of Financial Promotions
On 11 April, the FCA published a Dear CEO letter (the Letter) to remind firms involved in the approval of financial promotions for unauthorised persons of their obligations when doing so. Under section 21 of the Financial Services and Markets Act 2000 (also known as FSMA), it is unlawful for a person in the course of business to communicate a financial promotion unless:
I. That person is an authorised person;
II. The content of the communication is approved by an authorised person; or
III. A relevant exemption applies.
The key message of the Letter is that, before an FCA authorised firm approves financial promotions on behalf of domestic unregulated (and overseas) firms, they are required to comply with a number of requirements under the Conduct of Business (COBS) rules in the FCA Handbook. This includes ensuring that the financial promotions they approve are fair, clear, and not misleading.
Retail investment products can expose investors to a range of differing risks and returns, and a lack of an adequate explanation can cause significant harm and undermine the effective functioning of the sector as a whole. Therefore, it is critical that financial promotions of these products reflect an appropriate level of due diligence into the risks they bear. For example, in promising high returns, the approving firm should demonstrate it has taken sufficient steps to ensure the promotion is clear, fair, and not misleading. The Letter specifically mentions FCA firms approving financial promotions relating to mini-bonds, a type of retail investment product which can be issued by unregulated firms.
The FCA has identified a number of deficiencies and examples where due diligence carried out on a financial promotion fell well short of the standard. Firms are reminded that:
- Before they approve a financial promotion for communication by an unauthorised person, they must confirm that it complies with the financial
- If at any time they become aware that the financial promotion no longer complies with the rules, they must withdraw its approval;
- They must put in place adequate systems and controls, or policies and procedures, to comply with financial promotions rules; and
- They must ensure that information presented is accurate and always gives a fair and prominent indication of any relevant risks when referencing any potential benefits.
Non-compliance with the rules in COBS 4 can result in:
- The amendment or removal of financial promotions;
- The suspension or cancellation of any planned issuance of these products to investors;
- Formal limitations being placed on the activities of the firms which approved the non-compliant promotion; and/or
- Civil or criminal proceedings.
Furthermore, if concerns are identified with the due diligence performed, firms can expect the FCA to examine what governance and oversight deficiencies may have contributed to the failing(s), and determine who is responsible.
Market Watch 59
On 17 April, the FCA has published the latest Market Watch (no. 59), a newsletter on market conduct and transaction reporting issues. This edition covers transaction reporting observations, telephone reporting, recording and retention, and use of client codes. Key points to highlight are:
- The Markets Reporting Team found issues regarding the accuracy and completeness of transaction reporting (such as trade time, price, venue, and buyer and seller identification codes), and instrument reference data. The FCA stresses the importance for investment firms which execute transactions in financial instruments to maintain adequate procedures, systems and controls to meet their transaction reporting obligations, under article 26(1) of MiFIR. This includes the requirement to conduct regular reconciliation of front office trading records against data samples provided by the FCA, although the (low) number for sample requests suggests some firms may not be aware of this facility;
- Despite having telephone recording systems installed, the FCA has observed that some firms have not properly ensured that conversations are being recorded and retained for at least five years (in accordance with rules in SYSC 10A of the FCA Handbook). In some cases, firms failed to realise that telephone conversations were not being correctly recorded due to system failings for several months. The FCA reminds firms of the importance of ensuring that they have the systems in place to record telephone conversations, and of undertaking the appropriate checks to ensure that calls are consistently recorded. Recordings are a valuable tool in market abuse surveillance; and
- The FCA has observed that some trading venues’ member firms do not collect the full client identification code (such as the LEI or National ID) when an order is received, and use a different ‘short code’ for the same client over time instead. The FCA is concerned that, as a result, the use of ‘short codes’ may not be as effective as using ‘long codes’ from a market abuse surveillance perspective. Incorrect data being stored by the trading venue and inaccurate transaction and order data being reported have an adverse impact on the regulatory ability to perform market abuse surveillance.
On 18 April, the FCA has published complaints data for the second half of 2018 (H2). Data shows that:
- Firms reported over 3.91m complaints in H2 2018, meaning a 5% decrease compared with the first half (H1) of 2018;
- The most complained about product is the payment protection insurance (PPI), which accounts to 40% of all complaints, although the number of PPI-related complaints decreased by 8% between H1 and H2 2018;
- The number of complaints about credit cards increased by 10%, compared to H1;
- The total redress paid to consumers was £2.26 billion (a 12% decrease from H1). This is partly due to a decrease in the number of complaints received and closed, and partly due to the decrease in redress for complaints not upheld; and
- 37% of all complaints closed by firms in H2 2018 were closed within three business days (up from 35% in H1) and 95% were closed within eight weeks (up from 92% in H1).
Across all product groups, insurance and pure protection, and home finance receive the highest number of complaints as a proportion of the total number of products.
The FCA publishes complaints data every 6 months. Whilst it collects and publishes data at both an aggregate (market level) and firm specific basis, only specific data for firms reporting 500 or more complaints in a six-month reporting period, or 1,000 or more complaints in an annual reporting period are published. Firms going over these thresholds are also required to publish complaints data on their website (circa 98% of complaints firms report). Complaints data helps the FCA assess how well firms are treating their customers, and how their performance changes over time, as well as highlight potential concerns with products.
Should you wish to discuss any of the above points, or better understand how they may apply to your firm, please do not hesitate to contact us.