Insights
Regulatory Update Sep 2022
In this issue we cover:
FCA and PRA conclude investigation into 2008 HBoS failings
FCA Portfolio Letter on Trade Repositories
Questions and Answers on MiFID II and MiFIR Transparency
Speech by FCA’s Sarah Pritchard on fighting financial crime
Understanding of FSCS protection
Cancelling temporary permission
JMLSG consults on revisions to AML and CTF guidance
Assessing liquidity for orderly wind-down
FCA looks for ESG experts
The FCA board is establishing a new Environmental, Social, and Governance (ESG) Advisory Committee. The government expects the FCA to ‘have regard’ to the UK’s commitment to achieving a net zero economy by 2050. The new committee will therefore advise the FCA Board on:
- how it oversees ESG issues relevant to both its own operations and its role as a regulator;
- relevant emerging ESG topics and issues; and
- how the FCA should develop its ESG strategy.
The committee will include a small number of external experts with knowledge of ESG issues in the financial sector, and the FCA is seeking expressions of interest from those who may wish to join the committee. Members will be appointed in a personal capacity and will have to abide by a conflicts of interest policy; the FCA states that it doesn’t expect individuals currently employed by FCA regulated firms to be eligible. Interested parties should submit their CVs by 16 September 2022.
FCA and PRA conclude investigation into 2008 HBoS failings
The FCA and Prudential Regulation Authority (PRA) have now concluded their joint investigation into the operational and strategic management performance that led to the failure of HBoS. The investigation has been going on since the end of 2008 and both the FCA and the PRA have decided not to take any further action.
The authorities conducted investigations into senior managers at HBoS. They assessed whether individuals lacked the required fitness and propriety to hold certain senior roles prior to HBoS’s failure. The authorities concluded that, in line with standard market practice, no enforcement action needed to be taken against these former HBoS senior managers.
FCA Portfolio Letter on Trade Repositories
On 5 September 2022, the FCA published a portfolio letter to trade repositories (TRs) registered with the FCA under either UK EMIR or UK SFTR and to securitisation repositories (SRs) registered with the FCA under the UK Securitisation Regulation (the Letter). In the letter, the FCA sets out its view of the key risks of harm in relation to TRs and SRs and measures firms should take to minimise these risks.
The key risks identified for TRs were:
- market concentration which may exacerbate operational resilience risk, limit opportunities to switch provider and lead to lower incentives to provide high quality services; and
- inadequate systems and controls to prevent introducing errors in data.
The key risks identified for SRs were:
- wider market and macro-economic conditions are still developing due to the novelty of SR system;
- inadequate systems and controls to prevent introducing errors in data; and
- poor third-party performance of activities undertaken on behalf of SRs compromising the service provided by the SR.
The FCA expects firms should have robust operational resilience processes and monitoring procedures to review data systems and controls. Further, the FCA expect SRs to hold sufficient liquid net assets to cover potential general business losses and sufficient financial resources to cover the operational costs of an orderly wind-down or reorganisation. The FCA makes clear the SRs are responsible for effectively managing and controlling services provided by a third party.
Questions and Answers on MiFID II and MiFIR Transparency
On 5 September 2022, ESMA updated its Questions & Answers on MiFID II and MiFIR transparency topics, to clarify that transfers of financial instruments between two branches of the same legal entity, or between a branch and its parent, are not subject to post-trade transparency or transaction reporting requirements, as this does not constitute a change in ownership of financial instruments.
Speech by FCA’s Sarah Pritchard on fighting financial crime
On 7 September 2022, Sarah Pritchard, Executive Director of Markets, gave a speech to the Financial Crime Summit. In the speech, Ms Pritchard highlighted the role and effectiveness of regulated firms in detecting and preventing financial crime. Ms Pritchard also highlighted the likely impact of the cost-of-living crisis leading to increased levels of financial crime and emphasised that a coordinated response from government, the FCA and industry would be needed to protect consumers.
Understanding of FSCS protection
On 7 September 2022, the FSCS published research on identifying the gaps in FSCS protection. The FSCS research explores consumers’ understanding of FSCS protection of financial products. The FSCS found that while protection in the event of the collapse of a bank or building society was well known, many consumers are not aware that certain FSCS protections are available in respect of pensions, bad financial advice and other financial products. The FSCS is of the view that in the context of the cost-of-living crisis, increased consumer awareness would improve confidence and empower consumers when making financial decisions.
Cancelling temporary permission
The FCA reiterated on its website that firms who wish to cancel their temporary permission but still have active business with UK clients to run-off will still be able to use the supervised run-off regime (SRO), provided they continue to be authorised in their home state. It is the responsibility of the firm to ensure that it qualifies for the SRO regime. Further, while the firm will no longer be able to carry on regulated activities in relation to new UK business, it will still need to comply with the Principles for Business and other relevant rules set out in the FCA Handbook during the run-off period.
JMLSG consults on revisions to AML and CTF guidance
The Joint Money Laundering Steering Group is consulting on proposed amendments to Part I of its Anti-Money Laundering and Counter-Terrorist Financing Guidance.
The proposed revisions take account of The Money Laundering and Terrorist Financing (Amendment) (High-risk Countries) Regulations 2022 and The Money Laundering and Terrorist Financing (Amendment (No.2) Regulations 2022.
The proposed changes relate to:
- high-risk third countries Enhanced Due Diligence;
- trusts; and
- proliferation financing.
The deadline for comments is 17 October 2022.
Assessing liquidity for orderly wind-down
The FCA has published a new webpage setting out the findings from its multi-firm review on assessing liquidity for orderly wind-down by general insurance brokers. However, the findings are of broader interest to all regulated firms.
The FCA sets out good and bad practices from general insurance brokers. Good practices include firms:
- having clear identification and regular reviews of the risks inherent in their business models;
- giving strong consideration of the harms that could flow from those risks and the steps needed to mitigate them;
- having detailed and well thought-out cashflow projections and assumptions for wind-down, which helped with operable, credible planning; and
- having strong risk management frameworks that included risk metrics and forward-looking management information.
The FCA advises firms to review the appropriateness of their own wind-down planning arrangements and ensure that these are proportionate to the nature, scale, and complexity of their activities.
Trading venue perimeter
The FCA is consulting on new guidance on the regulatory perimeter for trading venues, so that firms have greater clarity on the permissions they need. The FCA hopes this will create a level playing field and protect the integrity of the UK’s financial system.
The key driver for this consultation is the evolution of a multilateral system and technological developments which have made it more difficult to discern arrangements and systems from trading venues. At this stage, the consultation is limited to views and stops short of making proposals. It forms part of the Wholesale Markets Review in conjunction with HM Treasury. The consultation paper will be of interest to trading venues, service companies, platforms, brokers and portfolio managers.