The latest regulatory update – July 2020

Modification by consent: SUP 10A.5.6

On 10 July 2020, the FCA published a new web page concerning a modification by consent of SUP 10A.5.6. The modification by consent extends the period in which an individual can cover for an Approved Person without being approved (known as the ’12-week rule’ and detailed in SUP 10A.5.6) from a maximum of 12 weeks in a consecutive 12-month period to a maximum of 36 weeks in a consecutive 12-month period

FCA to launch enhanced financial services register

The FCA replaced its existing financial services register with an enhanced register on 27 July 2020 and a directory of certified and assessed persons will be added later in 2020. The enhanced register includes improvements made in response to user feedback and is designed to make it easier to find and understand information on the register.

Firms will need to update any links to pages on the current register, other than those to the homepage, onto the enhanced register although current links will be redirected to the enhanced register’s homepage. The FCA is proposing to extend the deadline for solo-regulated firms to submit information about directory persons to the register to 31 March 2021.

Further details can be found on the FCA website.

FCA publishes Consultation Paper on extending SMCR Certification Regime and Conduct Rules deadlines

The FCA is consulting on extending the deadline for the following requirements from 9 December 2020 to 31 March 2021:

• The date the Conduct Rules come into force;
• The deadline for submission of information about Directory Persons to the Financial Services Register; and
• Changing references in the rules to the deadline for assessing Certified Persons as fit and proper (which has been announced by HM Treasury).

The purpose of this is to ensure alignment with the deadline by which firms must have first assessed the fitness and propriety of their Certified Staff which is from 31 March 2021.

The FCA is asking for comments on the consultation by 14 August 2020.

The FCA reminded firms that SMCR implementation will require planning, time and effort to deliver effectively. Firms should continue their programmes of work and if they are able to certify staff earlier than 31 March 2020, they should do so. Accordingly, the FCA will publish details of certified employees of solo-regulated firms from 9 December 2020 on the Financial Services Register.

Benchmark administrators have until December 2021 to train non-Senior Manager staff in the Conduct Rules. The FCA does not think Covid-19 will prevent them from effectively implementing the Conduct Rules and in particular, as the Certification Regime and reporting of Directory Persons do not apply to benchmark administrators, the FCA is not considering an extension.

Finalised guidance for payment and e-money firms

The FCA released a statement summarising the feedback received following its proposed temporary guidance issued on 22 May 2020. This aims to strengthen payment firms’ prudential risk management and safeguarding arrangements for customers’ funds in light of Covid-19. The document also outlines the FCA’s response to the feedback, and next steps.

This statement is accompanied by its finalised guidance and a ‘Dear CEO’ letter that confirms it expects firms to consider key areas and additional guidance at a Board and Director level and then agree what further actions are required. It also clarifies that principal firms should ensure their appointed agents comply with the contents of the letter that are relevant to them.

In the letter, the FCA set out six areas where non-compliance with these obligations caused harm to consumers:

• Safeguarding;
• Prudential risk management;
• Financial crime;
• Financial promotions and consumer communications;
• Governance and oversight; and
• Records management and reporting

UK to invest £100m in stronger AML checks through tax on banks

The UK is set to go ahead with a £100m investment in improving anti-money laundering systems, funded by a “levy” on financial institutions. Previously trailed in the Spring Budget statement by Chancellor Rishi Sunak, the investment is intended to pay for increasing the number of investigators and improving the technological capabilities of UK enforcement bodies to deal with illicit finance.

The annual levy will represent a significant increase on the National Crime Agency’s current budget of £478m and companies can expect to see a notable uplift in enforcement activity in an area that is slowly emerging as a priority for the UK government. Part of the remainder of the money will be used to fund the National Economic Crime Centre – the UK government’s coordinating body for financial crime enforcement. The other part will go towards reforming Companies House – ensuring that the platform has greater powers of verification. This is intended to address longstanding issues with the Companies House platform, particularly in regard to the lack of checks on beneficial ownership from overseas individuals and companies.

The government believes it is fair that those whose business activities are exposed to money laundering risk pay towards the costs associated with responding to and mitigating those risks. Further details of the consultation can be found at, https://www.gov.uk/government/consultations/economic-crime-levy-consultation

FCA letter to Remuneration Committee Chairs

On 22 July 2020, the FCA published a letter it had sent to Remuneration Committee Chairs. In the letter the FCA sets out its findings and observations from the 2019/20 remuneration round and how it plans to assess firms’ remuneration policies and practices throughout 2020/21.

Among other things the letter notes that during this time of uncertainty and change, the FCA expects remuneration policies and practices to remain aligned with the firm’s long term business plans, especially if these are under review or undergoing change and continue to support and reinforce a healthy culture at the firm. FCA supervisors will continue to assess how remuneration policies have evolved in response to the impact of Covid-19 including the impact on bonus pools and individual remuneration outcomes. The FCA will continue to ask Remuneration Committee Chairs how they have satisfied themselves that their firm’s remuneration policies reinforce a healthy culture at their firm and promote the right behaviours. The FCA expects Remuneration Committee Chairs to consider how their firm’s remuneration policies promote equality of opportunity and to ensure that diversity and inclusion is embedded within the firms approach to rewarding individuals, avoiding unconscious bias.

Dear CEO Letter – Inappropriate use of TTCAs and regulatory permissions for financing transactions

On 24 July 2020, the FCA published a Dear CEO Letter reminding firms acting as brokers in wholesale financial markets (including clearing brokers and prime brokers) of their duties with regard to title transfer collateral arrangements (TTCA).

Whilst the FCA acknowledged that firms enter into TTCAs with clients to allow them to use the relevant cash or securities to secure that client’s obligations, it reiterated the importance of firms complying with the applicable CASS rules, including the obligations relating to the use of TTCAs. In this regard, the FCA noted that it has recently identified examples of the inappropriate use of TTCAs, including:

• Holding money or assets under a TTCA without meeting the requirement to consider client obligations;
• Holding all of a client’s money or assets under a TTCA in the absence of present, future, actual, contingent or prospective obligations to the firm;
• Holding an inappropriate amount of money or assets under a TTCA compared to that client’s present, future, actual, contingent or prospective obligations; and
• Moving an increased amount of collateral from a segregated (CASS) to a TTCA (non-CASS) environment without a corresponding documented consideration demonstrating a connection between the collateral taken and the relevant client obligation.

In addition, the FCA flagged concerns around firms lacking arrangements to promptly return collateral to clients or segregate it as required by CASS.

The protection of client money and custody assets has been an ongoing focus for the FCA and, in light of Covid-19 and the increased risk of firm failures or client defaults, this is a timely reminder to ensure that documentation and collateral processes are up to date and subject to regular review.

FCA Guidance Consultation on fair treatment of vulnerable customers

The FCA has published a guidance consultation (GC20/3) on fair treatment of vulnerable consumers. The guidance aims to provide a framework to enable all firms to accurately assess whether they are treating vulnerable consumers fairly, and to ensure consistency across the financial services sector. The FCA was focusing on fair treatment of vulnerable customers in advance of Covid-19 has increased the number of vulnerable customers and highlights the importance of fair treatment for vulnerable customers.

Alongside the draft guidance, the FCA has published research on the experiences of vulnerable consumers when dealing with financial services firms. The research highlights the following four key themes for firms:

• Recognising vulnerability and understanding customers’ needs;
• The value of sympathy;
• The importance of empowered and knowledgeable staff; and
• Meeting the communication needs of vulnerable consumers.

Changes to MiFID II to aid recovery

On 24 July 2020, the European Commission published its long-awaited legislative proposal for targeted amendments to Directive 2014/65/EU on markets in financial instruments (MiFID II) as regards information requirements, product governance and position limits to help the recovery from Covid-19 (MiFID “quick fix”). In parallel, the Commission launched a public consultation on amendments to Delegated Directive (EU) 2017/593 on the research regime to help the recovery from the COVID-19 pandemic.

Key elements of the MiFID “quick fix” proposal include:

• Amendments to information requirements: this package of proposals includes phase out of paper-based default methods of communication, amendments to cost and charges disclosures by introducing an exemption for eligible counterparties and for professional clients for other services than investment advice and portfolio management, alleviation of ex-post reporting requirements and cost benefit analysis requirements, suspension of best execution reports and exemption of corporate bonds with make-whole clauses from product governance requirements.

• Amendments to the position limits regime for commodity derivatives: the Commission noted that “in its current form, the position limit regime has negatively affected the liquidity in new commodity markets” and in order to help these markets develop, it proposes to significantly narrow down the application of the position limits regime by restricting it only to agricultural commodity derivatives or commodity derivatives designated as significant or critical. The European Securities and Markets Authority (ESMA) will be mandated to develop draft regulatory technical standards to define those agricultural derivatives subject to position limits and to define critical or significant derivatives subject to position limits. In addition, the Commission proposes to delete the notion of “same contract” for commodity derivatives and to replace it with cooperative approach between national competent authorities. Finally, noting that significant differences exist between trading venues in respect of position management controls, the Commission proposes to mandate ESMA to further clarify the content of position management controls taking into account the characteristics of the relevant trading venues.

• Introduction of a narrowly defined hedging exemption for financial entities: the Commission proposes to extend an exemption from the position limits regime to financial counterparties acting as the market facing entity of a commercial group for the positions held to reduce the risks of the commercial entities of the group and to financial and non-financial counterparties for positions resulting from transactions undertaken to fulfil mandatory liquidity provisions.

• Amendments to ancillary activity test: the Commission proposes to simplify the Article 2(1)(j) MiFID II test, by deleting all quantitative elements and reverting to a solely qualitative approach.

Research

The Commission seeks stakeholder views on targeted changes to Article 13 requirements on research. This includes creation of an optional exemption when research is exclusively on small and mid-cap issuers or on fixed income instruments. For such research, investment firms will be able not to apply the current Article 13 requirements to set up a research payment account or pay research on its own resources, or to issue separate invoices for research. Small and mid-cap issuers will be defined as issuers that did not exceed a market capitalisation of EUR 1 billion over a 12 months period. In addition, the Commission proposes an optional exemption, under certain conditions, from the current research unbundling requirement if execution services and the provision of research pertain to small and midcap issuers. The consultation is open until 4 September 2020.