Regulatory Update March 2024

In this issue we cover:

• Supervisory strategy update for Asset Management & Alternatives
• Addressing AML failings
• Debt collection processes
• Market Abuse regime for cryptocurrencies
• Continued good practice under Consumer Duty

Supervisory strategy update for Asset Management & Alternatives

The Financial Conduct Authority’s (FCA) interim update letter to CEOs in the Asset Management and Alternatives sector highlights key action points for regulatory compliance and strategic planning:

• Importance of Governance: Enhanced governance is critical, particularly in managing risks during uncertain times. Firms must ensure senior accountability and effective oversight.
• Consumer Duty and Value Assessments: The Consumer Duty is in effect, necessitating thorough value assessments and alignment with FCA expectations to ensure fair customer outcomes.
• Operational Resilience: Firms must demonstrate their ability to stay within impact tolerances for important business services by March 2025, this will include mapping and testing to demonstrate impact tolerances for business services, highlighting the need for robust change management practices.
• ESG and SDR Compliance: Accurate disclosure and avoidance of misleading claims about sustainability are essential as the FCA focuses on Environmental, Social and Governance credentials and the implementation of Sustainability Disclosure Requirements.
• Private Asset Valuations: The FCA will review valuation practices for private assets, stressing the importance of transparency and reliability in valuations.
• Preventing Financial Crime: Firms need to have effective controls against financial crime and comply with the UK sanctions regime to mitigate risks.
• Embracing Innovation: Firms are encouraged to safely implement technological innovations to improve business models and outcomes.
• Global Engagement and Standards: Active involvement in the development of international standards is expected, reflecting the global role of the UK’s financial services sector.

Addressing AML failings

The FCA’s letter to CEOs of Annex 1 firms underscores the importance of robust anti-money laundering (AML) frameworks and outlines common control failings identified in recent assessments.

The FCA has observed common weaknesses across reviewed firms:

• Business Model: Discrepancies between registered and actual activities, and failure of financial crime controls to keep pace with business growth.
• Risk Assessment: Weaknesses in both Business Wide and Customer Risk Assessments.
• Due Diligence and Monitoring: Lack of detailed policies leading to ambiguity in compliance obligations under the MLRs.
• Governance and Training: Insufficient resources allocated to financial crime, inadequate training, and lack of a clear audit trail for financial crime-related decisions.

The shortcomings bring expected actions for Annex 1 firms to take including, conducting a gap analysis against these common weaknesses within six months and take prompt actions to address identified gaps.

The FCA warns of regulatory intervention for firms whose actions in response to these identified issues are deemed inadequate, with potential outcomes ranging from requiring third-party reviews to enforcement actions, including fines and removal of registration.

Debt collection processes

The UK Regulators’ Network (UKRN) joint statement from March 2024, involving the FCA, The Office of Gas and Electricity Markets (Ofgem), The Water Services Regulation Authority (Ofwat), and Office of Communications (Ofcom), addresses the support expected for customers in financial difficulty, particularly concerning debt collection practices.

The letter identifies poor practices which increase consumer harm:

• Inundating Communications: Customers feeling overwhelmed by frequent collections communications, negatively impacting their mental and/or physical health.
• Intimidating Communications: The use of an intimidating or threatening tone causing customers to disengage.
• Barriers for Debt Advisers: Debt advisers face obstacles in engaging with creditors on behalf of their clients, affecting the efficacy of debt advice and support services.

Regulated Firms are expected to take actions which promote a more considerate approach and include actions such as:

• Communication Frequency: Firms should ensure an appropriate frequency of collections communications, reducing it where it causes harm or fails to engage customers positively.
• Use of a Supportive Tone: Communications should be supportive, facilitating positive engagement without intimidation or threats.
• Debt Advice Information: Collections communications should clearly and prominently include information about free debt advice, utilising ‘warm’ referrals to aid customers in accessing advice and support easily.
• Ease of Contact for Advisers: Firms must simplify the process for debt advisers to contact creditors and ensure customer service agents are empowered to resolve issues.

Market Abuse Regime for Cryptocurrencies

The FCA announced plans to introduce a market abuse regime for cryptocurrencies within the year under their business plan 2024/2025, aiming to enhance consumer protection, market integrity, and international competitiveness. This initiative follows a government consultation from last year that proposed the inclusion of crypto assets in market abuse regulations.

The regime would hold all individuals accountable for market abuse involving crypto assets traded on UK venues, irrespective of their location or the location of the trade. The FCA, which oversees crypto regulations in the UK, has already implemented a promotions regime for cryptocurrencies, mandating risk warnings and a cooling-off period for new buyers, and is exploring regulations for stablecoins. The FCA’s 2024 to 2025 strategy includes plans to recuperate £6.2 million for new stablecoin regulations and an additional £200,000 for expanding the financial promotions framework, though details on the recovery process were not specified.

Continued good practice under Consumer Duty

By this stage firms should well and truly understand their Consumer Duty obligations and how to improve their current practices. If your firm is not at this stage, please reach out as Objectivus will be able to advise on how to take action to ensure that your firm’s current practices are sufficient.

The FCA has prepared a ‘good practices and areas of improvement’ release to prompt firms to take action and ensure they are continuously engaged with their Consumer Duty obligations. These include focusing on:

1. Culture, Governance, and Monitoring:
   • Need for broader engagement at all levels, especially at the Board level.
   • Proactive identification and addressing of issues before regulatory intervention.
   • Improvement in data and monitoring strategies.
2. Consumers in Vulnerable Circumstances:
   • Addressing weaknesses in tracking vulnerable customers.
   • Prioritising identification and support for vulnerable customers in the investment market.
   • Avoiding unnecessary evidence requests from consumers identifying as vulnerable.
3. Products and Services:
   • Improving information sharing across supply chains.
   • Ensuring distribution strategies drive good customer outcomes.
   • Understanding roles within distribution chains and responsibilities.
4. Price and Value:
   • Demonstrating that products offer fair value to customers.
   • Justifying benefits provided for the remuneration received.
   • Avoiding adding fees that diminish value to the end consumer.
5. Consumer Understanding:
   • Avoiding pushing too high-risk or complex products.
   • Being clear about charges and providing worked examples of costs.
6. Consumer Support:
   • Improving staff training for complex customer conversations.
   • Avoiding gamification practices that encourage risky trading.
   • Understanding customer circumstances in financial difficulty.
   • Enhancing systems to protect against fraud and cyber attacks.

 

Stay ahead in the dynamic financial services landscape by actively engaging with the latest regulatory updates and best practices outlined in this issue. Review your firm’s current strategies in light of the information on Asset Management & Alternatives, AML frameworks, Debt Collection Processes, Cryptocurrency Market Abuse Regime, and Consumer Duty compliance. Identify areas for improvement, embrace innovation, and ensure your practices align with our recommendations for governance, consumer support, and fair value. For tailored advice and support to navigate these changes, reach out to us at info@objectivus.com.