Regulatory Update October 2023

In this issue we cover:

  • FCA Handbook Changes
  • Boost to Diversity and Inclusion (D&I)
  • Promoting investment in the city
  • Cryptoassets feedback on applications
  • UK Investment Management Regulation Overview
  • Tackling Money Mule Activities


FCA Handbook Changes

On 29th September 2023, the FCA released Handbook Notice 112 highlighting updates to the FCA Handbook Included are alterations in how firms determine the own funds and liquid asset threshold requirements, introduced by the 2023 Investment Firms Prudential Regime (Amendment) Instrument.

These modifications aim to bolster the resilience and resources of firms, safeguarding the UK’s financial system. The Notice also mentions a delay in the reporting of transactions for exchange-traded funds priced at net asset value, introduced by the Technical Standards (Markets in Financial Instruments Transparency) (No 2) Instrument 2023, to enhance post-trade transparency and lessen operational strain.

Boost to Diversity and Inclusion (D&I)

In order to promote Diversity and Inclusion in Financial Services in a follow-up to their joint discussion in July 2021, the FCA and PRA have released a consultation paper on a proposed regulatory framework to enhance D&I. Both regulatory bodies emphasise the importance of D&I, noting its positive impact on governance, decision-making, and risk management. It also fosters a positive work environment and boosts the UK financial sector’s competitiveness by drawing and nurturing talent. The outlined proposals emphasise flexible standards, with more stringent requirements for larger firms. These standards include creating a D&I strategy, data collection and reporting on specific characteristics, and setting targets to counteract under-representation. Feedback is welcomed until 18 December 2023.

Promoting Investment in the City

The FCA’s Executive Director for Markets and International recently discussed the regulatory role in bolstering investments in the City. This comes at a crucial juncture as UK’s financial regulations undergo transformations. Key takeaways include:

  • The FCA aims to modify the UK’s listed market regulations to attract diverse companies, foster competition, and expand options for investors. These finalised plans will be disclosed by year’s end.
  • Following the new Financial Services and Markets Act, the FCA and the Bank of England will soon oversee third-party services crucial to financial sectors. This framework will also be unveiled by year-end.
  • Efforts by the FCA to streamline its authorisation procedures are evident, with reduced delays and quarterly performance metrics for better transparency.

Cryptoassets feedback on applications

The FCA updated its webpage on anti-money laundering (AML) and counter terrorist financing (CTF) for cryptoasset business applications. Only 6% of applications were approved in the past year.

Common issues included inadequate risk assessments and unclear business plans regarding crypto activities. The FCA advises applicants to provide complete outsourcing details, clear product descriptions, a comprehensive risk-scoring system for customers, and effective transaction monitoring. Additionally, businesses should have skilled staff for blockchain investigations and a clear suspicious activity reporting policy with escalation procedures.

UK Investment Management Regulation Overview

In a speech delivered by Ashley Alder at the Investment Association’s Annual Dinner, the FCA spoke about:

  • Proportional Regulation: Focus on tailored rules for varied firm sizes.
  • Priorities: Reform alternative fund managers’ regime, update retail fund rules, and promote tech innovations.
  • Alternative Fund Managers: Aim for consistent rules and simpler compliance.
  • Retail Funds: Consider clearer fund type distinctions and possible rebranding.
  • Tech Innovation: Explore potential of fund tokenisation.
  • UK Investment: Initiatives to direct savings into UK investments and aid consumer decisions.
  • Consumer Info: Move towards flexible, consumer-friendly journeys instead of rigid regimes.

The UK aims for a balanced regulatory reform in investment management, emphasising innovation, competitiveness, and consumer benefits.

Tackling Money Mule Activities

The FCA has emphasised the need for payment providers to improve their systems against money mule activities, where individuals move illicit funds on behalf of criminals.

Advanced technologies, such as facial recognition, geolocation, and device profiling, have proven effective. However, consistent application across all firms is essential.

The FCA warns of strict regulatory action against non-compliance, underscoring the importance of proactive strategies to safeguard regulatory standing and customer trust.

To combat money mules, firms should:

  • Intensify onboarding checks to spot potential mules.
  • Upgrade transaction monitoring for both incoming and outgoing funds.
  • Collaborate with industry peers and law enforcement on emerging threats and data sharing.
  • The Payments Association advocates the use of AI and cutting-edge tech for more efficient fraud detection.

The FCA’s focus aligns with an upcoming money mules action plan by the Home Office, further highlighting the issue’s significance.