Regulatory Updates October 2024

In this issue we cover:

CrowdStrike outage: Operational resilience failings

Non-financial Misconduct Not Going Unpunished

Crackdown On Illegal Finfluencers

Market Watch 80

Improved Value for Consumers in Cash Savings Rates

 

CrowdStrike outage: Operational resilience failings

The FCA is strongly encouraging firms to learn from past failings through increasing third-party-related operational incidents, such as the CrowdStrike outage in July 2024, which disrupted business services for many firms across the world. The incident highlighted firms’ dependency on third-party services and the need for operational resilience (PS21/3). The FCA have provided their feedback in response to the incident.

• Operational Resilience: Firms with strong operational resilience practices were able to quickly prioritise and restore key services, using tested, severe scenarios to guide their response. Effective communication strategies also helped manage customer and stakeholder expectations.
• Infrastructure Resilience: Identifying single points of failure and improving system diversity were noted as critical steps. Firms are encouraged to review change management and testing processes to mitigate risks from third-party updates.
• Third-Party Management: Firms that mapped third-party dependencies and maintained strong communication channels could better control impacts. Enhanced risk assessments and regular reviews of third-party performance are advised.
• Incident Response and Communication: Clear, pre-defined communication plans and established contracts outlining third-party responsibilities facilitated faster responses. Firms are urged to strengthen incident response through pre-approved templates and regular reviews of contact details and communication processes.

Firms should reassess testing scenarios, infrastructure resilience, third-party risk management and incident response plans to reduce future disruptions and enhance resilience. Yesterday the FCA along with the Bank of England and PRA published a joint Policy Statement (PS) 24/16 ‘Operational Resilience: Critical Third Parties to the UK Financial Sector’ containing the final rules, expectations and guidance on the oversight regime for critical third parties to the financial services sector (CTPs).

It is important to note, the new regime does not replace the responsibility authorised firms and financial market infrastructures have in continuing to meet operational resilience requirements. Firms continue to be accountable for managing the risks in their own outsourcing and third-party arrangements.

 

Non-financial Misconduct Not Going Unpunished

The FCA has recently published findings from its survey on non-financial misconduct, highlighting issues of bullying, harassment and discrimination that persist across some firms. This misconduct, according to the FCA, directly undermines firms’ culture and integrity, ultimately impacting how effectively firms serve their clients and uphold regulatory standards. Organisations are urged to view non-financial misconduct as a core regulatory concern, with the FCA emphasising that ethical workplace behaviour is central to financial firms’ overall performance and compliance.

• Cultural Challenges: Many firms reported cases of misconduct, suggesting that workplace culture improvements remain a priority. The FCA recommends firms build a positive culture by embedding respect and accountability into all levels of the organisation.
• Policies and Reporting Channels: Firms with clear policies on workplace behaviour and accessible, anonymous reporting channels have seen lower instances of misconduct. The FCA has highlighted these elements as critical to reducing misconduct and protecting employees. The FCA encourages leaders to strengthen governance frameworks, using resources like the FCA’s guidance on diversity, equity and inclusion as a basis for sustainable improvements in conduct.
• Leadership Responsibility: Firm leaders are expected to set high standards of behaviour and to address workplace issues proactively. Training and support programs are recommended to reinforce expectations of respectful behaviour, helping firms align with FCA expectations on ethical conduct.

 

Crackdown On Illegal Finfluencers

With financial influencers, or “finfluencers,” increasingly providing unregulated financial advice on social media, the FCA has intensified enforcement measures to protect consumers. The FCA warns that individuals promoting financial products without the proper authorisation risk misleading their audiences, often by making financial claims without clarity or compliance with FCA standards.

• Enhanced Regulatory Oversight: The FCA has issued warnings and taken enforcement actions against those promoting investments, trading platforms or other financial services without FCA authorisation, emphasising that only licensed advisors may provide financial advice.
• Collaborations with Social Media Platforms: To address these unauthorised promotions at scale, the FCA is working closely with social media companies to remove content that fails to meet FCA requirements. This partnership aims to reduce misleading financial promotions, helping consumers make better-informed decisions.
• Guidance for Authorised Firms: Firms engaging influencers are reminded to confirm that any individuals promoting financial products comply with FCA rules and guidance. The FCA’s financial promotions standards outline the requirements for firms and influencers, ensuring that financial advice on social media remains clear, fair and not misleading.

 

Market Watch 80

Market Watch 80 focuses on the challenges FCA authorised firms face when trading for overseas clients who use aggregated accounts that blur the identities of ultimate beneficial owners (UBOs). The points discussed in the newsletter highlighted:

• Regulatory Requirements: SYSC 6.1.1R mandates that firms must have robust policies and procedures to comply with their obligations under the regulatory system and to counter financial crimes. The Financial Crime Guide offers additional guidance on minimising these risks.
• Risks with Anonymised UBOs: Risks arise particularly with aggregated accounts managed by overseas firms, where the regulatory standards may not match those of the FCA, leading to increased market abuse risks. Firms often do not know the identities of UBOs, complicating compliance and oversight.
• Specific Challenges and Examples: The FCA highlights cases where UBOs, previously offboarded by UK firms due to suspicious activities, continue trading through these anonymous accounts, often managed by overseas brokers who anonymise their trades.
• Strategies for Compliance and Risk Management:
  • Firms are advised to adopt stringent measures for onboarding and trading with these disguised overseas aggregated accounts (OOAAs), including adjusting risk frameworks and thresholds for offboarding.
  • Firms should inform OOAAs of their zero-tolerance policy towards market abuse and ensure that their relationships with regulators and law enforcement are transparent and proactive.
  • Consider requiring OOAAs to disclose their systems and controls designed to prevent market abuse and insist on receiving UBO identities when necessary.
  • Assigning unique identifiers to trades from suspicious UBOs to help differentiate and potentially terminate those accounts if they fall outside of the firm’s risk tolerance.
• Enforcement and Compliance: The FCA emphasises the importance of submitting Suspicious Transaction and Order Reports (STORs) and maintaining high compliance standards to preserve market integrity. Firms that fail to meet these standards may face regulatory intervention.

 

Improved Value for Consumers in Cash Savings Rates

In its recent multi-firm review on cash savings, the FCA reported an increase in easy-access savings rates, with the average rate rising to 2.11% in June 2024 from 1.66% in July 2023. This positive shift reflects the FCA’s commitment to ensuring that savings products deliver fair value for consumers, in line with evolving market conditions.

• Alignment with Fair Value Standards: The FCA’s guidance on fair value encourages firms to ensure that savings rates remain competitive and transparent. Firms have adjusted rates to better reflect economic conditions, enhancing product value and accessibility.
• Transparency and Responsiveness: The FCA urges firms to clearly communicate rate adjustments to consumers. By enhancing transparency around how rates align with market dynamics, firms can support consumers in making well-informed financial choices that meet their needs.

These updates demonstrate the FCA’s commitment to consumer protection, ethical workplace standards and transparency across the financial services sector, urging firms to continually refine practices to align with evolving regulatory expectations.