Regulatory Update August 2021
In this issue we cover:
- FCA RDC reforms
- FCA proposals for new listing guidance for cannabis-related businesses
- FCA proposals for listed companies to disclose gender and ethnic diversity related targets
- FCA assessments of retail banks’ financial crime systems and controls
- Companies to pay back £2.5m over bribery offences
- FCA imposes £1.2m financial penalty on director
You can find these articles and a searchable archive of all our previous articles at https://objectivus.com
FCA RDC reforms
The FCA CP 21/25 concerns reforms to the role of the Regulatory Decisions Committee (RDC) and contains some controversial changes which could have a significant effect on firms and individuals operating in financial services in the UK.
The RDC is a committee of the FCA’s board which is structurally separate from the rest of the FCA. It currently has 17 members, drawn from a variety of professional backgrounds including the financial services that the FCA regulates and other relevant disciplines. Other than the Chair, RDC members are not FCA employees.
When taking decisions, the RDC usually follows a procedure in which the FCA’s staff first gather relevant evidence and make a recommendation to the panel. The FCA’s staff, and the firm or individual affected by the decision, are then able to make representations, both in writing and orally at a hearing. The RDC considers these and arrives at a decision, which is usually set out in a statutory notice issued to the relevant firm or individual affected by it.
The effect of the proposed reforms would be to change the balance of FCA decision-making as the role of the RDC would be reduced, and the role of FCA executives would be increased.
In summary, on the FCA’s proposals:
- the RDC would be removed as decision maker for authorisations, variations or requirements, and other cancellations of permissions, being replaced by FCA executives;
- the RDC would also be removed as decision maker from decisions to commence civil or criminal proceedings, being replaced by FCA executives;
- for some types of decision-making, oral representations would be removed, except in ‘exceptional circumstances’ or where this would ‘impact the fairness of the decision’; and
- where the RDC has been removed from decision-making, those affected by the FCA’s decision would not be able to obtain disclosure of communications passing between the relevant FCA staff and the FCA executives making the decision instead.
FCA proposals for new listing guidance for cannabis-related businesses
In September 2020 the FCA published a statement regarding the listing of cannabis-related businesses (CRBs) in the UK. Since then, several CRBs have been admitted to the London Stock Exchange (LSE). The FCA has now published the proposed technical note it had promised to offer more detailed guidance to CRBs considering an application for admission of their securities to the Official List.
Whilst the technical note is subject to a formal consultation it does provide detail of the evidence would-be applicants will need to provide to pass the FCA’s eligibility review which is substantial. There are several requirements highlighted:
- The FCA will not admit the securities of a company with any recreational cannabis business, directly or indirectly, to the Official List.
- UK-based companies producing and supplying cannabis-based medicinal products, licensed cannabis-based medicines and/or pure consumer products containing cannabidiol may have their securities admitted to the Official List if they have the appropriate Home Office licences and otherwise satisfy the criteria for listing. They will however also have to satisfy the FCA that the entirety of their operations, including their supply chain, are UK-based.
- Not all licences are equal and companies with cannabis-related activities lawfully operated overseas may have their securities admitted to the Official List only if the FCA is satisfied the activities are also lawful in the UK and that the business does not give rise to any money laundering offence under the Proceeds of Crime Act 2002 (POCA) (and they otherwise satisfy the criteria for listing).
FCA proposals for listed companies to disclose gender and ethnic diversity related targets
The FCA recently published a consultation paper (CP21/24: Diversity and inclusion on company boards) setting out a number of proposals to enhance diversity-related reporting by certain listed companies. Proposals include creating new requirements in the Listing Rules for certain premium and standard listed companies to publish (in their annual report and accounts) a “comply or explain” statement on whether they have achieved proposed targets for gender and ethnic minority representation on their board, as well as preparing further numerical data on the gender and ethnic diversity composition of the company’s board, key board positions, and executive management team. The consultation will close on 20 October 2021, with the proposed rule changes expected to come into force for financial years starting on or after 1 January 2022.
The FCA has stated that, subject to consultation feedback and FCA Board approval, it will seek to make relevant rules by late 2021, and that those rules will apply to financial years starting on or after 1 January 2022, so that reporting will start to be seen in annual financial reports published for that year in spring 2023. However, the FCA encourages companies to consider making disclosures on a voluntary basis in annual financial reports published before then.
FCA assessments of retail banks’ financial crime systems and controls
The FCA published a Dear CEO letter to retail banks on common control failings in AML frameworks. The letter was sent on 22 May 2021 and published recently in anticipation of the FCA’s 2021 Annual Business Plan. The FCA have confirmed that its Fraud Strategy is a priority area across all markets and indicated that they aim to drive down fraud by carrying out proactive surveillance and monitoring and working closely with other anti-fraud partners to maximise its collective fight against fraud. Consumer protection and preventing online harm features as particular areas of focus.
The issues summarised in the letter reflect the main areas where, in the FCA’s view, some firms have fallen short of the requirements set out in SYSC 6.3, Money Laundering Regulations (MLRs), and the provisions of the Joint guidance on money laundering and terrorist financing.
The areas in which the FCA considered that weaknesses existed included governance and oversight, risk assessments, due diligence, transaction monitoring and suspicious activity reporting (SARs). For all of these areas, the FCA felt that failure to document processes and decisions was a consistent problem. Further observations the FCA made included:
- Governance: the FCA endorsed the three lines of defence strategy and warned against blurring the lines of business roles and second line compliance roles.
- Risk assessment: the letter observed the quality of business risk assessment was inadequate. Customer risk assessments were typically too generic without differentiating between particular risks and adjusting accordingly. Firms tended to focus on the AML and sanctions risks posed by their customers, without adequate assessment of other risks, for example tax evasion or bribery and corruption. Similarly, customer due diligence, and enhanced due diligence where necessary, was inadequately performed and recorded.
- Transaction monitoring: the FCA considered that in some firms monitoring was not calibrated appropriately for the business activities and underlying customer base.
- SARs failings: the FCA was concerned by instances where the procedures for employees to raise internal SARs to the nominated officer were unclear, not well documented or not fully understood by staff. An additional FCA concern was that some firms were unable to demonstrate their investigation, decision-making processes and rationale for reporting or not reporting SARs to the National Crime Agency. SARs are in the spotlight following the FINCEN leak, which has triggered the UK Treasury Select Committee Economic Crime Inquiry into money laundering and consumer protection from economic crime following the pandemic.
The letter illustrates several consistent wider regulatory themes. These themes include:
- Focus on operational resilience to ensure adequate systems and controls.
- Senior management accountability.
- Increasing regulatory scrutiny and enforcement tools.
AML will be a focus area for the financial services sector as regulators continue the trend of exercising additional oversight and scrutiny of financial crime controls. The FCA Business Plan confirms preventing fraud by monitoring and surveillance remains of significant importance to the regulator.
Companies to pay back £2.5m over bribery offences
The Serious Fraud Office (SFO) has issued a £2.5m penalty and a two-year Deferred Prosecution Agreement (DPA) to two companies over bribery cases involving multi-million UK contracts. The Director of the SFO noted that the companies in question used rolling bribes to win contracts in an unfair way and that their actions “undermined the fundamental principles of fairness and the rule of law.”
An NDA is in place, meaning that the companies in question were not named.
The DPAs require the firms’ parent companies to establish a comprehensive compliance programme and healthy conduct culture at the workplace. They are also obliged to report to the SFO on compliance matters at frequent intervals throughout the DPA term. If the companies do not follow through on these requirements, the SFO will prosecute.
- Never give or accept cash or in-kind gifts above the allowed thresholds from business partners.
- Look out for any red flags that might indicate bribery or improper behaviour in your company.
- Report any knowledge or suspicion of active bribery via your company’s whistleblowing channels.
FCA imposes £1.2m financial penalty on director
The Financial Conduct Authority (FCA) has fined the Director of Retirement and Pension Planning Services Limited, currently in liquidation, over £1.2m for incompetence and breaching the SMCR rules.
Geoffrey Edward Armin advised over 400 customers concerning the transfer of their defined-benefit pensions into alternative pensions arrangements. He carried out the transfers without due consideration of his clients’ financial situations, their expected income requirements throughout their retirement or whether the plan was best suited to their needs. This means that he failed to divulge crucial information to the clients’ detriment throughout the advice process.
The Director also received significant remuneration for each transfer, suggesting that it was in his best interests to proceed with the recommendation and transactions, even if it did not benefit his clients. In addition to the fine, the FCA has barred him from taking up any senior management or advisory function in relation to all regulated activities in the financial industry.