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Regulatory Update Aug 2022

In this issue we cover:

Authorisations and variations of permissions

Information on cost of living for authorised firms

Landing slots for TPR firms

FCA alternatives supervision strategy

Regulatory Sandbox

Improvements to the Appointed Representatives regime

Strengthening financial promotion rules for high risk investments

Final Notice: Citigroup Global Markets Limited

A New Consumer Duty (Final Rules)

IFPR and eligibility for enhanced SMCR status as a Significant SYSC firm

 

You can find these articles and a searchable archive of all our previous articles at https://objectivus.com

 

Authorisations and variations of permissions – Consumer Duty implications

The FCA has updated its authorisations webpage setting out authorisation expectations relating to the new Consumer Duty.

While the FCA has communicated a phased implementation period of the end of July 2023 for new and existing products and services (and the end of July 2024 for all closed products and services), the FCA has reminded firms that its authorisations assessment is forward-looking. This means from now on, any firm or individual applying for authorisation or applying to vary their permissions, will have to demonstrate they can meet the Consumer Duty requirements, how those requirements relate to them.

 

Information on cost of living for authorised firms

The FCA has updated its website to create a new dedicated page for the ‘cost of living’ and to sign-post information for firms. This new webpage contains relevant publications, letters, updates, news and speeches on the current cost-of-living crisis in the UK.

The FCA acknowledges how firms have an important role in supporting consumers facing rising living costs and wants to ensure that its expectations of firms are clear and urges them to support customers. Many consumers will feel the impact of the crisis in their personal finances and the FCA is working to ensure lenders meet the standards expected to support their borrowers, including those in financial difficulty.

This new landing page on the FCA website will act as a useful reference point for firms and consumers to keep updated with the cost-of-living crisis.

 

Landing slots for temporary permissions regime firms

The FCA has recently updated its webpage on considerations for firms seeking authorisation in the UK and thereby leaving the temporary permissions regime (TPR).

It confirms that all firms in the TPR expecting to apply for full authorisation in the UK should have received a formal direction confirming their ‘landing slot’. Meanwhile, other firms that haven’t received a landing slot direction can still apply, but applications must be received by 31 December 2022. The FCA warns that applications that are submitted after this date will be treated as invalid.

For payments and e-money firms, the process of leaving the TPR is different, and they’ll need to consider whether an authorisation or registration model best suits their business. MiFID investment firms in the TPR are advised to consider how they’ll meet their ongoing requirements under the new Investment Firms Prudential Regime (IFPR) before submitting an application.

 

FCA alternatives supervision strategy

The FCA has published a portfolio letter on its alternative supervision strategy. The FCA acknowledges that several significant events such as COVID-19, Brexit, and the cessation of LIBOR have impacted the priorities for this sector.

The letter outlines the FCA’s updated supervisory strategy and priorities for alternative portfolio firms, pointing out areas where it considers improvement can be made. Supervisory priorities include:

  • putting consumers’ needs first – commenting on investment strategies that carry inappropriate levels of risk for target clients and conflicts of interest;
  • strengthening the UK’s position in global wholesale markets – discussing market integrity and disruption, market abuse and culture; and
  • ESG and the strategy for positive change.

The FCA recommends that Boards and/or Executive Committees consider which areas the firm should focus on and whether it has appropriate strategies in place.

 

Regulatory Sandbox

The FCA has recently updated its Regulatory Sandbox webpage to show which firms have been accepted since August 2021.

The FCA received 48 applications since August 2021 and accepted 13 firms. The firms and propositions accepted operate in the retail lending, retail investments, and retail banking and payments sector.

The main type of innovation continues to be dominated by data and technology infrastructure, with firms using AI/machine learning, DLT/blockchain technology, open banking, API, digital ID as well as predictive analytics.

 

Improvements to the Appointed Representatives regime

On 3 August 2022, the FCA published a Policy Statement on the regulatory regime concerning Appointed Representatives (ARs), following its Consultation Paper (CP 21/34). The Appointed Representatives regime (the Regime) is set out in primary legislation and allows ARs to offer certain financial services or products under the responsibility of and within the scope of permission of authorised firms (the Principals). The new rules within amended Regime is in response to concerns that many Principals are not providing adequate oversight of their AR’s  activities.

Under the new rules, Principals will need to:

  • apply enhanced oversight of their ARs, including ensuring they have adequate systems, controls and resources;
  • assess and monitor the risks their ARs pose to consumers and markets, providing similar oversight as they would to their own business;
  • review information on their ARs’ activities, business and senior management annually, and be clear on the circumstances when they should terminate an AR relationship;
  • notify the FCA of the future appointment of an AR 30 calendar days before this takes effect; and
  • provide complaints and revenue information for each AR to the FCA on an annual basis.

The FCA is working with HM Treasury to consider whether any legislative changes are needed to the Regime.

 

Strengthening financial promotion rules for high risk investments

On 1 August 2022, the FCA published a policy statement on financial promotion rules for high risk investments and introducing rules to strengthen the role of the authorised person who approves financial promotions for unauthorised persons.

The FCA intends to rationalise the current classifications of high risk investments under two categories of ‘Restricted Mass Market Investments’ and ‘Non‑Mass Market Investments’. The FCA believes too many consumers are accessing unsuitable high risk investments and intends to introduce new measures to strengthen risk warnings, inducements and stronger categorisation and appropriateness tests.

Additionally, the FCA will strengthen the Section 21 FSMA approval regime, as authorised firms which approve unauthorised firms’ financial promotions act as an important gateway. The FCA intends to introduce measures to ensure that approving firms have the relevant expertise in the promotions they approve and the quality of financial promotions in the market is high.

 

Final Notice: Citigroup Global Markets Limited

On 19 August 2022, the FCA issued a Final Notice and accompanying press release to Citigroup Global Markets Limited (Citigroup) for failing to properly implement the Market Abuse Regulation (MAR) trade surveillance requirements for the detection of market abuse.

Citigroup were found to have improperly implemented the requirements introduced in 2016 to monitor orders and trades to detect potential and attempted market abuse, taking 18 months to identify and assess the market abuse risks its business may have been exposed to, resulting in gaps in its procedures.

Citigroup were subject to a fine of £17,934,030 for this failure, but qualified for a 30% discount, meaning the final fine was £12,553,800.

 

A New Consumer Duty (Final Rules)

On 27 July 2022, the FCA published its final guidance on Consumer Duty. It applies to firms engaging in regulated activities in the UK across the retail distribution chain and to UK distributors of non-UK products/services to UK retail clients.

One of the key developments is the introduction of a new overarching Principle 12 to the FCA Principles for Business, under which “firms must act to deliver good outcomes for retail consumers”.

Further, the policy statement implements various ‘outcomes’ that firms should seek to achieve, including:

  • the products and services outcome;
  • the price and value outcome;
  • consumer understanding; and
  • consumer support.

A proposed new rule in COCON will be implemented as part of the Consumer Duty, requiring all conduct rule staff to “act to deliver good outcomes for retail consumers”.
Firms should be aware of the phased implementation, with the rules coming into force at various dates depending on the services being provided, and the expectations placed on firms.

 

IFPR and eligibility for enhanced SMCR status as a Significant SYSC firm

As a result of implementing the Investment Firm Prudential Regime and associated amendments to the definition of ‘Significant SYSC firms’, some firms have inadvertently been brought into enhanced scope under the Senior Managers and Certification Regime (SMCR). The FCA will consult to rectify this shortly. In the meantime, firms that have unintentionally come under enhanced scope, need not take any action.