The latest regulatory update – December 2021

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Regulatory Update December 2021

In this issue we cover:

  • Improving the Appointed Representatives regime
  • FCA sets out fees proposals for 2022/23 
  • A new Consumer Duty
  • FCA consults on amending FSCS
  • 10% depreciation notifications: further extension of temporary measures for firms
  • FCA sets out final messages on LIBOR
  • FCA publishes Primary Market Bulletin 37
  • FCA Decision notice: BlueCrest Capital Management (UK) LLP
  • FCA fined GIML £9.1m and Timothy Haywood £230,037 for failing to manage conflicts of interest
  • HSBC fined £63.9m for deficient transaction monitoring controls

Improving the Appointed Representatives regime

The FCA has opened a consultation (CP21/34) on improving the appointed representatives (AR) regime. It believes there is ‘significant evidence of harm’ arising from the current AR regime, highlighting that firms with ARs account for 50-400% more complaints and supervisory cases than those without.

The consultation proposes increasing the amount of information that principal firms provide about their ARs and clarifying their oversight responsibilities. The FCA is also seeking views on the practice of ‘regulatory hosting’, on overseas ARs or ARs which are larger than their principals, and on prudential standards for principal firms.

The consultation closes on 3 March 2022. It should be read by both principal firms and ARs themselves, so firms with ARs should ensure that this paper is circulated to them.

FCA sets out fees proposals for 2022/23 

The FCA has published its consultation paper (CP21/33) on proposals for changes to how it raises fees and levies for 2022/23. The FCA considers that the proposed fee increase (minimum fee, would increase from £1,151 to £2,200) will better reflect the costs associated with the authorisation and supervision of 51,000 firms throughout the UK.

One of the main proposals is a new model for calculating increased minimum fees for ‘A fee-block’ firms. The proposals would also see the integration of consumer credit firms into the minimum fees and prudential charges of A-block firms.

The deadline for responses is 31 January 2022. The FCA will consider all feedback received on the consultation and expects to implement changes in time for the 2022/23 fee cycle.

A new Consumer Duty

The FCA has issued the second consultation (CP21/36) on its proposed introduction of a new Consumer Duty. The most recent consultation takes on board feedback and engagement with industry and consumer groups following the FCA’s initial proposals published in May (CP21/13). It sets out more developed proposals for new rules to tackle the causes of harmful practices.

The new rules are intended to shift the mindset of firms and raise industry standards by putting the emphasis on firms to get products and services right in the first place.

The FCA has published draft guidance alongside the consultation to help firms prepare before the introduction of the new Duty. It has also confirmed that it will use assertive supervision and a new data-led approach to intervene quickly where firms’ practices do not deliver for customers.

The consultation is open until 15 February 2022 and the FCA expects to confirm any final rules by the end of July 2022.

FCA consults on amending FSCS

The Financial Services Compensation Scheme (FSCS) provides a guarantee to consumers that in the event of a firm failing, claims up to £85,000 will be paid. This is a cornerstone of the financial services market, providing stability and allowing customers to engage with the market with confidence.

While the importance of the scheme is not in question, the FCA believes that the funding arrangements could and should be reformed and is therefore undertaking a consultation.

Currently, the FSCS is funded through levies charged to financial services firms and this cost has grown significantly over the past decade. The FCA is of the opinion that this should reduce for two reasons – it is taking more proactive action to address the root causes for claims being made, and it is ensuring that firms have the financial resilience to meet their own redress obligations.

The FCA is interested in views from stakeholders on whether a change to the scope of FSCS protection – either to widen or reduce its scope – may be appropriate. Responses are requested by 4 March 2022.

10% depreciation notifications: further extension of temporary measures for firms

On 21 December 2021, the FCA issued a statement on 10% depreciation notifications. The statement refers to measures put in place since March 2020 to assist firms during market volatility linked to Covid-19 and the Brexit transitional period. The FCA confirms that it is extending the temporary measures for firms until 31 December 2022 whilst work on the requirement’s future, currently being carried out as part of HM Treasury’s Wholesale Markets Review, is concluded.

The FCA confirms that it will not be taking any action during this period for breach of COBS 16A.4.3 UK for services offered to retail investors provided that the firm has:

  • issued at least one notification in the current reporting period, indicating to retail clients that their portfolio or position has decreased in value by at least 10%;
  • informed these clients that they may not receive similar notifications should their portfolio or position values further decrease by 10% in the current reporting period; 
  • referred these clients to non-personalised communications (perhaps made available on public channels) that outline general updates on market conditions; and 
  • reminded clients how to check their portfolio value, and how to get in touch with the firm.

The FCA still expects firms to have due regard to the interests of their customers and treat them fairly (Principle 6), pay due regard to the information needs of their clients, and communicate information to them in a way which is clear, fair and not misleading (Principle 7). 

The FCA confirms that it will not take action for breach of COBS 16A.4.3 UK in respect of services provided to professional investors, provided that such firms have allowed professional clients to opt-in to receiving notification.

FCA sets out final messages on LIBOR

On 10 December 2021, the FCA issued their final LIBOR publications ahead of the end of 2021 deadline.

This included a speech delivered by Director of Markets and Wholesale Policy and Wholesale Supervision Edwin Schooling Latter on 8 December 2021 on the remaining actions firms are required to take before 1 January 2022 when 24 of the 35 LIBOR settings will no longer be available. The main points from the speech are:

  • Sterling, Swiss franc, Japanese yen and Euro LIBOR panels will terminate on 31 December 2021;
  • Sterling interest rate markets have transitioned to SONIA and the majority of sterling legacy LIBOR contracts will have moved away from LIBOR by or at the end of 2021;
  • In 2022, some firms will need to take further action to convert remaining legacy LIBOR contracts; and
  • The six sterling and yen LIBOR settings which will be based on risk-free rates (known as ‘synthetic LIBOR’) are temporary.

FCA publishes Primary Market Bulletin 37

On 9 December, the FCA published the latest edition of its Primary Market Bulletin. A key message is sponsors are required to take all reasonable steps to identify and manage conflicts of interest that could adversely affect their ability to perform their functions under LR 8.

The FCA observes the following as part of its review of sponsor requirements:

  • The majority of sponsors have not submitted a conflict guidance request since the introduction of TN 701.3;
  • There was an uptick in conflict queries during 2020 driven by Covid-19 related capital raising transactions; and
  • Over 75% of queries relate to potential conflicts involving the sponsor’s group acting as a lender to the issuer or other party connected with the transaction.

Primary Market Bulletin 37 also covers the implementation of the FCA’s postponed rules that require issuers to publish their annual financial reports in a structured format and touches on business continuity procedures for Primary Information Providers.

FCA Decision notice: BlueCrest Capital Management (UK) LLP

On 22 December 2021, the FCA published a Decision Notice to hedge fund management group BlueCrest Capital Management (UK) LLP setting out its decision to impose a penalty of £40,806,700 on BCMUK for breaching Principle 8 of the FCA’s Principles for Businesses and SYSC 10.1.7R and SYSC 10.1.8R.

FCA fined GIML £9.1m and Timothy Haywood £230,037 for failing to manage conflicts of interest

On 16 December 2021, the FCA issued warning notice statements to GAM International Management Limited (GIML) and Timothy Haywood in relation to conflicts of interests and failure to comply with gifts and entertainment policies:

  • GIML – breached principle 2 of the FCA’s Principles for Business for failing to ensure the effective operation of its conflicts of interest systems and controls, and principle 8 for failing to manage customer conflicts of interest fairly; and
  • Mr Haywood – breached Statement of Principle 7 for failing to take reasonable steps, as a person performing an accountable significant-influence function at GIML, to ensure the firm complied with the relevant regulatory rules requiring the fair management of conflicts of interest, and Statement of Principle 2 for failing to adhere to GIML’s Gifts and Entertainment Policy.

NatWest fined £265m for money laundering failings

On 13 December 2021, NatWest was fined £265mil at Southwark Crown Court for three convictions brought by the FCA under the Money Laundering Regulations 2007, following NatWest pleading guilty on 7 October 2021. This is the first time the FCA have brought criminal charges against an entity for money laundering failings.

The charges were concerned with the bank’s failure to monitor the accounts of Fowler Oldfield, a jewellery business based in Bradford between 8 November 2012 and 23 June 2016 resulting in over £360mil of laundered money passing through the bank.

HSBC fined £63.9m for deficient transaction monitoring controls

On 17 December 2021, the FCA published the decision notice it issued to HSBC Bank imposing a penalty of £63,946,800 for ‘serious weaknesses’ in its transaction monitoring systems from 31 March 2010 to 31 March 2018.

HSBC’s failings were of particular seriousness because:

  • they occurred over a prolonged period despite being identified in a number of internal and external reports;
  • HSBC were put on notice of potential weaknesses in their transaction monitoring controls in 2012 following separate action by the U.S. Department of Justice; and
  • the FCA issued continual guidance on the importance of maintaining appropriate financial crime controls both before and during the period in question.