Regulatory Update July 2021
In this issue we cover:
- Diversity of listed company boards and their executive management teams
- Ian Hudson sentencing
- Crypto issues
- HM Treasury Wholesale Markets Review
- FCA Business Plan 2021/2022
- FCA Vulnerable Customers Guidance
You can find these articles and a searchable archive of all our previous articles at https://objectivus.com
Diversity of listed company boards and their executive management teams
The FCA launched a consultation on proposals to improve transparency on the diversity of listed company boards and their executive management teams.
The FCA is consulting on changes to its Listing Rules to require listed companies to publish an annual ‘comply or explain statement’ on whether they have achieved certain proposed targets for gender and ethnic minority representation on their boards.
The ‘comply or explain’ statement targets are:
– At least 40% of the board should be women (including those self-identifying as women),
– At least one of the senior board positions should be a woman,
– At least one member of the board should be from a non-white ethnic minority background.
As part of the same annual disclosure obligation, firms must also annually report data on the make-up of their board and most senior level of executive management in terms of gender and ethnicity.
The Listing Rule diversity targets are not mandatory for companies to meet, so the FCA is not setting ‘quotas’, but providing a positive benchmark for issuers to report against. The proposals would apply to UK and overseas companies with equity shares in either the premium or standard listing segments of the FCA’s Official List, while the disclosure and transparency changes apply to companies with securities traded on UK regulated markets, such as the Main Market of the London Stock Exchange.
Ian Hudson sentencing
Ian Hudson has been sentenced to four years imprisonment for fraudulent trading and carrying on regulated activities without authorisation.
An investigation found that between 1st January 2008 and 31st July 2019, Hudson advised on regulated mortgages, pensions and other investments and purported to invest significant deposits received by him from clients on their behalf. During this time was he was not authorised by the FCA to undertake these financial services, as required by law.
In addition, while he told clients that the money they deposited with his business, Richmond Associates, would be invested in various financial vehicles or otherwise put to specific uses, this was not always the case. Instead, he used those deposits to re-pay existing clients, to make payments to other individuals, or to fund his own lifestyle. In total, approximately £2m was deposited by Mr Hudson’s clients.
At Southwark Crown Court, Hudson was convicted of one count of fraudulent trading, with two additional terms of 14 months, each reflecting a breach of s19 FMSA, to run concurrently following his earlier guilty plea.
On 30 April 2021, the FCA consulted on proposals to remove the presumption of suspension for SPACs that meet certain criteria which are intended to strengthen the protections for investors, while maintaining the smooth operation of the market. The proposed changes were designed to provide an alternative approach for SPACs that must otherwise provide detailed information about a proposed target to the market to avoid being suspended.
The additional investor safeguards that the FCA will require SPACs to provide in order to benefit from the alternative approach include:
- A ‘redemption’ option allowing investors to exit a SPAC prior to any acquisition being completed;;
- Ensuring money raised from public shareholders is ring-fenced;
- Requiring shareholder approval for any proposed acquisition; and
- A time limit on a SPAC’s operating period if no acquisition is completed.
In response to the feedback, the main changes to the original proposals are to:
- Lower the minimum amount a SPAC would need to raise at initial listing from £200 million to £100 million;
- Introduce an option to extend the proposed 2-year time-limited operating period (or 3-year period if shareholders have approved a 12-month extension) by 6 months, without the need to get shareholder approval; and
- Modify its supervisory approach to provide more comfort prior to admission to listing that an issuer is within the guidance which disapplies the presumption of suspension.
The final rules aim to provide more flexibility to larger SPACs, provided they embed certain features that promote investor protection. Private companies listing in the UK via a SPAC will still be subject to the FCA’s listing rules and transparency and disclosure obligations.
The new rules and guidance come into force on 10 August 2021.
The FCA banned Binance Markets Limited which is part of one of the world’s biggest cryptocurrency exchanges, from carrying out any regulated activity in the UK. This not only demonstrates the FCA’s interventionist approach to the cryptocurrency markets, but is indicative of the stricter approach that regulators are adopting towards cryptocurrency markets globally.
The FCA issued a notice on 26 June 2021 that Binance was not permitted to undertake any regulated activity in the UK. The FCA ordered Binance to display a notice on its website to this effect and ordered the company to take down any advertising and financial promotions. The FCA also required Binance to show that it has stored records of all of its UK customers, ready to be handed over to the FCA if necessary. The notice was coupled with a warning to consumers on investing in cryptoassets generally, reminding them to be wary of advertisements promising high returns on investments in cryptoassets or cryptoasset-related products.
The reasons for the FCA’s decision to ban Binance have not been publicised, however, it is widely assumed that concerns over potential money laundering and a lack of consumer protection lie at the heart of it. Alternatively, it could be that the FCA is seeking to warn consumers, who may not fully appreciate the risks posed by cryptocurrencies.
The effect of the FCA’s intervention should not be underestimated, with other regulators across the globe looking carefully at the crypto markets there is obvious concern about money laundering issues and associated wrongdoing arising in decentralised markets. Registration at least allows the regulators to exert a degree of control over compliance. Only six crypto firms have, to date, had their registration approved by the FCA, with many more having withdrawn their applications. Given the slow progress the FCA has made approving registrations we expect further interventions from the FCA. It is clear cryptoasset companies will need rigorous controls and expert guidance if they wish to operate in the UK.
HM Treasury Wholesale Markets Review
On 1 July 2021, HM Treasury published a consultation paper launching its Wholesale Markets Review, which is pitched as an opportunity to make the UK’s financial services rulebook “nimble and fit for purpose” following the UK’s departure from the EU. The consultation paper addresses several areas under the inherited MiFID II framework which market participants and the Government have identified as not achieving outcomes that are desirable for the UK market.
Here are some of the points that are likely to be of interest:
- Trading venues perimeter.The Government is seeking views as to how to better clarify the regulatory perimeter for trading venues, given the breadth of the current definition which brings any “multilateral system” where trading interests can interact within scope;
- Potential removal of some restrictions on MTF and OTF operators;
- Adjustments to the systematic internaliser (SI) regime;
- Removal of the Double Volume Cap (DVC).The FCA would have the power to limit dark trading where there is evidence that it is undermining the efficiency of the price formation process.
- Potential removal of the Share Trading Obligation (STO);
- Market makers and algorithmic trading.The Government is proposing to remove the requirement for algorithmic trading liquidity firms that pursue a market making strategy to enter a binding market making agreement with their trading venues, which will reduce the compliance burden for such firms;
- Amendments to the Derivatives Trading Obligation (DTO).The Government is proposing to realign the scope of the DTO with the Clearing Obligation (CO) so that counterparties that are in scope of the CO will also be in scope of the DTO, as well as extending the exemption from the DTO to all post-trade risk reduction services, provided certain conditions are met. The FCA may also be given a permanent power to modify or suspend the DTO, beyond the initial post-Brexit period;
- Clarifying the scope of transparency requirements for non-equity instruments;
- Changes affecting commodity markets.The Government is considering narrowing the scope of the commodity derivatives regime, including by removing the automatic inclusion of economically equivalent OTC commodity derivatives from the scope of the regime; and
- Enabling a Consolidated Tape (CT). The UK Government is proposing certain changes to the regime, such as making it mandatory for trading venues to submit their data to a CT, to overcome these issues.
FCA Business Plan
The FCA has published its delayed 2021/22 business plan.
The FCA note the challenges that they face, being, the post-pandemic recovery, Brexit, technological change, the green transition and an expanded regulatory remit.
Over the next year, the regulator will focus on:
- The proposed new Consumer Duty;
- Improving the effectiveness of wholesale markets; and
- Six cross-market issues – fraud, financial resilience, operational resilience, diversity and inclusion, a more sustainable finance future and international cooperation.
The report notes several significant proposals for reform:
- A simpler authorisation process, but stronger supervision for new firms (a “regulatory nursery”) and fast-growing firms (a “regulatory scalebox”);
- A review of all firms seeking to enter the UK via permanent post-Brexit arrangements for foreign firms, such as the Overseas Funds Regime. Not all firms in the Temporary Permissions Regime will be successful;
- Changes to the financial promotions regime, and related supervision and enforcement;
- Being more proactive in identifying and communicating issues that are outside the FCA’s regulatory perimeter. The Government has committed to annually review the FCA’s perimeter;
- Improved capabilities to collect, analyse and act on supervisory data;
- Supervising whether the ESG attributes of asset managers’ products are fair, clear, and not misleading, and reduce green-washing;
- Continuing to identify fund managers that are outliers, for instance in respect of high fees, and working with authorised fund managers and depositaries on remedies;
- Simplifying the pre- and post-trade transparency and commodity derivatives position limits regimes inherited from MiFID II;
- Working with the Pensions Regulator to form a view on how best to drive value for money in pensions; and
- The adoption of a new set of metrics by which to hold the FCA accountable, including a commitment to reduce the FSCS levy on the industry.
In practical terms, for many firms this might mean less frequent bilateral engagement with the regulator. Nonetheless the FCA will expect firms to be monitoring and acting on its activities, with stronger supervisory engagement where the FCA deems it to be needed.
FCA Vulnerable Customers Guidance
The FCA has published answers to frequently asked questions in relation to its finalised guidance for firms on the fair treatment of vulnerable customer published in February. The FCA reiterates that it wants to drive improvements in the way firms treat consumers with vulnerable characteristics, which it hopes will bring about a practical shift in firms’ actions and behaviours, though it stops short of prescribing exactly how to do this.
The questions themselves show that many firms have some way to go to meet expectations. In our opinion, it is worth firms challenging themselves on how mature their approach to vulnerability is, and whether they have looked holistically at every aspect of how it treats its customers.
A key theme in the FAQs is that it is up to firms to determine how to comply; not for the FCA to specify this. It highlights its timetable to evaluate firms’ progress in 2023/24 and that firms falling short of expectations can expect greater supervisory attention or enforcement action.