Regulatory Update May 2021
In this issue we cover:
- New Consumer Duty consultation paper by FCA
- Speech by BoE Governor on life after LIBOR
- FCA guidance for insolvency practitioners on regulated firms
- EU Commission consultation on a Retail Investment Strategy for Europe
- FCA Dear CEO Letter to ensure customers understand how their money is protected
- Implementing Basel 3.1
- Assessing operational resilience
- Changes to the UK financial regulatory framework due to Brexit
- ESMA guidelines on outsourcing to cloud service providers
- Speech by Charles Randell, Chair of the FCA
- FCA consultation paper on investor protection measures for SPACs
- Sapien Capital fined for serious financial crime control failings in relation to cum-ex trading
You can find these articles and a searchable archive of all our previous articles at https://objectivus.com
FCA’s new ‘Consumer Duty’ consultation paper CP21/13.
The new ‘Consumer Duty’ will set clearer and higher expectations for the standard of care provided to consumers and require firms to focus on the alignment of outcomes that consumers expect with those that they experience.
The consultation paper sets out the proposed scope and structure of the new rules and what those rules will cover, but is not a consultation on the draft rules themselves.
For more details see the Objectivus website
BoE Governor speech on life after LIBOR
The BoE has published a speech by Andrew Bailey, BoE Governor, ‘Descending Safely: Life after LIBOR’.
The speech covers developments in sterling markets, the use of forward-looking term risk-free rates, and moving to the most robust reference rate. It also acknowledges that lessons must be learned to prevent similar issues arising in the future. The speech also warns firms to treat the transition from LIBOR as a risk management issue and to expect the nature of PRA supervision to be in line with how it supervises other risk management matters.
FCA guidance for insolvency practitioners on regulated firms
The FCA has published its finalised guidance for insolvency practitioners (IPs) approaching regulated firms.
The guidance, which provides the FCA’s views on how IPs should ensure regulated firms meet ongoing regulatory obligations following appointment, covers the following core areas:
- Pre-insolvency – including early engagement with the FCA, pre-insolvency checks, insolvency costs, and creditors’ committees
- Entering insolvency – including interaction with the FCA, communicating with clients, interaction with Financial Services Compensation Scheme (FSCS) and Financial Ombudsman Service (FOS), and notifying customers that they may have claims for redress
- During insolvency – including claims process, FCA participation in court cases and creditors’ committees, client assets and trading while in an insolvency process
- Restructuring procedures
EU Commission consultation on a Retail Investment Strategy for Europe
On 11 May 2021, the Commission launched a public consultation on the upcoming retail investment strategy, which is planned for adoption in early 2022. The Commission is seeking views on how to improve the EU’s existing retail investor protection framework. Whilst the consultation does not provide any additional details on what the retail investment strategy will look like, it sets out a list of consultation questions related to the following areas
- financial literacy;
- digital innovation;
- disclosure requirements;
- the PRIIPs regulation;
- suitability and appropriateness assessment;
- reviewing the framework for investor categorisation;
- inducements and quality of advice;
- addressing the complexity of products;
- consumer redress;
- product intervention powers; and
- sustainable investing.
FCA Dear CEO Letter to ensure customers understand how their money is protected
On 18 May 2021, the FCA published a Dear CEO Letter, asking e-money firms to write to their customers to make it clear how their money is protected. In the letter, the FCA expressed their concern that many e-money firms compare their services to traditional bank accounts or hold themselves out as an alternative in their financial promotions, but do not adequately disclose the differences in protections between e-money accounts and bank accounts. In particular, they do not make it clear that Financial Services Compensation Scheme (FSCS) protection does not apply. The FCA is also concerned that firms are giving a potentially misleading impression to the extent to which products or services are regulated by the FCA.
The FCA has confirmed in the letter that e-money firms need to do the following:
- write to customers within six weeks of the date of the letter to remind them of how their money is protected through safeguarding and that FSCS protection does not apply;
- review financial promotions to ensure promotions give customers enough information and where any promotion does name the FCA as regulator and refers to matters it does not regulate, the promotion must make it clear that those matters are not regulated by the FCA; and
- draw the Dear CEO Letter to the Board’s attention.
The FCA confirmed that they also intend to follow up, with a sample of firms, to assess the action taken.
Treasury Committee publishes responses to Greensill inquiry correspondence
On 11 May 2021, the Treasury Committee published responses relating to its inquiry into Greensill Capital. The FCA’s response confirmed that it is formally investigating matters relating to Greensill Capital UK (GCUK) and Greensill Capital Securities (GCSL) and the oversight of GCSL by its principal, Mirabella Advisers LLP. Some points of note are:
- GCUK has been a registered entity, an ‘Annex 1’ firm, under the Money Laundering Regulations (MLRs) since 6 May 2014. This means that the FCA was only responsible for supervising it in relation to its compliance with anti-money laundering rules;
- The wider activities that GCUK undertook were not regulated by the FCA as most commercial lending falls outside the FCA’s remit and the origination of a supply-chain finance instrument is not a regulated activity;
- The FCA agrees with the Bank of England’s assessment that the Greensill entities were not systematically important for the purposes of UK financial stability; and
- There are a number of areas that have been under consideration for regulatory or perimeter change and the collapse of Greensill has drawn further attention to these issues. These include, amongst others, the appointed representatives regime, investigation and penalty powers in the event of firm failure or deregistration, criteria for fitness and propriety under the MLRs;
The Treasury Committee further stated it is likely to examine the reasons for Greensill’s failure, how it was managing risks before the failure, its business model and funding, and the characterisation of it as a fintech business.
Implementing Basel 3.1
The PRA has completed a consultation, proposing capital requirements regulation (CRR) rules to support timely implementation in the UK of the remaining elements of Basel international standards, including previously on-shored EU legislation (CRR II).
The implementation target date is 1 January 2022, which provides additional time for firms to optimise solutions and embed supervisory reporting, such as market risk under the standardised approach of the Fundamental Review of the Trading Book (FRTB).
Assessing operational resilience
The UK supervisory authorities published their final policy and supervisory statements to strengthen the operational resilience of financial services firms and market infrastructures.
These rules come into force in March 2022, and firms must identify their important business services, set impact tolerance levels for disruption, map resources, and test relevant scenarios against tolerance levels.
The PRA published a supervisory statement on outsourcing and third-party risk management. These policy and supervisory statements provide firmer guidance to assess the current state of resilience and rapidly embed a robust framework to address any gaps.
The Basel Committee on Banking Supervision issued updated revisions to the Sound Management of Operational Risk and complemented this with Principles for Operational Resilience. This aims to promote a principles-based approach to improvements, as well as international and cross-sector collaboration.
Changes to the UK financial regulatory framework due to Brexit
On 29 April 2021, the Financial Services Bill 2019-21 received royal assent.
The key aspects include:
- Prudential requirements for investment firms: Amendments to the UK Capital Requirements Regulation (CRR) so that it no longer applies to investment firms, other than PRA-designated firms. Schedule 2 to the Act sets out a new Part 9C to the Financial Services and Market Act 2000 (FSMA) on the prudential regulation of FCA investment firms;
- Prudential requirements for credit institutions: Introduction of a mechanism for HM Treasury and the PRA to implement the Basel standards covered by the EU CRR II and gives HM Treasury the power to make regulations to revoke existing prudential regulation contained in the UK CRR;
- Benchmarks: Amends the UK Benchmarks Regulation (BMR) to give the FCA additional powers to manage the orderly wind-down of critical benchmarks (such as LIBOR). It will also extend the transitional period for third country benchmarks under the UK BMR from 31 December 2022 to 31 December 2025;
- Overseas Funds Regime: Amends Part 17 of FSMA to introduce a new Overseas Funds Regime allowing overseas collective investment schemes to be marketed to all UK investors, including retail investors;
- MiFIR: Amends UK MiFIR to give the FCA powers to impose temporary restrictions or prohibitions on third-country firms providing investment services in the UK.
- Duty of care: Requires the FCA to consult on whether it should introduce rules providing that authorised persons owe a duty of care to consumers.
- Market abuse: Amends the Criminal Justice Act 1993 and the Financial Services Act 2012 to increase the maximum sentence for criminal market abuse from seven to ten years;
- Buy-now pay-later products: Gives HM Treasury the ability to bring interest-free buy-now pay-later products within the regulatory perimeter; and
- Cashback: Amends Part 2 of Schedule 1 to the Payment Services Regulations (SI 2017/752) to introduce an exemption for cashback without a purchase, so that it will no longer be a regulated payment.
ESMA guidelines on outsourcing to cloud service providers
On 10 May 2021, ESMA published guidelines on outsourcing to cloud service providers (CSPs) to help firms and competent authorities identify, address and monitor the risks and challenges arising from cloud outsourcing arrangements. The guidelines provide guidance for firms on:
- the risk assessment and due diligence they should undertake on their CSPs;
- the governance, organisational and control frameworks they should establish to monitor the performance of their CSPs and how to exit their cloud outsourcing arrangements without undue disruption to their business;
- the contractual elements that their cloud outsourcing agreement should include; and
- the information to be notified to competent authorities.
The guidelines apply from 31 July 2021 to all cloud outsourcing arrangements entered into, renewed or amended on or after that date. ESMA states that firms should review and amend accordingly existing cloud outsourcing arrangements with a view to ensuring that they take into account the guidelines by 31 December 2022.
Speech by Charles Randell, Chair of the FCA titled “Outcomes-focused regulation: a measure of success?”
On 6 May 2021, Charles Randell, Chair of the FCA, gave a speech to the Building Societies Association on the future of outcome-focused regulation the main points of his speech were:
- Outcome-focused regulation came into disrepute when it was seen as having failed to detect early warning signs of the Financial Crisis. There might also be a more general problem with the concept of outcome-focused regulation, as both the (former) Financial Services Authority (FSA) and now the FCA have resorted to considering the inputs when assessing whether the desired outcomes have been achieved;
- The COVID-19 pandemic has revealed further limitations of outcome-focused regulation. The pandemic has led to increased demand for unsecured credit by illegal providers, which raises the question of whether the FCA should measure the impact of its actions only with reference to authorised firms;
- There have been positive examples where focusing on outcomes and measuring them has enabled the FCA to deliver its objectives of consumer protection, competition in the interests of consumers and market integrity;
- Best consumer outcomes have not been fully embedded in everything the FCA and financial services firms do. However, by defining the right outcomes, measuring them more and acting on the results faster and with an enhanced data capacity, the FCA will be able to target its interventions more effectively; and
- The FCA should be bold about stating and measuring the outcomes even when it cannot fully control them, for example in the areas of fraudulent high-risk investments and speculation.
FCA consultation paper on investor protection measures for SPACs
On 30 April 2021, the FCA published a consultation paper (DP21/10) on proposed changes to its Listing Rules for certain special purpose acquisition companies (SPACs). The FCA proposes amending the rules to allow an alternative approach for listed SPACs that are able to demonstrate higher levels of investor protection which have developed in certain overseas jurisdictions.
Currently, a SPAC will have to suspend trading in its shares at the point it identifies announces an acquisition target. Suspension seeks to preserve market integrity during a period when limited information on a prospective deal could result in disorderly trading in a SPAC’s shares. However, suspension results in existing investors being locked into a SPAC until completion, which could be many months and therefore undesirable for investors and issuers. The FCA is proposing that SPACs that comply with higher levels of investor protection should not be subject to this requirement.
Sapien Capital fined for serious financial crime control failings in relation to cum-ex trading
On 6 May 2021, the FCA fined Sapien Capital Ltd (Sapien) £178,000 for failings which led to the risk of facilitating fraudulent trading and money laundering. This is the first FCA case in relation to cum-ex trading, dividend arbitrage and withholding tax reclaim schemes of which there are currently a number of ongoing investigations.
The FCA found that, Sapien failed to have in place adequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by the Solo Group.
The way these trades were conducted, in combination with their scale and volume, were, in the FCA’s view, highly suggestive of financial crime and appear to have been undertaken to create an audit trail to support withholding tax reclaims in Denmark and Belgium.
It is the FCA’s view that Sapien failed to exercise due skill, care and diligence in applying anti-money laundering policies and procedures and in failing properly to assess, monitor and mitigate the risk of financial crime in relation to clients introduced by the Solo Group and the purported trading.