Regulatory Update October 2020
FCA update on complaint handling
The FCA has updated its webpage concerning firms’ handling of complaints during the COVID-19 pandemic. The FCA has updated information on Payment Protection Insurance (PPI) complaints and reinforces the importance of firms continuing to comply with complaint handling requirements.
New FCA Brexit webpages
Market making exemptions and preparing for Brexit
The FCA page explains that under the on-shored Short Selling Regulation (SSR) any firm wishing to use the exemption for market-making transactions will be required to join a UK trading venue and notify the FCA of their intention to use the market maker exemption in writing, 30 days ahead of their intended use. Firms that have already notified the FCA of an intention to use the market maker exemption and remain members of a UK trading venue will be able to continue using the exemption after the transition period ends only for instruments traded on UK trading venues. Notifications for instruments traded in the EU will no longer be valid.
EEA market makers that are not already members of a UK trading venue will need to become members of one before the end of the transition period. As such they will need to provide the FCA with a notification made to another competent authority at least 30 days before the end of the transition period.
Net short positions reporting and preparing for Brexit
The FCA page is useful for firms that report net short positions as it provides them with information regarding what they should do during and after the transition period. Under the SSR position holders will be required to report their net short share positions at the 0.20% threshold.
The reporting thresholds for UK sovereign debt and uncovered positions in UK sovereign credit default swaps will remain the same. The amount of the outstanding UK sovereign debt will be updated quarterly by the FCA on its website.
Short position holders will need to consult the FCA’s Financial Instruments Reference Data System and the UK list of exempted shares to see if their holding share is exempt. If a share is not exempt, then the FCA should be notified. The UK list of exempted shares will be in an Excel file which will be published on the FCA’s website from 1 January 2021.
European Commission consultation on AIFMD
The European Commission has launched a public consultation seeking to make the EU’s Alternative Investment Fund (AIF) market more efficient and competitive. AIFs include private equity funds and a variety of other types of funds.
The Alternative Investment Fund Managers Directive (AIFMD) established an EU-wide legal framework for the authorisation, supervision, and oversight of these managers.
The consultation aims to gain insight from stakeholders to improve the overall functioning and competitiveness of the EU AIF industry, in order to create a more hospitable environment for investments and provide stability within the financial system. This is part of a wider effort to develop the Capital Markets Union (CMU), particularly in light of COVID-19.
The deadline for comments is 29 January 2021 and the Commission is expected to publish a proposal for amending the AIFMD in Q3 2021.
Financial Services Bill
The Financial Services Bill was introduced in Parliament on 21 October 2020 and is designed to ‘ensure the UK’s world-leading financial services sector continues to thrive and grasp new opportunities on the global stage’. The Bill contains a broad range of measures that will affect firms across the financial sector, as well as firms seeking to maintain access to the UK after the end of the Brexit transition period on 31 December 2020.
- Prudential rules – contains major reforms for the prudential regulation of credit institutions and investment firms. The Bill will implement the ‘Basel III’ standards issued by the Basel Committee on Banking Standards as well as a new investment firms prudential regime.
- LIBOR transition – provides the FCA with powers to help firms transition from the LIBOR interest rate benchmark to alternatives as the banks that currently submit their rates to LIBOR have indicated that they intend to cease doing so by the end of 2021.
- Gibraltar – contains measures designed to ensure continued access between the UK and Gibraltar for financial services firms after the end of the Brexit transition period.
- Overseas Funds Regime – intends to ensure market access for overseas investment funds to the UK by creating a regime allowing access for recognised collective investment schemes from countries or territories approved by HM Treasury. The Bill also contains a specific regime for the admission of overseas money market funds to the UK.
- UK MiFIR – updates the UK on-shored version of the Markets in Financial Instruments Regulation (UK MiFIR) to reflect changes to the UK’s framework for cross-border access by overseas firms to the UK market requiring the assessment of third country equivalence by HM Treasury.
- De-authorisation – provides for a simpler process to allow the FCA to remove firms from the FCA register. This follows concerns that the details of inactive firms on the register have been exploited to trick unsuspecting customers.
- Insider dealing and market abuse – includes amendments to clarify firms’ obligations under the UK version of the Market Abuse Regulation (UK MAR) in relation to insider information, insider lists and transactions with senior managers. The Bill also increases the maximum criminal sentence for market abuse from 7 to 10 years and extends the reach of UK anti-money laundering rules to overseas trustees.
- Debt respite scheme – provides powers for the implementation of the statutory debt repayment scheme (SDRP). This allows people with problem debt to make arrangements with their creditors on the amount and timing of repayment.
- Help to save – provides powers for a regime to create successor accounts for the existing help-to-save regime. This is intended to encourage saving by individuals with low incomes.
- PRIIPs – The Bill contains measures intended to improve the functioning of the UK on-shored Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation. In particular, the amendments are intended to clarify the scope of the PRIIPs Regulation and reduce uncertainty regarding its application.
- OTC derivatives – contains amendments to the European Market Infrastructure Regulation (EMIR) to improve access to clearing services, especially for smaller firms. It will require firms offering clearing services to do so in accordance with fair, reasonable, non-discriminatory, and transparent terms. The FCA will have powers to make rules setting out the grounds on which commercial terms will meet this obligation.
- Financial collateral – intends to ensure that the Financial Collateral Arrangement (No.2) Regulations 2003 are fully valid and effective. This follows concerns raised during litigation that the UK Government may have gone beyond its powers when transposing requirements related to financial collateral arrangements into UK law in 2003.
- FCA chief executive – specifies a statutory limit of 5 years on the length of time the chief executive of the FCA may remain in office bringing it in line with other posts subject to statutory term limits, such as deputy governors of the Bank of England.
Following its introduction to Parliament, the Bill will be subject to legislative scrutiny in the House of Commons and the House of Lords. Once both Houses have agreed, the Bill will receive Royal Assent and become law.
The FCA has published an update to its webpage on whistleblowing, and an explanation on how individuals can whistleblow to the FCA and practical case studies.
The case studies provide three examples of activities that can be reported to the FCA whistleblowing team:
- failings in anti-money laundering checks; and
- misconduct of a Senior Manager.
FCA fine for breach of Short Selling Regulation
The FCA has fined Asia Research and Capital Management Ltd (ARCM) £873,118 (including a 30 per cent early settlement discount) for breaches of the SSR. This is the first time that the FCA has taken enforcement action for a breach of this regulation.
ARCM failed to notify the FCA and to disclose to the public its net short position in Premier Oil Plc built between February 2017 and July 2019 as required under the SSR.
The failings were particularly serious as: the breaches were multiple and committed over a long period of time; the FCA was not notified promptly upon discovery of the failings; and the size of ARCM’s final net short position was exceptionally large.
ICO fine for British Airways data breach
On 16 October 2020 the ICO fined British Airways (BA) £20m in respect of a 2018 data breach. Although this is the largest data protection fine ever imposed by the UK regulator, BA will no doubt be feeling relieved as the ICO had originally indicated that it would fine BA £183.39m.
BA breached data protection laws by failing to take appropriate security measures that would have prevented personal data being accessed during a cyber-attack. The penalty notice issued by the ICO identifies numerous failings and missed opportunities to improve data security.
Over 400,000 customers were affected by the breach. The unsecured data accessed during the cyber-attack included names, addresses, payment card numbers and CVV numbers of BA customers. Additionally, login details of BA employee and administrator accounts were compromised and usernames and PINs of BA Executive Club accounts were accessed.
Because the breach exposed the personal data of citizens across the EU, the ICO investigated the matter on behalf of all EU authorities under a special cooperation process laid down in the General Data Protection Regulation (GDPR).
FCA bans crypto derivatives for retail investors
On 6 October 2020 the FCA announced the publication of final rules banning the sale of derivatives and exchange traded notes (ETNs) from 6 January 2021 to retail consumers that reference certain types of cryptoassets.
In its statement the FCA stated that it ‘considers these products to be ill-suited for retail consumers due to the harm they pose’. It pointed to certain features of cryptoassets falling outside the regulatory perimeter which mean retail customers may suffer harm from unexpected losses in investing in such products; including unreliability of valuation, prevalence of market abuse, extreme volatility in cryptoasset price movements and overall it deemed them inadequate for retail customers.
To address these harms, the FCA will be introducing new rules banning the sale, marketing, and distribution to all retail consumers of any derivatives and ETNs that reference unregulated transferable cryptoassets.
FCA guidance on fitness and propriety assessments in the Financial services sector
The FCA has updated its webpage in relation to the Senior Managers and Certification Regime of solo-regulated firms with details of good and bad practice relating to the carrying out of fitness and propriety assessments.
The FCA makes it clear that it expects the annual assessment to be a robust process and not just a tick box exercise.
The FCA’s approach is to identify positive and negative indicators as to whether firms can demonstrate that they are making regular, thorough, and consistent assessments of the fitness and propriety of their senior managers and certified staff.