Regulatory Update September 2021
In this issue we cover:
- FCA reminds firms about financial crime risks
- UK GDPR
- PRA Dear CEO letter on reliability of regulatory reporting
- FCA and HMT response on London Capital & Finance report
- New cancellation and variation of FCA power
- FCA’s consumer investments strategy
- FCA speech on a new listing regime
You can find these articles and a searchable archive of all our previous articles at https://objectivus.com
FCA reminds firms about financial crime risks
In a recent statement the FCA reminded firms about their obligations to have robust systems and controls in place which respond to changing risks, such as the recent developments in Afghanistan. Such events have an impact on the financial activity relating to the country in question, including:
- patterns of activity
- risks relating to particular customers
- the flow of funds.
Firms should have systems and controls in place to counter the risks that they are used by to commit financial crime as well as to meet their legal obligations.
The FCA expects firms to consider these events in a risk-based manner, specifically in relation to Afghanistan, through:
- monitoring activities and assessment of transactions to mitigate the risk of exploitation
- ensuring that suspicious activity is reported to the UK Financial Intelligence Unit.
Firms should remember there are already sanctions to screen against for Afghanistan.
The General Data Protection Regulation (GDPR) is probably the most famous piece of legislation to come from the EU. It shapes the way we engage with organisations both online and in the real world. When the UK formally withdrew from the EU, GDPR became retained EU law and continued to apply as before. The UK Government have recently announced it wants to reform data protection legislation.
Unsurprisingly since Brexit the data protection regime in the UK remained substantially unchanged although leaving the EU has meant that UK has become classified as a “third country” for the purposes of data protection. To prevent interruptions of data flows between the UK and the EU it needs to demonstrate to the European Commission that it has adequate safeguards in place to protect personal data. Mirroring the EU’s data protection regime was the easiest way for the UK to do this. Thus, on 28 June 2021 the European Commission adopted an adequacy decision in respect of the UK, which allowed personal data to continue to flow freely between the UK and the EU.
Oliver Dowden the Digital Secretary mentioned in an interview that the UK was changing tact on data protection and looking for a break from the EU approach and stated that data should be regulated in “as light a touch way as possible” and referenced changing the rules on cookie pop-ups, (which are regulated by the Privacy and Electronic Communications Regulations).
The EU’s adequacy decision on data protection is time limited and will expire in four years, meaning that substantial changes to the way privacy is protected in the UK could lead to uncertainty about whether the EU will renew, suspend or revoke their adequacy decision. If the EU’s adequacy decision expires or is repealed organisations would face a new domestic regime that is less onerous, and a process for sharing data internationally that is more cumbersome.
PRA Dear CEO letter on reliability of regulatory reporting
Following the Dear CEO letter issued in October 2019, the PRA expected all banks and building societies to submit complete, timely, and accurate regulatory returns. As part of its ongoing monitoring process, the PRA asked firms to demonstrate how they deliver regulatory reporting of appropriate quality. It also commissioned several reports from skilled persons. The reviews required skilled persons to opine on governance arrangements, systems, and controls to produce the returns and the schedule of key interpretations. It also asked them to provide an assessment of the accuracy of the returns.
The PRA has now issued a further Dear CEO letter to provide feedback on common findings from a variety of skilled person reviews during the previous two years, and wider supervisory work. The PRA confirms significant deficiencies continue to be found in several firms’ processes to deliver accurate and reliable regulatory returns.
Key areas of concerns include:
- Governance – lack of accountability and ownership at senior levels in the production and integrity of financial information and regulatory reporting;
- Controls – identified gaps within firms’ governance arrangements and control framework for producing regulatory returns; and
- Data and investment – many firms have still not prioritised investment in regulatory reporting, leading to reduced capacity and capability compared to financial reporting
Although these findings are specific to PRA regulated organisations, FCA regulated firms would do well to take notice of the PRA’s concerns as they will undoubtably be closely regarded by the FCA.
FCA and HMT response on London Capital & Finance report
The House of Commons Treasury Committee published a report setting out the responses of the FCA and HM Treasury (HMT) to the Committee’s ‘Fourth Report of Session 2021–22: the Financial Conduct Authority’s Regulation of London Capital & Finance plc’.
One response from HMT was that the government considers the existing arrangements for examining and amending the regulatory perimeter are effective. It therefore considers it unnecessary to provide the FCA with formal power to recommend changes to the regulatory perimeter. HMT is also exploring solutions to tackle fraud and notes that the Home Office is developing the Fraud Action Plan, which will be published after the 2021 Spending Review.
The responses of the FCA included a reiteration of the apology for how it handled the case and provided a progress update confirming that it was set to meet the report’s recommendations by the end of 2021. The FCA will also continue to consider whether further rule changes are required to prevent consumers from getting a misleading impression about the regulatory protections from which they benefit.
New cancellation and variation of FCA power
The FCA has opened a consultation (CP21-28) on changes to its Handbook and Enforcement Guide. The FCA is consulting because of its additional powers given under the Financial Services Act 2021 (FS Act).
The new FS Act sets out a more streamlined procedure, allowing the FCA to act quickly and efficiently to:
- Vary or cancel the statutory permissions to conduct FCA regulated activities of many authorised firms, where those firms appear to be carrying on no FCA regulated activities for which they have permission and have not responded to notices warning of the risk of such action
- Reflect such variations and cancellations on the Financial Services Register
The new FS Act also provides for the possibility that the FCA may reverse or annul its decisions should it choose to.
This consultation closes on 29 October 2021.
FCA’s consumer investments strategy
The FCA has published details of its consumer investments strategy, aimed at giving consumers the confidence to make effective investment decisions, supported by a high-quality, affordable advice market. The FCA hopes this will lead to fewer people being scammed or persuaded to invest in products that are too risky for their needs and will publish metrics to assess whether these outcomes are being met.
The regulator has set out its related commitments to achieve by 2025, including a 20% reduction in consumers who could benefit from investment earnings but are missing out and halving the number of consumers who invest in higher risk products that do not meet their needs.
The FCA has set out a package of measures it will implement over the next 4 years. These include:
- Exploring regulatory changes;
- Making it easier for firms to provide more help to consumers who want to invest in relatively straightforward products; and
- Launching a new £11 million investment harm campaign to help consumers make better-informed investment decisions.
FCA speech on a new listing regime
The FCA’s Director of Market Oversight, Clare Cole, delivered a speech covering the modernisation of the Listing Regime.
The speech discusses how the FCA is committed to ensuring the Listing Regime will be more agile and flexible following Lord Hill’s Listing Review which highlighted aspects of the regime that are causing companies to reconsider London listings.
The consultation on the Primary Markets Effectiveness review covers some specific amendments to the regime that are likely to be introduced soon, including:
- A targeted approach to allowing dual class share structures in the premium segment
- A reduction in the level of free float to 10%
- Measures to improve investor trust and confidence in the types of companies on different markets, by raising the minimum market capitalisation required for listing on the main market to £50 million