The Financial Conduct Authority (FCA) has issued a ‘Dear CEO’ letter (the letter) with an update on key issues in light of COVID-19 to firms providing services to retail investors. In addition to the measures it has taken with the Bank of England (BoE) and HM Treasury (HMT), the FCA has considered many requests for forbearance and regulatory adaptations from firms and trade associations, some of which are discussed further below. The FCA has implemented a “significant package of reprioritisation and deprioritisaion of regulatory work” to allow firms to concentrate on their COVID-19 response efforts and protecting their consumers and has indicated that it will continue to update its approach in response the crisis.
The FCA will generally look favourably on forbearance requests for changes which support firms and consumers (some of which it will have the power to make immediately; others which may require co-ordination between the FCA and other UK Government or European agencies), and will only consider requests where there is a genuine need to help consumers or which, for example, would support the FCA’s response to the crisis.
Next steps for firms:
- In light of the impact of COVID-19 on firms’ operational resilience, the FCA re-emphasised its expectations for firms to focus strongly on supporting and serving consumers and small businesses during this time. The FCA also expects firms to be actively managing their own financial resources/resilience (and in particular liquidity), with firms notifying the FCA immediately if they expect to face financial difficulties.
- Where firms are re-directing resources due to reduced levels of staff, they should have regard to the FCA’s strong focus on consumer protection. Firms should consider documenting how these decisions are made, with the aim of allocating resources to achieve consumers protection as far as possible during this time.
- Firms should keep up-to-date with developments by regularly checking the FCA’s website to ensure they are aware of the regulations and rules which continue to apply to them. Firms should also remain vigilant of scams which are increasingly prevalent during the COVID-19 crisis; both the FCA and National Crime Agency have released warnings on rising fraud levels and firms have a responsibility to ensure that consumers are protected.
- Firms may also wish to consider making use of dialogue between trade associations and the FCA where appropriate to raise prevalent operational challenges with the FCA.
Key areas of focus:
In addition to the above, the FCA sets out in the letter its approach to a number of key issues to help firms manage their response to the crisis:
- Financial resilience – The FCA has already published guidance on financial resilience and prudential issues. Importantly, the FCA has clarified that government loans cannot be used to meet capital adequacy requirements as they do not meet the definition of capital. Firms therefore need to ensure that they have other appropriate funding available to meet their capital adequacy requirements, if necessary.
- Flexibility for client identity verification – Whilst firms must continue to comply with their obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) to verify clients’ identities, they can be flexible with how they achieve this. The MLRs and Joint Money Laundering Steering Group guidance already provide that client identity verification can be carried out remotely, and outline appropriate safeguards and checks which firms can implement to assist with verification – some examples are given by the FCA. Firms can also consider seeking additional verifications once restrictions on movement are lifted.
- Flexibility over best execution reports – The FCA and the European Securities and Markets Authority (ESMA) have both published clarification for firms on best execution obligations in the current climate (the ESMA public statement is available here). The FCA expects firms to continue to meet their best execution obligations, including on client order handling, taking into account current market conditions when determining the relative importance of execution factors. Firms may wish to consider using different types or orders to execute client orders and manage risk during market volatility.
Following ESMA’s guidance, the FCA will not take enforcement action where a firm:
- does not publish its RTS 27 report by 1 April 2020, provided it is published no later than 30 June 2020; or
- does not publish RTS 28 and Article 65(6) reports, provided they are published by 30 June 2020.
- Flexibility over 10% depreciation notifications – Firms will not be required to inform investors in every instance where the value of their portfolio or leveraged position falls by 10% or more in value. Instead, until 1 October 2020, the FCA has confirmed that it will not take enforcement action provided that a firm:
- has issued at least one notification to retail clients within a current reporting period notifying them that their portfolio has decreased in value by at least 10%; and
- subsequently provides general market updates online, through other public channels, and/or generic, non-personalised client communications; or
- chooses to cease providing 10% depreciation reports for any professional clients.
In what is currently a highly volatile market, firms may wish to think about adopting this new approach which could ease the impact of repeated communications on consumers and the operational burden on themselves, or using email or phone calls to notify clients as opposed to written notifications.
- Pause on implementation of measures – The FCA’s policy statement on pension transfer advice has been delayed until Spring 2020 and follow-up work on assessing the suitability of retirement income advice has been paused. Rules on investment pathways and platform switching provisions have already been made; these have been referred to the FCA Board for further consideration. Ongoing work with firms providing defined benefit transfer advice will continue.
On 12 February, the FCA’s Executive Director of Enforcement and Market Oversight, Mark Steward, delivered the keynote address at the City & Financial Global Investigations and Enforcement Conference in London. This was Mr Steward’s second speech in as many weeks, – the previous one, on 6 February, was concerned with market integrity and the FCA’s strategic approach to market regulation (see our blog post on that speech here). This latest speech focused more broadly on the FCA’s approach to enforcement.
In this article, we explore the implications for firms of some of the key messages of the speech. Continue reading
Every quarter our financial services regulatory team publishes the Financial Services Regulatory Timeline, a look ahead at key regulatory milestones in the coming months and years in a range of areas, created for our clients in financial institutions. Three areas covered in the Timeline are Financial Crime, Enforcement, and Market Abuse. For the readers of our FSR and Corporate Crime blog, we have produced these sections as a Calendar of key developments in Financial Crime, Market Abuse and Enforcement which can be accessed here.
On 4 October 2019, the Securities and Futures Commission (SFC) published proforma terms and conditions which will apply to virtual asset fund managers that meet specified criteria.
This follows the SFC’s statement of 1 November 2018 regarding the regulatory framework for virtual asset fund managers, fund distributors and trading platform operators (see our e-bulletin of 2 November 2018 for further details), in which the SFC indicated (among other things) that it would impose terms and conditions on certain virtual asset fund managers.
Last Friday, the Securities and Futures Commission (SFC) launched a consultation on proposals to regulate depositaries (trustees and custodians) of SFC-authorised collective investment schemes (CISs) which are offered to the public in Hong Kong. Responses are required to be submitted by 31 December 2019.
In their March 2018 coalition agreement, the coalition partners CDU, CSU and SPD have agreed to establish new rules on criminal sanctions against companies and – for the first time – legal requirements for internal investigations. The agreement already sets out a clear framework and demonstrates a strong political will to tighten the level of sanctions, introduce an obligation to prosecute corporate crimes and create incentives for compliance measures as well as for the assistance in the clarification of criminal offences through internal investigations. The former Federal Justice Minister, Katarina Barley, declared the law reform to be a “priority project”. Following her election to the European Parliament, her successor, Christine Lambrecht, made the draft bill available to a small circle of experts in mid-August 2019 and started the consultation process with the other ministries. The legislative proposal is being discussed extensively in legal practice and academia.
On 12 September 2019, the South African Financial Sector Conduct Authority (FSCA) announced the conclusion of its investigations into Steinhoff International Holdings N.V. (Steinhoff). The FSCA found that Steinhoff provided false, misleading or deceptive statements to the market and accordingly breached the provisions of the Financial Markets Act No. 19 of 2012 (the FMA). As a consequence of this breach, the FSCA has fined Steinhoff R1.5 billion but has remitted a portion of the fine due to the precarious financial position of the Steinhoff group, resulting in Steinhoff paying a penalty of R53 million. This is the largest fine ever to be levied by the FSCA.
The Steinhoff investigation and enforcement action
In December 2017, Steinhoff’s shares plunged following the sudden resignation of its CEO, Markus Jooste, and allegations of accounting irregularities. Following a lengthy internal investigation conducted by an independent expert, it was revealed that a range of “fictitious and/or irregular” transactions “substantially” inflated the profits and assets of the group by over €6.5 billion between 2009 and 2017. The investigation also found “a pattern of communication” showing that executives “instructed a small number of other Steinhoff executives to execute their instructions, often with the assistance of a small number of persons not employed by the Steinhoff Group”. These “fictitious and/or irregular transactions were entered into with parties said to be, and made to appear to be, third party entities independent of the Steinhoff group and its executives” but which the investigation found appeared instead to be “closely related to” those executives who were issuing the instructions to perform these transactions.
Although the fine’s quantum remains R1.5 billion, the FSCA took into consideration Steinhoff’s financial position, the losses already sustained by Steinhoff’s shareholders and the cooperation of the current management of Steinhoff in the investigations, and decided to remit a portion of the penalty resulting in Steinhoff being required to pay an amount of R53 million. Brandon Topham, the divisional executive for investigations and enforcement at the FSCA, said in an interview that “if you look at the financial statements you will see that it is actually insolvent and there is just no way it would have been able to pay a fine of R1.5 billion.”
While the investigations into Steinhoff itself have been concluded, Mr Topham confirmed that “the perpetrators behind the actual misrepresentation … are still on our radar and we are busy with investigations into that”. Mr Topham also warned that those behind the fraudulent actions are unlikely to receive the same treatment that Steinhoff did in respect of the remission of a portion of the fine, and that the FSCA would be making further announcements in this respect in the next 8-12 months.
Going forward – higher fines to come from the FSCA?
The magnitude of the fine issued by the FSCA against Steinhoff not only demonstrates the significant impact that the Steinhoff scandal had on millions of South Africans (through losses in investments and retirement/pension savings) but also suggests a change in behaviour of the FSCA – issuing fines far beyond the levels previously seen and more in line with the penalties administered by foreign regulators such as the US Securities and Exchange Commission. While the FSCA did remit a large portion of the fine in order to assist the embattled company, the comments from Mr Topham suggest that the fines to be issued against the individuals involved may be as significant and with no remittance possible. Entities subject to the provisions of the FMA should be cautious of this development and ensure that their corporate governance protocols relating to insider trading and other market abuse matters adequately protect against any conduct which may expose such entities or their management to the new agenda of the FSCA.
Financial services firms conduct their business activities across markets and borders, often performing services and holding data in locations other than those in which they interact with their clients. Over a decade after the financial crisis, their regulators remain under sustained public and political pressure to improve customer outcomes and punish poor conduct. When issues arise, those regulators frequently need to seek assistance from their global counterparts to be able to unravel what has occurred, irrespective of where it took place.
Understanding how and when regulators interact with each other and with firms across borders, how firms are required, or expected, to respond, and how to handle multiple proceedings in different jurisdictions, is more critical than ever.
This fourth edition of “The Long Arm of Regulation: Responding to Cross-Border Financial Services Investigations”, Herbert Smith Freehills’ guide to cross-border financial services investigations, gives an overview of how to approach these issues, and aims to assist firms in navigating the differing regimes across 15 key jurisdictions, including, for the first time in this edition, South Africa. The guide covers a range of important topics, including the regulators’ breadth of powers, mechanisms for obtaining – and withholding – information, consequences for failing to comply, and the management of competing confidentiality and reporting obligations.
In producing this publication, we have drawn on the expertise of our financial services regulation practice across our international network of offices and through our formal alliance with Prolegis (Singapore). In addition, we are enormously grateful for contributions from law firms Anderson Mori & Tomotsune (Japan), Stibbe (the Netherlands) and Homburger (Switzerland).
In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation which are expected for September 2019.
Please click here to access a preview of the Guide.
We are pleased to launch the 2019 edition of our Asia Pacific Guide to Privilege.
Businesses are increasingly faced with multi-jurisdictional disputes where evidence rarely falls within the borders of a single country and complex legal privilege issues often surface when dealing with communications across multiple jurisdictions.
Compiled by our network of Herbert Smith Freehills lawyers and trusted local counsel, the updated Guide takes account of the latest developments across Asia Pacific and covers 21 jurisdictions.