A new regulatory regime for peer-to-peer lending

In June, the FCA published its policy statement on crowdfunding platforms (PS19/14). PS19/14 contains two new sets of rules which apply to: (i) loan-based (P2P); and (ii) investment-based crowdfunding platforms.

Prior to this, P2P and investment-based crowdfunding platforms were already subject to the FCA’s High Level Standards, such as the Principles for Business. However, as the evolution of the two types of investment has differed, so has the regulation around them. Continue reading

FCA’s First Annual Perimeter Report – have you crossed the line?

The FCA has published its first annual perimeter report, reflecting on perimeter issues.

The perimeter is basically the legal boundary determining what the FCA regulates (and therefore also what it does not regulate).

Andrew Bailey, CEO of the FCA commented that the perimeter “is tested by the actions of particular firms and how those actions can harm consumers, for instance by firms innovating and creating new product offerings and services and by firms deliberately trying to avoid our perimeter.”

The Report provides a useful insight into the FCA’s view on a number of perimeter issues most likely to cause harm to UK consumers and markets; and flags areas for potential change to the perimeter in the future.

A spotlight on unregulated activities

The Report highlights a number of areas which are either entirely or partly outside the perimeter and some steps proposed to address potential customer (or market) harm, including:

  • Unregulated firms that contact consumers with offers of free pension reviews. These can be instrumental in consumers deciding to transfer out of defined benefit pensions, potentially losing valuable benefits, but are not currently treated as regulated advice.

The Report did not go as far as to propose that firms offering free pension reviews should fall within the perimeter, but it did highlight that firms offering “investment advice” in this context must be regulated.

  • Unregulated mortgage book purchasers

Entities may purchase books of mortgages from lenders without being authorised to lend. The FCA is concerned that there is a risk that consumers may become “trapped” in unsuitable mortgages as these entities cannot offer new loan products.

The FCA is not proposing to change the perimeter, but the changes proposed to its responsible lending rules could allow these consumers access to a more affordable external remortgage option.

  • Investment consultants

Investment consultants advise pension fund trustees on matters such as asset manager selection. The FCA identified serious competition concerns with investment consultancy and fiduciary management in its Asset Management Market Study. The Treasury plans to consult on bringing these services within the perimeter.

  • Proxy advisors

Proxy advisors issue voting advice and recommendations. The FCA notes that both issuer companies and investor firms have raised concerns about proxy advisors’ conduct and conflicts of interest. The revised EU Shareholder Rights Directive aims to address these concerns by introducing disclosure requirements for these advisors and the FCA has been appointed to enforce these disclosures.

  • Online cross-border services

The FCA discusses the challenges of “regulatory arbitrage” where firms conduct activity online and cross-border, making it easier to choose a less stringent regulatory regime.

The FCA is responding to this challenge through its involvement in initiatives to align international policy but did not propose any specific perimeter changes in the Report.

  • Cryptoassets

As the FCA explains, “Cryptoassets can display different characteristics through their life and be used for different functions, which can create uncertainty as to which cryptoassets already fall within the perimeter.”

The Treasury will consult on its approach to cryptoassets that currently fall outside the perimeter “later” this year, while the FCA has said that it will consult on a potential ban on retail sales of products (for example, derivatives) that reference unregulated cryptoassets.

(For more information about cryptoassets, please see our recent articles: “Cryptoasset compliance in an uncertain regulatory environment” and “Cryptoassets – what should the second line of defence be focussing on?“)

  • Mini-bond issuers

Issuers of these products have been able to issue their securities without the need for FCA authorisation, which limits customer access to the Financial Services Compensation Scheme. For example, the LC&F administration left approximately 14,000 consumers who had invested in its mini-bonds at risk of losses.

The Treasury has announced a review of the wider policy questions raised by the LC&F case. This will include a review of the current regulatory arrangements for the issue of mini-bonds and other non-transferable securities.

The insurance perimeter

The FCA acknowledges the lack of clarity on the definition of insurance and on whether certain contracts should be classed as insurance (within the perimeter). The FCA is considering whether it needs to take further steps, such as issuing guidance. It identifies two particular types of contract that, in its view, should be categorised as insurance:

  1. contracts which give the provider absolute discretion to not pay out, where this discretion is not, in practice, exercised or could be considered an unfair term;
  2. certain product warranty contracts that artificially describe the repair services.

These types of contracts are commonly used as extended warranties for electrical and other goods.

Tech companies

The FCA notes that “the boundary between providing mostly unregulated technical infrastructure to deliver financial services and providing regulated activities is increasingly narrowing.  This also raises questions around whether financial regulators have the necessary tools and techniques to effectively oversee those organisations.” This is an area that the FCA continues to monitor.

Other key points:

  • Financial Promotions in a digital age: The FCA is considering how the Financial Promotions Regime (i.e. the UK rules on marketing financial services and products) can become more effective in a digital age, which may include additional FCA powers in respect of internet service providers.
  • Simplification post Brexit?: the Report acknowledges that the perimeter is a patchwork of UK and EU legislation; and that this can create confusion. Where the perimeter is set by EU legislation, the UK currently has limited flexibility to make changes unilaterally. Andrew Bailey, CEO of the FCA, states, “We may have an opportunity to create a simpler approach post-Brexit. This year we have started to consider the future of regulation to help determine the UK financial services framework after Brexit.”
  • Open Finance: the FCA will publish a call for input on Open Finance later this year to look at how the principles of Open Banking, such as those relating to data sharing, can be applied across financial services.


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Ciara Brady
Ciara Brady
Associate (Ireland), London
+44 20 7466 2446

Product Intervention Powers and Design and Distribution Obligations in Financial Services: A Cross-Border Perspective

Authors: Hannah Cassidy, Clive Cunningham, Natalie Curtis, Javier de Carlos, Katherine Dillon, Matthias Gippert, Leopoldo Gonzalez Echenique, Vincent Hatton, Patricia Horton, Pierre Le Ninivin, Kai Liebrich, Natasha Mir, Stuart Paterson, Fiona Smedley, Jenny Stainsby, Jennifer Xue

Many regulators view their ability to intervene as one of their key supervisory tools to reduce harm in cases where there is a risk of significant consumer detriment or threat to financial markets.

At the same time, many jurisdictions have put in place product governance regimes for financial services firms which aim to avoid, or at least mitigate from an early stage, any potential risks of failure to comply with investor protection rules. In particular, the design and distribution obligations under these product governance regimes aim to overcome the limitations of disclosure and ensure that firms which manufacture and distribute financial products take some responsibility and adopt a more targeted customer-centric approach.

The stages of development, level of detail, scope and coverage of regulators’ product intervention powers, and the product design and distribution obligations under product governance regimes, vary across jurisdictions.

Our guide (which can be found here) summarises the frameworks in selected jurisdictions, allowing a high-level comparison of the different regimes and offering a glimpse of the direction of travel.


Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Fiona Smedley
Fiona Smedley
Partner, Sydney
+61 2 9225 5828
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 21014133
Natalie Curtis
Natalie Curtis
Partner, Singapore
+65 6868 9805

Herbert Smith Freehills launches new banking litigation blog

Our Banking Litigation team has launched their new Banking Litigation Notes blog, focusing on the latest banking litigation developments of interest to financial institutions.  The team’s first post highlights our recent briefing on the latest communication from the FCA and PRA to ensure firms are properly prepared for the transition from LIBOR to alternative interest rate benchmarks.

To subscribe to the Banking Litigation Notes blog, please click here.

FCA publishes its latest Industry Feedback on its 5 Conduct Questions Programme

Authors: Clive Cunningham, Harry Millerchip, Katie McGrory


The FCA recently published its Industry Feedback for 2018/19 on its 5 Conduct Questions (5CQ) Programme (which can be accessed on the FCA’s website, here).

The 5CQ Programme was introduced by the FCA in 2015 for wholesale banks as a tool to help firms improve their conduct risk management and drive cultural change. This year, the 5CQ Programme was rolled out more widely across other wholesale financial services firms, including brokers.

The Industry Feedback is divided into three sections:

  • Section 1 identifies the FCA’s high-level observations over recent years on efforts by firms to improve culture in the wholesale banking sector;
  • Section 2 address each of the 5CQs in turn and provides an update on industry progress, outlining specific examples of firm behaviours observed by the FCA during its supervision work; and
  • Section 3 sets out the FCA’s assessment of ‘speak up’ cultures and whistleblowing procedures in wholesale banks.

In this blog post we provide a brief overview of the content of the Industry Feedback; the key themes; and next steps in the 5CQ Programme. Although the Industry Feedback looks at the wholesale banking sector, the FCA has emphasised that it is broadly applicable to all firms in the financial sector and will be of interest to boards and non-executive directors (NEDs) of firms (among other stakeholders).

The Industry Feedback reflects the key priorities raised in the FCA’s Business Plan for 2019/20 (which can be accessed on the FCA’s website, here). The 5CQ Programme fits into the FCA’s broader focus on culture and governance, particularly with the upcoming extension of the UK Senior Managers and Certification Regime (SMCR).

Overview of the FCA’s Industry Feedback

Overall, the FCA concludes that firms have made significant progress with their conduct initiatives since the 5CQ Programme was introduced. As part of the 5CQ Programme, firms initially focused on correcting bad behaviours and problematic internal processes and procedures by implementing new policies and procedures, training and surveillance. The FCA now wants firms to focus on encouraging and protecting positive behaviour in its own right. Good culture and conduct are increasingly recognised as a key driver in corporate growth and a differentiating factor for customers.

The FCA highlighted a number of key themes and issues, including the following:

  • although firms in the wholesale financial services sector have improved their conduct, non-financial misconduct remains a serious issue – the treatment of a firm’s own staff should be included in its definition of ‘conduct risk’;
  • risk identification efforts are often top-down rather than bottom-up. Identifying risk (including conflicts) remains a weakness;
  • close proximity of senior managers to the trading floor will not necessarily prevent or improve conduct risk management;
  • there is little evidence of firms restructuring remuneration (eg. commission-based) to avoid or manage potential for harm; and
  • firms are establishing new committees to focus on conduct risk.

Industry progress

We set out some of the FCA’s key messages on industry progress on the 5CQ Programme below. The FCA also outlines specific examples of good and bad initiatives and responses to its 5CQ Programme, which may be of interest to firms. See Section 2 of the Industry Feedback for more detail.

The 5 Conduct QuestionsKey messages on industry progress
What proactive steps do you take as a firm to identify the conduct risks inherent within your business?
  • A firm’s definition of ‘conduct risk’ must be tailored to its own history and circumstances. It should focus on the risk of ‘good’ conduct deteriorating in addition to existing ‘bad’ conduct.
  • Firms are increasingly supplementing a top-down approach to identifying and managing conduct risk, with bottom-up initiatives.
  • Training provided by firms is shifting from conduct risk awareness to scenario-based training (without clear outcomes) to help encourage staff to better identify conduct risk and develop their own understanding of acceptable (and unacceptable) behaviours.
How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business?
  • Firms should consider reframing ‘Tone from the Top’ as ‘Tone from Above’, acknowledging the importance that most staff give to messages from their immediate manager (not just senior management).
  • Firms are reporting a significant and positive impact of SMCR on governance and conduct.
  • Most firms have introduced conduct elements to performance conversations and remuneration structures; however, in practice the FCA believes this is having only a modest effect on remuneration. Firms need to continue to focus on managing the link between conduct and remuneration.
What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function?
  • Internal infrastructure has improved and there is evidence of an increase in positive feedback loop.
  • Centrally-led and overly complex governance structures remain a challenge to improving culture and setting clear accountability.
  • Some firms may not be providing sufficient conduct risk training or adequate follow-on support for NEDs.
How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and equally importantly, how does the Board or ExCo consider the conduct implications of the strategic decisions that they make?
  • Investment in data aggregation and analysis has enabled firms’ management to gain better oversight of conduct.
  • Firms should ensure these systems also focus on encouraging and protecting ‘good’ conduct – not just remediating ‘bad’ conduct.
Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?
  • Horizon-scanning and assessments for risks that might undermine conduct objectives are generally underdeveloped.
  • Business line representatives should be present at horizon-scanning sessions (ie. horizon-scanning should not be conducted for the whole of the firm without business involvement).

‘Speak up’ and whistleblowing

The FCA also commented on the status and health of ‘speak up’ cultures and whistleblowing structures and procedures. It emphasised that ‘speak up’ initiatives and whistleblowing procedures will continue to attract periodic testing and validation as part of the FCA’s routine supervision. The FCA’s key comments include:

  • staff at firms need to feel comfortable to speak up, and share concerns and mistakes without fear of blame or retribution;
  • ‘speak up’ initiatives should be about day-to-day conversations, discussions and challenge across the whole firm. They should be framed inclusively and designed to encourage participation – not (as the FCA observed in some firms) as “speak up, or else”;
  • the FCA identified some uncertainty about the division between different channels of escalation (ie. ‘speak up’ initiatives versus whistleblowing). Firms have acknowledged they need to be clearer about the division;
  • non-financial misconduct (including sexual harassment, bullying, favouritism and exclusion) is a significant problem which needs to be tackled with buy-in from staff at all levels, including senior management. Some firms reported that their whistleblowing channels had seen an increase in the number of non-financial misconduct cases. Firms expect this has been caused by increased media coverage and firm initiatives which have encouraged reporting, rather than a deterioration in behaviour; and
  • many firms had no sense of what a normal level of whistleblowing events should be. The FCA recommends that firms establish case level expectations.

Next steps

The FCA will continue to engage with firms on their conduct across the wholesale financial services sector, both as part of the 5CQ Programme and as part of its routine supervision. The FCA has indicated that it will increasingly test and challenge management and staff on conduct progress.

As part of its wider rollout of the 5CQ Programme, the FCA noted that few firms had the range of conduct initiatives which it has seen in the larger wholesale banks. Firms should be engaging with changing their conduct as an ongoing matter of priority (and not just in response to the rollout of the 5CQ Programme).

Firms in the wholesale financial services sector (and more broadly) should review the Industry Feedback carefully and take it into account as part of their ongoing work on conduct, culture and governance, and their engagement with the FCA.

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Harry Millerchip
Harry Millerchip
Associate, London
+44 20 7466 6447

Katie McGrory
Katie McGrory
Associate, London
+44 20 7466 2669

Retail bank fined £1.89m by FCA and PRA for outsourcing failings

Author: Hanne Gundersrud


The FCA and PRA have announced their second enforcement action in relation to outsourcing failures by the retail bank R. Raphael & Sons plc (“Raphaels“). The firm failed to manage its outsourcing arrangements properly, in breach of FCA Principles 2 and 3, the applicable provisions of Chapter 8 of the FCA’s Senior Management Arrangements, Systems and Controls sourcebook (“SYSC 8”), and PRA Fundamental Rules 2, 5 and 6. Raphaels received separate fines of £775,100 from the FCA and £1,112,152 from the PRA in respect of the breaches, resulting in a combined fine of £1,887,252. Raphaels agreed to resolve the matter with its regulators and therefore qualified for a 30% discount in the fines imposed by both regulators.

Continue reading

The month ahead in financial services regulatory developments…

In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation for June 2019.

3 Jun
5 Jun
8-9 Jun
  • G20 ministerial meetings:
    • finance ministers and central bank governors (Fukuoka, Japan)
    • trade and digital economy (Tsubuka, Japan)
10 Jun
11 Jun
12 Jun
13-14 Jun
14 Jun
15-16 Jun
19-20 Jun
20-21 Jun
21 Jun
26 Jun
27 Jun
28-29 Jun
29 Jun
  • Deadline for responses to the European Securities and Markets Authority (ESMA) CP on ELTIF RTS
By 30 Jun
End Jun

Key themes from the FCA’s Approach to Enforcement

Authors: Benedicte Perowne and Kimberly Everitt

On 24 April 2019 the FCA published its final “Approach to Enforcement” document, following a consultation period which ended in June 2018. The approach document attempts to provide transparency and explain the FCA’s approach in greater depth.

The FCA’s overriding principle in its approach to enforcement is substantive justice – a commitment to achieve fair and just outcomes in response to misconduct. It intends to conduct consistent and open-minded investigations in order to achieve the right outcomes. Continue reading