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
In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation for August 2019.
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.
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:
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.
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 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 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.
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.
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?“)
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 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:
These types of contracts are commonly used as extended warranties for electrical and other goods.
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.
In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation for July 2019.
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.
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.
Authors: Clive Cunningham, Harry Millerchip, Katie McGrory
Background
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:
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:
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 Questions | Key messages on industry progress |
| What proactive steps do you take as a firm to identify the conduct risks inherent within your business? |
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| 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? |
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| 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? |
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| 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? |
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| Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct? |
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‘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:
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.
Author: Hanne Gundersrud
Overview
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.
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.
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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
