REGULATORY DEVELOPMENTS FCA SETS OUT APPROACH TO SOCIAL MEDIA AND CUSTOMER COMMUNICATIONS On 13 March 2015 the Financial Conduct Authority (FCA) published FG15/4: Social media and customer communications (Guidance), a finalised guidance document which sets out the FCA’s position on the types of social media communications that constitute financial promotions and hence fall within scope of the FCA’s regulatory powers. The Guidance sets out a broad and non-exhaustive list of the types of websites and applications that fall within the definition of “social media”, including blogs, microblogs (e.g. Twitter), social and professional networks (e.g. Facebook, LinkedIn, Google+), fora and image- and video-sharing platforms (e.g. YouTube, Instagram, Vine, Pinterest). The Guidance contains illustrative examples of compliant and non-compliant social media communications. Some of the significant issues addressed in the Guidance are summarised below. Capacity of Communicator: The FCA confirms that its regulatory powers only apply to communications made “in the course of a business” and not by an individual in his or her personal capacity. Where an individual closely associated with a business makes a communication through social media, it should be made clear that the communication is not made in the course of that business. Unintended Recipients: Social media communications can quickly reach a large number of unintended recipients. Businesses should ensure that such communications remain clear, fair and not misleading from the viewpoint of these recipients. Software allowing the precise targeting of particular groups can be used to reduce the risk of a communication reaching unintended recipients. Risk Warnings: Where a communication, such as a “tweet” or a “post”, is accompanied by an image, care should be taken to ensure that any required risk warning is not solely contained in the image, as certain websites and applications grant the user an option to remove images from such communications. Signposts: Communications containing a link to another website containing a financial promotion must be standalone compliant with FCA requirements. Communicating Customer Feedback: A business forwarding or sharing (e.g. “retweeting”) a customer communication, where the communication endorses a regulated financial product or service, will constitute a financial promotion by the business, even though the business did not produce the communication originally. Cold Calling: The FCA advises that a person “following” or “liking” a business does not constitute “an established client relationship” or an “express request” for the purpose of the FCA’s rules on unsolicited promotions. Record Keeping and Approval: Businesses should keep adequate records of significant communications. In addition, businesses should have procedures in place so that only appropriately senior and competent employees are able to approve communications. NEW SENIOR MANAGERS REGIME – PRA PUBLISHES FIRST SET OF FINAL RULES On 23 March 2015, the Prudential Regulation Authority (PRA) published Policy Statement (PS3/15) which sets out its feedback to responses to the consultation papers on the new frameworks for individuals in the Banking and Insurance sectors (CP14/14, published July 20141 and CP26/14, published November 2014). PS3/15 also sets out the first set of the PRA’s final rules implementing the Senior Managers Regime (SMR) and Certification Regime for UK banks and PRA designated investment firms (relevant authorised persons) and the Senior Insurance Managers Regime (SIMR) for Solvency II insurers. The PRA noted that some elements of the new regimes need to be finalised in conjunction with the FCA and certain aspects of the regimes are still under development. The PRA’s final rules for relevant authorised persons cover: senior management functions (SMFs), allocation of Prescribed Responsibilities, the Certification Regime, and assessing fitness and propriety. The final rules set out in the PS3/15 come into force on 7 March 2016. 1 Please refer to our Exchange International Newsletter, Issue 24 for further analysis of the PRA/FCA joint consultation paper. www.dlapiper.com | 15 1. Key matters still under development The following elements are to be finalised: ■ The treatment of non-executive directors (NEDs). In CP7/15, the regulators proposed that only the Chairman, Chairs of the Risk, Audit, Remuneration and Nomination Committees and Senior Independent Director would be subject to the SMR. ■ The approach to the presumption of responsibility in section 66B, Financial Services and Markets Act 2000 (FSMA), which was also addressed in CP7/15. The PRA noted that a large number of respondents requested further clarification on how the regulators would apply the ‘presumption of responsibility’ in practice, in particular, the action required to satisfy the ‘reasonable steps defence’. ■ A template for the statement of responsibilities (CP28/14). ■ The application of the new regimes to UK branches of foreign banks. In CP9/15, the PRA proposed to require all incoming non-EEA branches to have at least one individual pre-approved as a Head of Overseas Branch. If another individual based in another UK group entity has direct management and/or decision-making responsibility over the incoming non-EEA branch’s UK-regulated activities, that individual needs to be pre-approved as Group Entity Senior Manager of the branch. Dedicated individuals performing certain executive SMFs will also need to be approved. The FCA proposed to apply a new SMF (Overseas Branch Senior Manager) to incoming non-EEA branches. 2. Final Rules (a) Senior Management Functions The PRA has not made any substantive changes to the set of SMFs proposed in CP14/14, but clarified the application of the Group Entity Senior Manager (SMF7) and the application of the SMR to small firms: ■ The current approach to approval of senior individuals located overseas under the Approved Persons Regime (APR) will continue in relation to approval of the Group Entity Senior Manager Function (SMF7), i.e. there must be a direct link between the individual’s decisions, powers and responsibilities and the areas and activities of the firm subject to UK regulation. ■ The PRA will apply fewer requirements to firms with gross total assets of £250 million or less, calculated across a rolling period of five years or, if the firm has been in existence for less than five years, across the period during which it has existed. Such firms will only be required to have a CEO, CFO and a Chairman and be subject to a single, customised, shorter and simplified set of Prescribed PRA Responsibilities. (b) Allocation of Prescribed Responsibilities As proposed in CP14/14, it will be possible for Prescribed Responsibilities to be wholly allocated to more than one Senior Manager, but not split. This means that in principle, each individual could be deemed wholly responsible for the Prescribed Responsibility. In addition, the PRA will not allow firms to attempt to explain in the Statement of Responsibility which individual is responsible for which aspect of the Prescribed Responsibilities. However the PRA will allow individuals who have been allocated a Prescribed Responsibility “to explain how the shared Prescribed Responsibility was discharged in practice when trying to demonstrate that he or she took reasonable steps to avoid the breach”. The PRA has also: ■ adopted the requirement for ring-fenced banks (RFBs) to allocate the RFB Prescribed Responsibility to all Senior Managers responsible for areas covered by the ring-fencing requirements; ■ amended the wording of these two responsibilities to clarify that the CEO and Chairman should both play a leading role in their development and implementation; ■ added Prescribed Responsibilities for large firms relating to stress testing (PR11) and remuneration (PR18); and ■ clarified that the handover arrangements requirement does not entail a need for a handover certificate to be produced by the departing Senior Manager. 16 | Exchange – International Newsletter (c) The PRA’s Certification Regime The PRA will proceed with the approach to specifying certification functions set out in CP14/14. However, the PRA has decided to extend the ‘grace period’ proposed in CP14/14 from two weeks to four weeks. (d) Assessing fitness and propriety The PRA noted that respondents were generally content with its proposed approach to assessing the fitness and propriety of Senior Managers and with the factors firms should take into account. Therefore the PRA will proceed with these requirements, including the requirement to carry out criminal records checks before submission of a SMF application. FCA PUBLISHES DISCUSSION PAPER ON MIFID II IMPLEMENTATION On 26 March 2015, the FCA published a discussion paper (DP15/3) on its approach to implementing aspects of the MiFID II where it has discretion. The discussion is open for comments until 26 May 2015. Formal consultation on MiFID II implementation will take place later in 2015. The discussion paper covers the following topics: ■ Applying MiFID II rules to insurance-based investment products and pensions. Although not within MiFID scope, the FCA already applies most of its MiFID I-derived conduct of business rules (Conduct of Business sourcebook (COBS)) to such products. The FCA considers that insurance-based investments and pensions should, in principle, continue to be governed by the same conduct of business rules as MiFID II investments. ■ Treatment of structured deposits. The investor protection requirements under MiFID II have been extended to cover structured deposits. These products are currently regulated through the Principles for Businesses and the FCA’s Banking Conduct of Business sourcebook (BCOBS), which is less onerous than the requirements under the COBS and therefore the FCA is seeking views on how it should incorporate these new requirements. ■ Receipt of commissions and other benefits for discretionary investment managers. MiFID II bans discretionary investment managers from accepting and retaining third party commissions, fees and monetary and non-monetary benefits, unless those payments are rebated in full to clients. The FCA is considering whether it should develop rules to ban receipt of such payments even if they are to be related to the client. ■ Professional client business – client categorisation and treatment of local public authorities and municipalities. Local authorities are categorised as retail clients (with the ability to opt-up to elective professional status where they meet the qualifying criteria) under MiFID II. Member states have been given the discretion to adopt specific alternative or additional criteria for the assessment of the expertise and knowledge of such entities requesting the opt-up. The FCA has put forward three options on how they should exercise this discretion, but have stated that their initial preference is to strengthen the opt-up criteria. ■ Adviser independence. MiFID II introduced a new EU-wide standard for ‘independent advice’, which requires firms offering independent advice to assess a “sufficient range of different product providers’ products…prior to making a personal recommendation.” The FCA’s existing independence requirements cover “retail investment products”, which includes some MiFID investment products (e.g. structured products and UCITS) and some non-MiFID products (e.g. insurance-based investments and personal pensions). However, the existing requirements do not cover other products such as shares, derivatives, bonds and structured deposits. The FCA does not consider it proportionate to include shares, bonds and derivatives in the retail investment products definition, but does consider it appropriate to include structured deposits within the definition of retail investment products (given its substitutability with other MiFID products). www.dlapiper.com | 17 ■ Applying MiFID II’s remuneration requirements for sales staff and advisers to non-MiFID firms. The remuneration rules under MiFID II seek to ensure that sales staff and advisers are not incentivised to sell products inappropriately. There are currently various provisions that directly or indirectly seek to achieve the same outcome – Principle 3 which applies to all types of firms and Remuneration Codes in SYSC 19A (which applies to banks and CRD IV investment firms), SYSC 19B (which apply to alternative investment fund managers) and SYSC 19C (which applies to MiFID investment firms which do not fall within CRD IV). The FCA is seeking views on whether it should explore applying the remuneration standards under MIFID II to non-MIFID II business, e.g. applying the standards to consumer credit firms. ■ Recording of telephone conversations and electronic communications. MiFID II requires member states to require ‘Article 3 firms’ (firms who are exempt from MiFID requirements pursuant to the optional exemption under Article 3 of MiFID) to comply with requirements ‘analogous’ to certain conduct of business and organisational requirements under MIFID II. Currently, such firms in the UK are subject to a domestic regime which satisfies the majority of the MIFID II requirements. However, the FCA Article 3 firms that are retail IFAs and boutique corporate broking firms do not need to comply with requirements relating to the recording of telephone conversations or electronic communications. The FCA is considering whether to apply MiFID II recording rules to all Article 3 firms. The FCA is keen to avoid inconsistencies in its supervisory approach and is therefore also proposing to remove the duplication exemption that currently applies to discretionary investment managers and MiFID II recording rules. ■ Costs and charges disclosure. MiFID II introduces a new costs and charges disclosure requirement. The FCA is keen to explore the practical and technical challenges that firms may face in presenting aggregated costs and charges information to consumers. The FCA is also seeking views on whether it should investigate developing a standardised format for disclosing costs and charges for both point-of-sale and post-sale disclosures. ■ MiFID II’s revised inducements standards. MiFID II significantly strengthens existing MiFID I inducement standards and some MiFID II requirements are stricter than current UK rules. For example, MiFID II bans discretionary investment managers from accepting and retaining fees, commissions or any monetary or non-monetary benefits from third parties, (apart from certain minor non-monetary benefits). A number of changes will need to be made to current UK rules, e.g. the MiFID inducement rules apply to retail and professional client business, whereas the inducements rules under the UK Retail Distribution Regime (RDR) only applies to retail client business. The FCA also anticipates that UK rules for independent advisers will also need to be strengthened once the corresponding MiFID II rules have been finalised. The FCA is seeking views on whether it should maintain consistency and apply MiFID II’s inducement standards for independent advice to restricted advice and to extend the requirements to insurance-based investments and pensions. ■ Complex and non-complex products and application of the appropriateness test. MiFID II has restricted the types of products that can be classified as ‘noncomplex’ which means that the types of products which can be sold execution-only have been narrowed. The FCA notes that the Commission is taking a strict interpretation of the new complexity criteria for debt securities and structured deposits and that it is likely that in future any shares and bonds that embed a derivative, structured UCITS, non-UCITS collective investment undertakings will be considered complex. The FCA view is that not all ‘complex’ products come with the same risks and therefore do not require the same level of knowledge and experience; however it would expect the appropriateness assessment to be particularly thorough where complex financial instruments are being offered to less experienced customers who may be less likely to understand the risks. The FCA also notes that firms which currently offer direct offer financial promotions are unlikely to be able to meet the requirements of the appropriateness test because the obligation to perform the appropriateness test is on the firm, not the client/ potential client. 18 | Exchange – International Newsletter FCA REGULATES SEVEN ADDITIONAL FINANCIAL BENCHMARKS On 1 April 2015, the seven additional UK-based benchmarks set out below were brought within scope of the FCA’s regulatory powers. ■ Sterling Overnight Index Average (SONIA) ■ Repurchase Overnight Index Average (RONIA) ■ ICE Swap Rate (previously called ISDAFIX) ■ WM/Reuters (WMR) London 4pm Closing Spot Rate ■ LBMA Gold Price (which has replaced the London Gold Fixing) ■ LBMA Silver Price ■ ICE Brent Index The London Interbank Offered Rate (LIBOR) has been within the perimeter of the FCA’s regulatory powers since 2 April 2013. The extension of the scope of the regulatory regime for UK-based benchmarks follows recommendations arising out of the Fair and Effective Markets Review, which is led by the Bank of England, HM Treasury and the FCA and was launched in order to reinforce the integrity of and confidence in UK wholesale financial markets. In respect of each of the benchmarks above, any person who collects, analyses or processes information for the purpose of determining a benchmark, or administers the arrangements for determining a benchmark (Benchmark Administrator), will be carrying on a regulated activity and will require FCA authorisation. Any person who provides information to another person in connection with and for the purpose of the determination of a relevant benchmark (Benchmark Submitter) will also need to be authorised by the FCA. Chapter 8 of the Market Conduct Sourcebook (MAR) contains the relevant FCA rules with which Benchmark Administrators and Benchmark Submitters must comply. Chapter 8 of MAR has been amended to reflect the fact that, unlike LIBOR, a number of the additional seven benchmarks are determined based on publicly available data that has not been made available for the purpose of determining a benchmark, rather than based on information provided by Benchmark Submitters. Chapter 8 MAR also contains new provisions requiring Benchmark Administrators to keep records on the information used to determine benchmarks and the originators of such information. The changes to MAR came into effect on 1 April 2015 and are shown in the FCA’s policy statement: Bringing additional benchmarks into the regulatory and supervisory regime (March 2015). PRA SUPERVISION OF INTERNATIONAL BANKS: BRANCH RETURN REQUIREMENT The PRA has published a policy statement: Supervising international banks: the Branch Return, in which the PRA confirms that it will be introducing a new rule requiring UK branches of banks incorporated outside of the UK (i.e. incorporated in either the EEA or a third country) to provide the PRA with a twice-yearly branch return, providing information on their UK activities. The PRA states that branch returns received as part of a voluntary pilot collection have supported the development of the PRA’s risk appetite for branches, informed supervisory strategy for individual firms, provided a cross-firm view with regard to certain specific risks and supported policy formulation. The new requirement to provide a branch return follows the recent implementation by the PRA of new rules requiring UK branches of non-UK banks to ensure that their resolution plans provide adequately for the resolution of UK branches. This requirement came into effect on 5 September 2014, following another PRA policy statement. The new rules will come into effect on 1 July 2015. BANK OF ENGLAND OUTLINES 2015 BANKING SYSTEM STRESS TEST The Bank of England has published a paper: Stress testing the UK banking system: key elements of the 2015 stress test (Paper), which sets out the key elements of the 2015 stress testing of the UK banking system. The 2015 stress test will be carried out on banks and building societies that collectively account for around 70% of lending to UK businesses and 75% of UK mortgage lending. www.dlapiper.com | 19 In 2014, the Bank of England and PRA carried out the first concurrent stress test of the UK’s largest banks and building societies, which followed on from the Financial Policy Committee’s (FPC) March 2013 recommendation that the Bank of England and PRA should conduct regular stress testing on the UK banking system. A key difference between the 2014 stress test and the 2015 stress test will be that the parameters and methodology of the 2015 stress test have been fully designed by Bank of England staff, whereas the 2014 was primarily a UK-adapted version of the EBA’s EU-wide stress test of the European banking system. There will be two core elements of the 2015 stress test, each of which is considered below. Testing scenarios Two scenarios will be considered as part of the stress test. First, a stress scenario will be considered, which is designed specifically to assess the resilience of UK banks and building societies to a deterioration in global economic conditions. Second, a baseline scenario will be considered, which will enable assessment of banks’ and building societies’ projected profitability and capital ratios in circumstances similar to those set out in the Bank of England’s Inflation Report published in February 2015. Hurdle rate framework The results of the stress test will be used to inform the PRA’s assessment of the capital adequacy of individual banks and building societies along with their risk management and capital planning processes. Where a bank’s key capital ratios fall below certain thresholds in the stress scenario, it is likely that the PRA will require the bank to strengthen its capital position. The FPC will use the results to assess the UK banking system as a whole and develop system-wide policy responses where appropriate. HM TREASURY LAUNCHES CONSULTATION ON MIFID II TRANSPOSITION HM Treasury launched its Consultation on MiFID transposition on 27 March 2015. The government is seeking views on its draft secondary legislation as well as its general policy approach to certain policy areas where is has not provided draft legislation. However, on-going discussions between EU member states and the EU Commission on MiFID II transposition may result in amendment of the government’s approach, particularly where areas of uncertainty are clarified (see below). The consultation closes on 18 June 2015. Draft statutory instruments The Treasury has published four draft statutory instruments as annexes to the Consultation: ■ Draft Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2016 (Annex A of the Consultation). This draft instrument, amongst other things: provides for the exercise of the optional exemption under Article 3 of the MiFID II Directive; creates the position limit regime; and sets out obligations in relation to algorithmic trading, provision of direct electronic access services, acting as a general clearing member and the synchronisation of business clocks. ■ Draft Financial Services and Markets Act 2000 (Data Reporting Services) Regulations 2016 (Annex B of the Consultation). Persons who provide data reporting services (DRS) will need to be authorised under Article 59 of the MIFID II Directive. The government is proposing to create a specific regime for the DRSs which is independent of the Regulated Activities Order (RAO) and is seeking comments on its approach to the structure of the definition of Data Reporting Services Provider (DRSP). The government is also proposing to apply provisions akin to sections 89 (Misleading statements) and 90 (Misleading impressions) of the Financial Services Act 2012 to DRSPs. 20 | Exchange – International Newsletter ■ Draft Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2016 (Annex C of the Consultation). This draft instrument amends the RAO to: bring within its scope the new regulated activity of operating an organised trading facility; provide that structured deposits are within the scope of certain specified activities; make emission allowances a specified investment; make options and futures specified investments in certain circumstances involving alternative investment fund managers; and transpose the exemptions under Article 2 of the MIFID II Directive. ■ Draft Financial Services and Markets Act 2000 (Qualifying EU Provisions) (Amendment) Order 2016 (Annex D of the Consultation). This draft instrument amends the Financial Services and Markets Act 2000 (Qualifying EU Provisions) Order 2013 to make MiFIR a qualifying EU provision for various parts of FSMA, which grants the FCA and PRA the appropriate powers to perform their roles arising from MiFIR. The Treasury has also provided draft secondary legislation provisions which will provide that certain binary options are regulated and supervised by the FCA, rather than the Gambling Commission (Annex E of the Consultation). Third Country Regime There are two parts to the MiFID II third country regime: ■ Article 47 of MiFIR allows third country firms to provide services to eligible counterparties and professional clients without the need to establish a branch provided that the firm is registered with ESMA. ■ Article 39 of the MiFID II Directive gives member states the option to require third country firms who provide services to retail and elective professional clients to establish a branch in its jurisdiction. Branches authorised in accordance with Article 39 benefit from the MiFID passport. Although the UK government acknowledges that the Article 39 MiFID II third country regime has a number of potential benefits (e.g. the MiFID passport), it is minded not to implement the regime. The government is proposing to retain its current third country regime, which broadly provides for three routes for accessing the UK market: ■ establishment of a UK subsidiary that must apply for UK authorisation, which is then able to passport into other EU countries (sections 55A and 55B FSMA); ■ establishment of a UK permanent place of business – a UK branch – and obtain authorisation for the third country entity. This is subject to prudential assessment and cooperation of the third country. The branch cannot then passport into other EU countries (section 55D FSMA); and ■ reliance on exclusions provided for in UK legislation, e.g. the ‘overseas persons’ exclusion in Article 72 of the RAO, which includes exclusions for particular investment services and activities carried on in the context of a “legitimate approach” or carried on “with or through” an authorised or exempt UK person. In this case the entity will not have a physical presence in the UK. Position limits and reporting MiFID II introduces a position limit regime for commodity derivatives traded on trading venues and for economically equivalent OTC contracts. The regime applies to persons holding positions in relevant contracts whether or not the persons are authorised and therefore the government considers it preferable to implement the requirements as a “standalone” regime. Structured deposits Firms selling or advising clients in relation to structured deposits will need to comply with certain provisions under MiFID II (e.g. in relation to management oversight, organisational and conduct of business requirements and transactions executed with eligible counterparties). The government is proposing to amend Article 3 of the RAO to include the definition of structured deposit (to be copied out from MiFID II) and to extend the following regulated activities so as to apply to structured deposits: Article 21 (Dealing in investments as agent); Article 25 (Arranging and making arrangements); Article 37 (Managing investments); and Article 53 (Advising on investments). www.dlapiper.com | 21 Benchmarks The government notes that once the proposed regulation on indices used as benchmarks in financial instruments and financial contracts (the Benchmark Regulation) has been settled, it will consider whether it needs to amend FSMA so that a “person with a proprietary right to a benchmark” (but who is not authorised) is subject to certain FCA enforcement powers and rights of information. Power to remove board members MiFID II introduces a new provision in Article 69(2)(u), which requires that a competent authority has at least the power to “require the removal of a natural person from the management board of an investment firm or market operator”. The government is seeking views on the best approach to transpose this power and have outlined two options for consideration: ■ Option A – rely on existing FSMA powers under the Approved Persons Regime; or ■ Option B – create a new standalone power in Part V FSMA to allow the PRA/FCA to require an institution to remove members of its board where specific conditions are met. Organised Trading Facility (OTF) MiFID II creates a new category of investment service, the operation of an OTF, which will principally apply to firms carrying out matched principal trading electronically for clients. An OTF can only facilitate the trading of bonds, structured finance products, emission allowances or derivatives on a discretionary basis. The government proposes to amend the RAO to include this as a new regulated activity, but that it will not require firms to apply for a separate dealing in investments as principal permission, in addition to the activity of operating an OTF, if they engage in matched principal trading as an operator. REPORTS FCA PUBLISHES BUSINESS PLAN FOR 2015/2016 The FCA published its 2015/2016 business plan on 24 March 2015 (Business Plan), which sets out how the FCA plans to pursue its statutory objectives as well as its priorities for the 2015/2016 period. In previous years, the FCA had also published a risk outlook document alongside its business plan setting out the FCA’s most important areas of focus for the relevant period. However, for the 2015/2016 period, the FCA has combined the business plan and risk outlook to form one document. The intention behind this change is to show clearly how the FCA’s analysis of risk is connected to both its regulatory actions and how it seeks to advance its objectives. FCA Priorities A number of the FCA’s priorities for the 2015/2016 period as set out in the Business Plan are set out below. ■ Review of retirement sales practices. In light of the changes to the rules regarding access to pensions, the FCA will review retirement sales practices. In particular, the review will focus on how firms are supporting consumers to make appropriate choices on retirement given the wider range of options available. ■ Consumer credit regime. The FCA will continue to implement and review the consumer credit regime, with a particular focus on youth indebtedness, which is becoming an increasingly significant feature of the market. ■ Developments in technology. The FCA will monitor developments in technology and how such developments affect firms and consumers. In particular, the FCA will carry out a market study on the use of “big data” (such as web analytics and behavioural data tools) in the insurance market. ■ Mortgage market. The FCA will assess the mortgage market and plan to examine how the market is operating following the Mortgage Market Review. 22 | Exchange – International Newsletter ■ Wholesale markets. Work in the wholesale markets will continue, including a market study into competition in investment and corporate banking services, as well as working alongside the Bank of England and HM Treasury on the UK Government’s Fair and Effective Markets Review. Risk Outlook The Business Plan sets out the seven main areas of focus that the FCA considers pose the greatest risks to its objectives. These areas of focus are set out below. For the most part, they are consistent with the risk areas identified in the FCA’s 2014/2015 risk outlook paper. However, in the Business Plan, the issue of rapid growth in house price has been replaced with financial crime as one of the FCA’s top seven areas of concern. The FCA has stated that nevertheless rapid growth in house prices remains of significant concern. ■ Technological developments. Increasing reliance on technological platforms and engagement with technologies could give rise to a number of risks, as utilisation of technology may outstrip firm and consumer capacity and capability, and may outperform the regulatory responses to the resulting risks. ■ Culture in firms. The FCA considers that poor culture and controls threaten the soundness, stability and resilience of financial markets, although the FCA acknowledges that efforts have been made by firms to improve in these areas. ■ Large back-books of customers. A large number of firms in certain retail markets operate with a large stock of back-books (stock of existing customers). Large back-books arise where customers remain with providers for many years. This often occurs in relation to current and savings accounts, insurance products and mortgages. There is a risk that firms may rely on extracting value from back-book customers to support profitability by cross-selling unwanted products and offering existing customers worse terms than new customers. ■ Old-age consumers. Pensions, retirement income products and distribution methods may deliver poor consumer outcomes. A recent FCA market study into the retirement market demonstrated that consumers tend to under-estimate longevity, making it difficult for elderly consumers to determine the most appropriate products. The FCA considers that firms may develop decumulation products or services that highlight certain key features at the expense of other important information, as well as the products themselves being complex, opaque and overpriced. ■ Unaffordable debt due to poor practice. Poor culture and practice in consumer credit affordability assessments could result in unaffordable debt. In particular, there is a risk that this will increasingly affect younger consumers. The FCA notes that increasing economic stress levels of consumers under the age of 30 may have resulted in an increased tendency for young people to use credit and debt products to service their day-to-day living. There is a risk that high levels of debt for younger consumers can lead to problems later in life, including problems in being offered a mortgage. ■ Unfair Contract Terms. Consumers risk getting a bad deal if, based on unfair contract terms, firms change the nature or costs of their products, or have too much discretion as to what benefits derive from their products. This year, the scope for the assessment of fairness of consumer contract terms will be widened under the Consumer Rights Act. This follows recent cases from the European Courts, which have added clarity to the basis for assessing the fairness of consumer contracts. ■ Financial Crime. Financial crime, in particular money laundering, as well as bribery and corruption, poses a risk to the integrity of the UK financial system. The FCA will continue to focus on these measures across the 2015/2016 period. The FCA indicates that it will work with the PRA, the Financial Stability Board and regulators internationally to address concerns about “derisking”, whereby banks use issues around financial crime to move away from providing services to entire groups of customers or business sectors. www.dlapiper.com | 23 ENFORCEMENT DEUTSCHE BANK FINED £226,800,000 FOR LIBOR BREACHES Pursuant to a final notice dated 23 April 2015 (Notice), the FCA has fined Deutsche Bank AG (Deutsche) £226,800,000 in relation to Deutsche’s manipulation of both the LIBOR and the Euro Interbank Offered Rate (EURIBOR) (collectively IBOR) rates over a period of at least five years. In order to gain financial advantage, Deutsche, through its Money Markets Derivatives and Pool Trading desks, engaged in a course of conduct to manipulate Deutsche’s IBOR submissions in breach of Principle 5 of the FCA’s Principles for Businesses (FCA Principles) which requires firms to observe proper standards of market conduct. Deutsche’s conduct also involved instances of collusion with external parties and the carrying out of certain trading activities in order to maximise impact on IBOR rates. Managers at Deutsche were central to this misconduct. The FCA held that there was a culture within Deutsche to increase revenues without proper regard to the wider integrity of the market. In respect to manipulation of EURIBOR, traders influenced Deutsche’s submitters to alter Deutsche’s EURIBOR submission, contacted other banks and requested that they put in different EURIBOR submissions, and offered or bid cash in the market to create an impression of an increased or reduced supply in order to influence other banks to alter their EUIRBOR submissions. The FCA also determined that Deutsche breached Principle 3 of the FCA Principles, which requires firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems. This breach arose out of Deutsche’s failure to have any IBOR-specific systems and controls in place. Deutsche failed to address its lack of systems and controls even after being put on notice of the risk of misconduct. Furthermore, Deutsche had defective systems and controls in place to support the audit and investigation of traders more generally. Specifically, Deutsche had poor systems to facilitate the recovery of recordings of traders’ telephone calls and the mapping of trading books to traders, which impeded the FCA’s investigation. Finally, Deutsche failed to comply with the Principle 11 requirement to deal with its regulators in an open and cooperative way, and to disclose to the appropriate regulator anything relating to the firm of which that regulator would reasonably expect notice. Deutsche’s breaches of Principle 11 are set out below. ■ First, Deutsche had recklessly failed to disclose a report relevant to Deutsche’s misconduct which had been commissioned by the Federal Financial Supervisory Authority for Germany on the basis that Deutsche had been prohibited from disclosing the report by the German regulator. It transpired that no such prohibition existed. ■ Second, an individual on behalf of Deutsche knowingly provided a false formal attestation to the FCA, which stated that Deutsche had adequate systems and controls in relation to LIBOR submissions at a time when no such systems or controls existed. ■ Third, Deutsche failed throughout the FCA investigation to provide accurate, complete and timely information, explanations and documentation to the FCA, causing delay and difficulties to the FCA. The FCA concluded that such failures were not intentional on the part of Deutsche. Overall, the FCA considered that the various breaches of Principles 3, 5 and 11 warranted significant financial penalties. In respect of Principles 3 and 5, the fundamental importance of the IBOR rates to the UK and global financial markets, as well as the exacerbation of the extent and duration of Deutsche’s breaches caused its failure to have IBOR-specific systems and controls, were considered to be aggravating factors when determining Deutsche’s financial penalty. Deutsche’s breaches of Principle 11 were also considered to warrant a substantial financial penalty due to the involvement of Deutsche’s senior management in Deutsche’s breaches generally, along with a false formal attestation having been provided to the FCA. As Deutsche agreed to settle at an early stage of the FCA’s investigation, it qualified for a 30% reduction in the fine. Had the discount not been applied, the totally penalty would have been £324,000,000. 24 | Exchange – International Newsletter FCA BANS TRADER FOR LIBOR MANIPULATION The FCA has issued a final notice dated 27 February 2015 (Notice), prohibiting Paul Robson, a former money markets trader, from performing any function in relation to any FCA-regulated activity following his involvement in the manipulation of the Japanese Yen LIBOR (JPY LIBOR) between at least May 2006 to at least early 2011. The Notice was issued after Robson, facing an indictment by the United States Department of Justice (DoJ), pleaded guilty to one count of conspiracy in relation to attempts to manipulate the JPY LIBOR. A copy of the indictment is attached to the Notice at Annex A. Robson was employed by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank) as a money markets trader between October 1990 and October 2008. As part of this role, Robson acted as the primary submitter for the JPY LIBOR for the bank. Robson submitted false statements to the British Bankers’ Association and took requests from traders as well as trading positions into account when making such submissions in order to manipulate the JPY LIBOR to his advantage. Traders at Rabobank held positions in relation to derivative contracts which referenced the JPY LIBOR. Due to the scale of these positions, small moves in the JPY LIBOR could result in large swings in profit or loss for the bank. In light of Robson’s criminal conviction for an offence of dishonesty, the FCA determined that Robson lacks honesty and integrity and is hence not fit and proper. The seriousness of Robson’s misconduct was aggravated by the fact that: ■ he was an experienced employee of Rabobank and was an approved person; ■ he engaged in the manipulation of the JPY LIBOR over a prolonged period of time; and ■ LIBOR is of significant importance to the operation of UK and global financial markets. The Notice follows a final notice dated 29 October 2013 issued by the FCA to Rabobank for manipulation of the JPY, USD and GBP LIBOR rates. Please contact firstname.lastname@example.org, email@example.com or firstname.lastname@example.org for further information.