FCA updates on funds: FCA has updated on its authorisation and supervision priorities for funds. It says:

  • from April 2015 it will introduce new targets for authorisation of non-UCITS retail schemes (two months) and qualified investor schemes (one month). It continues to aim for a two-month target for authorising UCITS funds;
  • it carried out a review on derivative reporting and disclosure. It found that UCITS customers often do not get adequate information about leverage. It also found most firms do not submit to FCA details of their derivative risk management process although FCA's rules require them to do so;
  • it carried out a review of valuation and liquidity oversight. It found firms rely on a single standing independent valuer when they should carry out some check of valuation. It also found depository and trustee monitoring of liquidity varied greatly across funds. Although this monitoring should reflect the liquidity risk, firms must ensure the right degree of oversight; and
  • it has agreed with trustees and depositaries that they will regularly report to it fund breaches and summaries of their visits to authorised fund managers.

(Source: FCA Updates on Funds)

FCA feeds back on dealing commission: FCA has published a feedback statement to its Discussion Paper on the use of dealing commission. Its paper sets out:

  • FCA's views on ESMA's advice to the Commission: FCA says it supports ESMA's final advice on inducements and research. It notes the difference between the draft and final advice as ESMA now sets out a "positive" model for how portfolio managers can still pay for research such that it is not an inducement. FCA believes this removes the inducement risk and conflicts of interest for portfolio managers and will lead to better scrutiny by managers and improved monitoring and best execution. It notes ESMA's view that commission sharing arrangements do not entirely address the conflicts problems. FCA thinks ESMA's intention is to create a "hard dollar" research market;
  • feedback on FCA's request for views on the options ESMA had presented: FCA found respondents tended to hold one of three opinions: (i) investors and their representatives favoured unbundling; (ii) trade associations and individual firms acknowledged the need for improvements to the current regime but thought this could be addressed by building on the current dealing commission rules; and (iii) other associations and firms said there was no need for radical reform. FCA believes a reform that fully separates portfolio managers' receipt of research from execution arrangements will improve competition in the research market;
  • how FCA intends to implement relevant aspects of MiFID 2. FCA notes that MiFID 2 reforms will radically enhance disclosures of all costs and charges. It notes concerns over dealings with non-EEA firms that still prefer a bundling option but hopes there can be commercial solutions; and
  • what FCA expects from investment management firms up to MiFID 2 implementation. Firms must, for the time being, comply with the Conduct of Business Sourcebook (COBS) requirements, specifically COBS 11.6. But they also need to start considering how MiFID 2 will force them to change their controls. FCA plans to implement any changes to its rules as part of MiFID 2 implementation and expects its consultation on the relevant parts of implementation to take place in late 2015. 

(Source: FCA Feeds Back on Dealing Commission)

FCA announces wholesale market competition investigation: FCA is to carry out an investigation of competition in investment and corporate banking services. Its initial review into competition in the wholesale sector found clients may find it hard to assess whether they are getting value for money because of limited clarity on price and quality of service. It also saw a potential for bundling and cross-selling of services to be a barrier for small firms or new market entrants when they try to challenge large established players. FCA will publish terms of reference for the market study shortly and will also consider undertaking a separate market study into asset management and related services later in the year. This announcement comes shortly ahead of FCA assuming "concurrent powers" to enforce UK/EU competition law from 1 April and it will be likely to take into account those new powers when considering imposing any remedies later in its process. (Source: FCA Announces Wholesale Market Competition Investigation)

FCA and PRA consult on NEDs and the SMR: FCA and PRA have published a joint consultation paper setting out their approach to non-executive directors (NEDs) under the new Senior Managers Regime (SMR). The consultation confirms that NEDs with specific responsibilities  ̶  Chairman, Senior Independent Director and chairs of the Risk, Audit, Remuneration and Nominations Committees - will fall under the SMR while those who do not perform delegated responsibilities will not. The paper also covers how the regulators will impose regulatory sanctions on individual senior managers where a bank breaches a requirement and the relevant senior manager cannot show they took reasonable steps to avoid or stop it. Key provisions of the proposals:

  • require firms to apply the same fitness and propriety standards to all NEDs in relevant firms regardless of whether they are in scope of the SMR or not;
  • make certain notifications in respect of NEDs who are out of scope of the SMR;
  • clarify the individual responsibilities and accountability of NEDs who are within SMR scope; 
  • set out PRA's proposed approach to applying the presumption of responsibility to senior managers in relevant firms; and
  • confirm FCA's decision to take a similar approach for Solvency 2 firms to achieve consistency between regimes. "Standard NEDs" will not fall within the combined SMR or the regime for individuals in Solvency 2 firms. 

The paper includes draft rules, supervisory statements and forms. Consultation closes on 27 April. (Source: FCA and PRA Consult on NEDs and the SMR)

FCA and PRA update on whistleblowing: FCA has updated its website pages on whistleblowing. The pages explain:

  • how to be a whistleblower;
  • the law and individuals' rights; and
  • how FCA uses information whistleblowers provide.

The page complements a joint consultation paper from FCA and PRA on whistleblowing in dual-regulated firms. The paper proposes requiring all relevant firms to put in place whistleblowing policies if they have not already done so and to ensure they tell UK-based employees of their rights to blow the whistle. It also addresses protections for whistleblowers and proposes to allocate the prescribed responsibility for whistleblowing under the SMR to a specific individual, who must oversee internal arrangements, report to the board and report employment tribunal findings in favour of a whistleblower to FCA. Consultation closes on 22 May. (Source: FCA and PRA Update on Whistleblowing)

FCA looks at consumer vulnerability: FCA has published an occasional paper illustrating how poorly firms sometimes treat vulnerable customers and encouraging firms to address this. (Source: FCA Looks at Consumer Vulnerability)

FCA consults on consumer credit changes: FCA is consulting on changes to its consumer credit rules. Its proposals cover several aspects of regulation:

  • Credit broking: FCA seeks views on whether it should keep the rules on fees, transparency and cancellation rights in relation to credit broking business that it introduced in December 2014 without consultation following its concern over brokers' role, particularly in high-cost short-term credit (HCSTC). The paper both reiterates why FCA made the changes and includes its cost-benefit analysis of the change. FCA sees no reason to make any changes, except for a few minor additions and clarifications. It is also seeking views on appropriate remuneration structures for credit brokers, disclosure of fees and commissions and fee payments. It will then decide whether to make further rules.
  • Lending: FCA plans to require firms to treat guarantors as customers for lending business (currently they must only do so for debt collecting and administration purposes), so firms will have to provide adequate explanations to guarantors, assess their creditworthiness and treat them with forbearance. It also seeks views on introducing rules that set out when it might be appropriate to provide separate disclosures and carry out separate assessments on joint borrowers. Further, it plans to remove the provisions in chapter 9 of the Consumer Credit Sourcebook (CONC) that relate to credit reference information and to make other minor changes to rules and guidance.
  • Financial promotions: FCA wants to remove the exemption from the requirement for firms to include a risk warning in financial promotions for HCSTC where there was no space to do so as it believes the circumstances in which there is genuinely no space to do so are very limited and some firms have abused the exemption. It also plans changes to the rules on the clear, fair and not misleading requirement (to make the current guidance a rule), relative prominence and when to provide representative APRs. It plans certain other minor and clarificatory changes around financial promotion also.
  • Arrears, default and collection: FCA plans to make it clearer that customers in difficulty should be told that not-for-profit organisations can provide advice, and to allow firms to introduce continuous payment authority to collect repayments where a customer is in arrears or default and the lender is exercising forbearance. There has been an anomaly in the current rules that has not allowed this to date. Under this heading, it also wants to prevent firms agreeing debt management plans where there is no reasonable prospect the customer's situation will improve and where bankruptcy may be a better option.
  • Mortgages: Finally, the paper consults on consequential changes in relation to implementing the Mortgage Credit Directive and the transfer of second charge mortgage regulation. It notes that, although most loans will transfer to regulation under the Mortgage and Home Finance Conduct of Business Sourcebook (MCOB), some will remain in CONC, such as those entered into before mortgage regulation and those loans not secured on the home but used to buy residential property. Treasury has decided that these loans are not regulated credit agreements, but FCA wants to apply certain MCOB protections to them anyway. 

FCA asks for comments by 6 May. It wants to make the new rules as soon as possible, but also plans a further consultation later in the year on other consumer credit-related matters. (Source: FCA Consults on Consumer Credit Changes)

FCA fines Aviva for conflicts failings: FCA has fined Aviva Investors Global Services Limited (Aviva) £17,607,000 for systems and controls failings that meant it failed to manage conflicts of interest fairly. FCA found that, over an eight-year period, Aviva used a side-by-side management strategy on certain desks within its fixed income area so the same desk managed funds that paid differing levels of performance fees, a proportion of which were paid to traders in that area who managed funds on a side-by-side basis. This gave the traders an incentive to favour one fund over another. Aviva recognised the conflicts this might present and recorded it in its conflict log. However there were significant weaknesses in the risk management framework and the systems and controls. Traders were able to delay recording the allocation of executed trades for several hours, which meant those who managed funds on a side-by-side basis could assess a trade’s performance during the course of the day and, when it was recorded, could "cherry pick" trades for particular funds. Once Aviva discovered two of its former traders had been behaving in this manner, it investigated and paid £132,000,000 in compensation to eight funds impacted by the behaviour. Aviva's "three lines of defence" model of risk management would have mitigated these risks if it had worked properly. FCA commented that Aviva's behaviour since discovering the breaches had been "exceptional", which led to significant reduction in the penalty. (Source: FCA Fines Aviva for Conflicts Failings)