FCA updates on remuneration: FCA has written to firms' remuneration committee chairs in proportionality level 1 on embedding ex-post performance adjustment (malus) within their remuneration codes. FCA stresses the importance of remuneration committees in applying the Remuneration Code to ensure greater alignment between risk and individual reward, to discourage excessive risk-taking and short-termism, to encourage more effective risk management, and in turn to support a strong conduct culture within firms. FCA also outlined its expectations on the application and consideration of malus in terms of:
- scope: an appropriate range of individuals including those who failed to act, or those who by virtue of their seniority could be deemed indirectly responsible or accountable;
- staff understanding: staff in firms should be clear on the fully discretionary nature of their variable remuneration and firms should apply appropriately sized reductions, including taking account of any fines;
- timing: firms should consider events early on and apply reductions as soon as reasonably possible;
- procedure: firms should consider events using a clearly defined, robust and well documented process that considers a range of relevant factors;
- transparency: the process clearly shows the difference between awards before and after application of malus and should be clearly communicated to employees;
- ex-ante risk adjustments: firms should take into account the risk of conduct failings which have not yet crystallised when setting the size of the bonus pool, making larger adjustments where they believe these risks have increased; and
- co-operation with FCA: firms should provide information in sufficient detail and at an early enough point to facilitate the process of reaching agreement on bonus plans.
In the 2014/15 remuneration round FCA will focus on the application of malus while continuing to look for compliance with all areas of the Remuneration Code, including the consideration of potential future risks in the setting of awards. FCA will pay particular attention to whether firms have considered the changes arising from the fourth Capital Requirements Directive (CRD4) such as the bonus cap and identification of material risk-takers. FCA urges firms to provide the necessary information or, where unavailable, estimates as soon as possible. (Source: Embedding the Application of Ex Post Performance Adjustment (Malus) - Update for 2014/15 Remuneration Round)
FCA consults on benchmarks: FCA is consulting on fair, reasonable and non-discriminatory access to regulated benchmarks. Responses to an earlier consultation expressed concern over the unconstrained ability of administrators to set the prices of benchmarks. FCA has decided as a result to introduce a new rule setting out how the administrator must act on a fair, reasonable and non-discriminatory basis. FCA asks for comment by 3 August. (Source: FCA Consultation: Fair, Reasonable and Non-discriminatory Access to Regulated Benchmarks)
FCA publishes hedge fund review: FCA has published its hedge fund review based on data as at September 2014. The main findings include:
- only two of the top 10 funds by net asset value (NAV) that participated in the survey also reported the same detail of information under Alternative Investment Fund Managers Directive, making the overlap of these two reporting channels less significant;
- execution on regulated exchanges makes up 68% of the securities transaction volume, but only 60% of derivatives volume, leaving a still substantial part of execution taking place on a bilateral or OTC basis;
- clearing is increasingly taking place at CCP level, even if transactions are concluded OTC; and
- the hedge funds in the survey obtain their leverage primarily in the form of derivative positions (synthetic leverage). Financial leverage is a far less significant source of leverage and around 20% of funds have no financial leverage at all. The predominant approach is towards secured and collateralised borrowing, with less than 10% of funds using unsecured borrowing.
Funds have increasing exposure to structured/securitised products and listed equities, and smaller holdings of unlisted equities on the securities front. On the derivatives front, the funds’ gross exposure to IRDs and FX increased. Net exposure in fixed income derivatives also remained outright long. (Source:FCA Hedge Fund Review June 2015)
FCA speaks on competition and innovation: Martin Wheatley gave a speech exploring the balance between ensuring consumer protection while encouraging market growth. Addressing the issue of competition he noted:
- the continued reluctance of UK current account holders to switch provider;
- regulatory action to encourage competition, such as reducing liquidity requirements for new market entrants and authorisation at an earlier stage; and
- that these measures have also opened up alternate sources of funding, or shadow banking, for commercial customers.
He then went on to speak about the effect of behavioural economics on competition. In particular he looked at:
- why consumers tend to make "sub-optimal" decisions when selecting financial products;
- how regulators are acting to ensure that consumers are better educated and that products are marketed in terms that they can understand so that consumer behaviour promotes better products at the expense of weaker ones; and
- the actions FCA has already taken in the retail banking and insurance industries, and will soon take in the investment and corporate banking spaces.
Finally he addressed innovation. Specifically he outlined:
- how the alternative funding market is expanding rapidly;
- how FCA’s Innovation Hub has been giving direct support to innovators, and how it might adapt the regulatory regime to support useful innovation; and
- how FCA is working with firms to test approaches to customer engagement; including by reforming disclosure.
FCA publishes SME insurance review result: FCA has published the results of its thematic review into handling of insurance claims for small and medium-sized enterprises (SMEs). The review highlighted:
- a clear disparity between SMEs' expectations and the service they actually received: notably poor communication leading to delays in the settling of claims;
- delays in the initial visits by loss adjusters, in some cases by up to three weeks;
- that many claimants were left unsure as to what actions they should take to minimise disruption to their businesses;
- dissatisfaction among SMEs with the lack of clarity over who was responsible for driving claims outcomes; and
- a lack of clarity over the next steps in the claims process.
FCA also noted that in a number of cases the sums insured were inadequate to cover the loss incurred. This highlights the need for businesses to accurately assess how much cover they need if faced with major disruption. FCA will provide feedback to firms in the review and, where appropriate, may ask firms to determine whether individual instances of poor claims handling reflects widespread issues within the firm. (Source: FCA Review Highlights Gap Between Insurance Claims Service and SMEs’ Expectations)
FCA promotes Innovation Hub: Christopher Woolard, Director of Strategy and Competition at FCA, spoke on innovation and FCA. He described:
- the role of the Innovation Hub in helping innovators to navigate regulation and in working to change processes and policies where this would promote innovation;
- how the Innovation Hub has helped around half of the 170 firms that have approached it already with 83% describing their experiences as good or excellent; and
- two particular case studies: one involving a business that aims to provide consumers with a clearer picture of and greater control over their creditworthiness, and another involving a company aiming to provide more direct access to the bond market.
Looking forward, FCA is exploring ways in which it could make it easier for firms to test their products on a sample of consumers before having to become fully authorised – as in other industries, such as pharmaceuticals. Mr Woolard also announced that in the autumn FCA will be issuing a "Call for Input" seeking examples of regulatory barriers to innovation in digital and mobile from a broad range of participants. (Source: The FCA and Innovation: A Speech By Christopher Woolard, Director of Strategy and Competition at FCA)
FCA outlines wholesale banking ToR: FCA has published the terms of reference (ToR) for its investment and corporate banking market study. Building on feedback to the wholesale sector competition review published in February, FCA will focus on the following key issues:
- transparency, and in particular the transparency of the allocation process in debt and equity issues and the impact of established market practice and regulations on transparency in the IPO process;
- client choice and behaviour and the impact of syndication;
- assessing whether and how bundling and cross-subsidisation affects competition; and
- the potential benefits of reducing regulatory barriers to firms entering or expanding into primary markets.
FCA seeks input from a wide range of firms by 22 June. It aims to publish a report setting out interim findings and any proposed remedies (as required) in advance of the final report in spring 2016. (Source:FCA Publishes Terms of Reference for its Investment and Corporate Banking Market Study)
FCA comments on Plevin v. Paragon: FCA is considering whether it needs to make new rules to deal with the Supreme Court's decision in Plevin v. Paragon Personal Finance Ltd that a failure to disclose to a client a large commission payment on a single premium PPI policy made the relationship between a lender and the borrower unfair under section 140A of the Consumer Credit Act 1974. (Source: FCA Statement on Plevin v. Paragon Personal Finance Ltd)
FCA publishes Keydata decision notices: FCA has published decision notices against Stewart Ford (former chief executive), Mark Owen (former sales director) and Peter Johnson (former compliance officer), all previously of Keydata Investment Services. FCA has decided to fine them £75 million, £4 million and £200,000 respectively and ban them all from performing any role in regulated financial services in future. Keydata sold financial products, underpinned by bonds issued by Luxembourg-based special purpose vehicles called SLS Capital and Lifemark, and marketed as being eligible for ISA status, when they were not, in fact, so eligible. FCA found that all three executives:
- failed to act with integrity and also misled the then Financial Services Authority (FSA) on a number of occasions in relation to the performance of the investment products;
- permitted Keydata to continue to sell the Lifemark-backed products to retail investors when the individuals knew it was highly likely that (i) the products did not comply with the ISA regulations, (ii) the financial promotions were unclear, incorrect and misleading, (iii) the due diligence on the products was inadequate and (iv) there were problems with the performance of the portfolio ultimately underlying the products;
- deliberately misled FCA by making false representations in compelled interviews about the performance of the investment products, having failed to disclose to FCA problems with the SLS portfolio which impacted on the SLS products’ performance.
In addition FCA found that:
- Mr Ford and trusts set up for the benefit of his family received £72.4 million in fees and commissions and Mr Owen received £2.5 million in commissions on sales of the Lifemark products;
- with regard to the SLS-backed products, Mr Ford deliberately concealed the problems with the portfolio underlying these products from investors, financial advisers and the then FSA. Mr Owen recklessly relied on assurances from Mr Ford that he would resolve the problems with the portfolio’s performance and solvency and agreed to Keydata funding the income payments to investors from Keydata’s own resources although he was aware this would conceal the portfolio’s solvency problems;
- Mr Johnson failed to ensure FCA was aware of problems with the products and their financial promotions, identified by Keydata’s professional advisers; and
- Mr Ford and Mr Owen failed to disclose to FCA the significant personal benefits and commissions they received from the sale of the Lifemark products, when they were aware of FCA’s concerns around their involvement in Lifemark and the commissions they received.
All three applied unsuccessfully to the Upper Tribunal for an order preventing FCA from publishing the Decision Notices. (Source: FCA Publishes Decision Notices in Respect of Three Former Members of Keydata’s Senior Management)
FCA welcomes Commission's CMU paper: FCA has issued a report in response to the Commission's Green Paper on the CMU. Overall, FCA welcomes the Commission's work and is ready to help. FCA noted that:
- greater supply of investor finance will require appropriate investor protection;
- there should be a focus on implementing legislation that already exists or is planned;
- more consistent supervision within the current framework could bring significant benefits;
- authorities should aim to legislate only where necessary and embed the Better Regulation agenda;
- the opportunities of new technology and the potential gains from effective competition need to be embraced; and
- European markets need to be embedded in a globally competitive landscape.
FCA highlighted the following priorities for action:
- ensuring investor protection;
- harnessing the benefits of digitalisation;
- competitive, fair and effective intermediation;
- reviewing the Prospectus Directive;
- examining impediments to bond market liquidity; and
- improving available credit information.
FCA also provided some individual responses to specific questions posed in the Green Paper. (Source:FCA's Response to Commission's Green Paper: Building a Capital Markets Union)
FCA consults on PIF capital requirements: FCA is seeking views on capital resources requirements for personal investment firms (PIFs). FCA proposes that:
- the majority of PIFs will have capital resources requirements that are the higher of a new minimum capital resources requirement of £20,000 or 5% of their relevant annual income for the previous year; and
- it will consider the case for a time limit on complaints to the Financial Ombudsman Service. FCA will consult on this later in the year in light of the new capital requirements proposed in the current paper.
Consultation closes on 7 September. FCA will then publish its final rules in a policy statement later in 2015. (Source: FCA Consultation: Capital Resources Requirements for Personal Investment Firms)
FCA creates RLR webpage: FCA has created a webpage detailing the background to its responsible lending review (RLR), which started in April following the Mortgage Market Review. The RLR consists of a review of mortgage lenders and market research. It will run throughout 2015 and FCA will report on it in the first half of 2016. From autumn 2015 FCA will also begin a wider assessment of barriers to competition with a view to launching a market study in early 2016 on those aspects of the mortgage market that are not working to the benefit of consumers. (Source: FCA Responsible Lending Review Webpage)
FCA publishes general insurance outsourcing review: FCA has published the results of its thematic review on outsourcing in the general insurance market. It surveyed 12 insurers, and 19 firms that held underwriting or claims handling authorities on their behalf. It found that insurers often do not treat delegated authority as outsourcing. FCA wants firms to:
- improve their due diligence on delegates and their management of delegation arrangements;
- focus more on how the outsourcing might impact customers;
- ensure that intermediaries who design products understand the scope of their responsibilities; and
- ensure that they carry out appropriate supervision of product and intermediary performance.
Other areas of concern included that some firms had not properly considered potential conflicts or how to manage them, and there was a tendency to over-rely on internal audit rather than having in place proper controls.
FCA now plans to follow up concerns with individual firms, and focus generally on them in its ongoing supervisory work. It will also look at how firms will respond to the governance changes that Solvency 2 will require. (Source: FCA Publishes General Insurance Outsourcing Review)
Martin Wheatley speaks on trust and confidence: Martin Wheatley has spoken on improving trust and confidence in banking. He focused on accountability and how FCA will apply the presumption of responsibility. He said he hopes a better accountability regime will lead to less prospect of employees breaching regulatory requirements. He stressed that changes to regulation at top levels in institutions did not mean that middle management would not take equal responsibility for ensuring necessary changes happen. He then spoke about the aims of the certification regime and conduct rules. (Source:Martin Wheatley Speaks on Trust and Confidence)
FCA updates on binary options: FCA has updated its website to explain how it is proposing to take over regulation of binary options, so that the products are financial products rather than gambling products. It notes consumers may think FCA already regulates activities in binary options, as many other EU regulators do. It notes its consultation on the proposed changes, which closes on 18 June. (Source: FCA Updates on Binary Options)
FCA holds prudential supervisory forum: FCA has held its first prudential supervisory forum. The forum included speeches on:
- FCA's prudential approach and its link to conduct supervision;
- liquidity adequacy and cash management;
- resolution and recovery; and
- crisis management.
(Source: FCA Holds Prudential Supervisory Forum)
FCA announces CIS convictions: Following FCA's successful prosecution of eight individuals who, between July 2008 and November 2011, were involved in the operation of an unauthorised collective investment scheme based on land through three companies, FCA has announced the sentences handed down to the individuals. Five individuals received sentences leading to 26 years' immediate imprisonment. Two further individuals received suspended sentences and the last is still to be sentenced. The defendants were guilty of a range of offences, including carrying on unauthorised regulated activities and in one case deliberately misleading the regulator. A solicitor was convicted and imprisoned as part of the action. (Source: FCA Announces CIS Convictions)