Senior managers regime, certification regime and conduct rules

The introduction of the first stage of the SMR has not slowed the volume of publications from the regulators on this crucial area of reform. Although the regime is now in force, there continue to be developments, most notably regarding the treatment of the legal function. We have set out below the further significant rule changes that have taken place over the last six months, together with related publications.

Overall responsibility for the legal function under the SMR

In January the FCA published a Supervisory Statement acknowledging that there was significant uncertainty as to whether the individual with overall responsibility for the legal function within a firm needed approval under the SMR. In this Discussion Paper the FCA:

  • explains that its view to-date is that there should be an SMF charged with responsibility for firms’ legal function, albeit that individual need not be the head of legal or equivalent;
  • acknowledges that its own publications contributed to confusion as to what the correct position was; and
  • sets out the arguments regarding whether the legal function should continue to be part of the SMR going forward.

Responses were due by 9 January 2017 with final rules anticipated later in 2017. It remains the case that, until a final position is reached, firms need not depart in the interim from decisions already reached on this point in good faith.

Unsurprisingly the view of many lawyers on this controversial issue is that the legal function should remain outside the SMR. The Law Society and the BBA have already strongly agreed with this primarily on grounds relating to privilege and the difficulties that could arise for in-house counsel if the legal function is part of the SMR. It is clear from the Discussion Paper that there are reasonable arguments on both sides. For further detail and analysis please see our article on this topic.

Policy Statement and final rules on regulatory references

As expected the regulators have finalised new rules on regulatory references. These aim to stop the recycling of so-called “rolling bad apples” by imposing more prescriptive reference requirements from firms subject to the SMR and SIMR and requiring all firms to provide references in respect of applicants for SMF, certification and notified NED roles. This is a key part of properly assessing individuals’ fitness and propriety.

The most onerous changes apply to banks and insurers. Once the rules come into force they will be required to:

  • take “reasonable steps” to seek references from all previous employers covering the past six years. The regulators declined to modify this requirement in respect of overseas or unregulated former employers despite acknowledging that such references may be difficult to obtain and less useful. Instead they have stressed that it is only a requirement to take “reasonable steps” although they do not define what this means;
  • provide particular information in response to reference requests, including all breaches of Conduct Rules, in template form. Significantly the final rules now only require disclosure of breaches that resulted in disciplinary action (aligned with the amendments to when Conduct Rules breaches must be notified to the regulator). Known or suspected breaches are not a mandatory disclosure but may nonetheless have to be included as part of the general requirement to disclose all relevant information. Firms may also amend the template form provided they still comply with the rules;
  • update references if new relevant information comes to light. In respect of this the FCA has clarified that it is only intended that firms update the individual’s current employer and that this obligation only exists for six years from the date the employee left, save in respect of serious misconduct; and
  • have systems in place to keep 6 years of records of disciplinary action and fitness and propriety findings in respect of individuals. Firms will not be in breach of the reference requirements if they omit something they were not required to keep records of.

There are also less significant changes to the reference requirements for all firms primarily to extend the categories of persons they must provide references in respect of to cover certification roles and notified NEDs as well as pre-approved roles. The FCA has given some useful guidance around the overarching requirement applicable to all firms to provide “all relevant information”. In particular it states that firms should look to the current guidance on information around upheld complaints etc but that it is not necessary to disclose criminal convictions and only information that has been properly verified should be included. There is a helpful table summary of which requirements apply to which firms on page 26 of the paper.

It is relevant to note that the reference requirements will apply to contingent (i.e. seconded) and contract workers where the role they are carrying out is an SMF or requires certification.

The new rules apply from 7 March 2017, coinciding with the commencement of the full certification regime and application of the Conduct Rules. It seems likely that the more prescriptive requirements may be extended to all firms when the SMR is extended to them in 2018.

FCA Feedback Statements on the implementation of the SMR

These Feedback Statements set out the results of the FCA’s supervisory review of the Statements of Responsibility and Management Responsibility Maps submitted by firms prior to 8 February 2016. There is a statement for each type of firm the SMR applies to (i.e. UK banks, credit unions).

In short the FCA is pleased that most firms have engaged with the SMR and “invested a considerable amount of effort” preparing for it. However, they have identified a number of areas where firms may not be meeting the Handbook rules and guidance or may not have fully understood the regime or implemented it correctly. These concern:

  • the seniority of individuals designated as SMFs or given particular responsibilities;
  • whether all business functions and activities have in fact been allocated to individuals;
  • lack of clarity of allocation of responsibilities as between individuals where further detail of the boundary of responsibilities would assist;
  • inconsistency between Statements and Maps as to who is responsible for what; and
  • insufficient information about governance arrangements, especially for firms which are part of a larger group.

Firms should be reviewing their Statements of Responsibility and Management Responsibility Maps in light of the feedback. Where revisions are needed, consideration will need to be given as to whether these are such as to trigger a requirement to resubmit revised documents.

Proposed amendments to DEPP regarding enforcing the duty of responsibility

FCA CP16/26, PRA CP34/16, 28 September 2016

The ‘duty of responsibility’ replaced the extremely controversial proposed ‘presumption of responsibility’ for SMFs and came into force on 10 May.

Under the duty of responsibility, the regulators can take enforcement action against SMFs if they are responsible for the management of any activities in their firm in relation to which their firm breaches a regulatory requirement, and they did not take such steps as a person in their position could reasonably be expected to have taken to avoid the breach occurring or continuing.

The consultations set out the regulators’ considerations when deciding (i) if a particular SMF was responsible for the activities the breach concerns; and (ii) whether the senior manager took such steps as an individual in their position could reasonably be expected to take.

In respect of (i) it is notable that the regulators will look beyond what is stated in firms’ Statements of Responsibilities and Management Responsibilities Maps and also consider how the firm operated in practice.

In respect of (ii) the test is a mix of objective and subjective with the regulators considering what steps a competent senior manager would have reasonably taken but that notional competent senior manager is attributed with the specific individual’s position, role and responsibilities in all the circumstances. This appears to leave scope for an individual’s personal situation to be taken into account. In deciding whether the steps taken by the individual were reasonable considerations will include the nature and scale of the firm’s business and whether the actions taken were in breach of other legal requirements.

Responses are also due by 9 January 2017 with final rules expected later in 2017.

Consultation on the application of the Conduct Rules to “standard” Non-Executive Directors

FCA CP16/27, PRA CP34/16, 28 September 2016

As a result of strong objections to all NEDs requiring pre-approval as SMF in the final SMR the FCA only designated so-called “approved” NEDs as SMFs where they hold particular roles (e.g. chairmen of particular boards or committees). The FSMA requirement that conduct rules could only be applied to employees meant that the remaining standard NEDs are not currently subject to any of the Conduct Rules in COCON. FSMA has since been amended so that the Conduct Rules may be applied to all directors.

The FCA proposes that standard NEDs be subject to the five FCA individual Conduct Rules and senior conduct rule 4 requiring persons to “disclose appropriately any information of which the FCA or PRA would reasonably expect notice”. The intention behind the proposal is that applying COCON to standard NEDs will help raise standards of conduct for these individuals and, by placing additional duties on them, help reduce the risk of future misconduct and mis-selling. As with the other SMR papers, responses were due by 9 January 2017 with final rules expected in the first part of 2017.

Arguably making standard NEDs subject to these Conduct Rules mainly formalises standards of conduct to which NEDs are subject as directors. However, the proposals represent a continuation of the trend towards an increase in potential scope for the regulators to take enforcement action against individuals in the event of future misconduct or breaches by firms.

Final notices

FCA fines, publicly censures and orders Jersey resident to pay restitution for insider dealing and improper disclosure

A Final Notice has been published by the FCA in respect of Gavin Breeze, in connection with market abuse in the form of insider dealing. In September 2014, Mr Breeze had been contacted by the CEO of MoPowered plc, in which Mr Breeze was a shareholder. He was informed that the company was seeking to raise new capital via a share placement, at a substantial discount to the company’s share price at the time. The FCA concluded that it was clear the information regarding the discounted placement would, once announced, have a substantial impact on the company’s share price. However, Mr Breeze disclosed information regarding the placing to another shareholder and instructed his own broker to sell his entire shareholding, at any price.

As might be expected, once the discounted placement was announced, the company’s share price fell dramatically. However, Mr Breeze had succeeded in disposing of at least part of his shareholding by that time, enabling him to avoid a loss in respect of those shares.

Mr Breeze was fined £59,557; he received a 15% discount for agreeing to settle at the earliest opportunity, and for proactive cooperation with the FCA’s investigation. He was also publicly censured by the FCA, and ordered to pay restitution amounting to £1,850, plus interest, to the individuals who bought his shares at a higher price than they would have done, had the information known to Mr Breeze been public.

FCA commences proceedings against investment portfolio manager at Blackrock

The FCA has commenced criminal proceedings against Mark Lyttleton, a former investment portfolio manager at Blackrock Investment Management (UK) Ltd. Mr Lyttleton was charged with insider dealing, in connection with offences relating to trading in equities and a call option in 2011, and pleaded guilty to two counts of insider dealing on 2 November 2016. He will be sentenced on 21 December 2016.

FCA imposes penalties on Sonali Bank (UK) Limited and its former money laundering reporting officer for serious AML failings

The FCA has fined Sonali Bank (UK) Limited (SBUK) £3,250,600 and imposed a 168-day business restriction, preventing it from accepting deposits from new customers. The FCA also took action against the bank’s former money laundering reporting officer (MLRO), Steven Smith, by imposing a fine of £17,900 and prohibiting him from performing the MLRO or compliance oversight functions at regulated firms.

Despite having previously received clear warnings about serious weaknesses in its anti-money laundering (AML) governance and control systems, the FCA found that SBUK had failed to maintain adequate AML systems between August 2010 and July 2014.

SBUK were found to have breached two of the FCA’s Principles for Businesses:

  • Principle 3 (Management and Control) – by having serious and systemic weaknesses in its AML controls, SBUK breached this Principle 3. The FCA found that the weaknesses extended to almost all levels of SBUK’s business and governance structure, including its senior management team, MLRO function, oversight of branches, and AML policies and procedures. As a result, SBUK failed to comply with its operational obligations in respect of customer due diligence, the identification and treatment of politically exposed persons, transaction and customer monitoring and making suspicious activity reports; and
  • Principle 11 (Relations with regulators) – while under FCA investigation, SBUK breached Principle 11 by failing to notify the FCA, for at least seven weeks, that a significant fraud had been alleged. SBUK should have notified the FCA on this matter immediately under SUP 15.3.17R.

SBUK was fined £3,250,600, of which £3,110,600, imposed as a result of SBUK’s breach of Principle 3, was subject to an uplift of 20% due to aggravating factors; namely that SBUK had been on notice of various weaknesses in its AML systems and controls for four years and that the firm had access to a considerable amount of public guidance relating to AML regulatory requirements.

As regards the Final Notice against Mr Smith, the FCA found that he had breached Principle 6 (Due skill, care and diligence in managing the business) of the FCA’s Statements of Principle and Code of Practice for Approved Persons and that he was also “knowingly concerned” in SBUK’s breach of Principle 3.

The FCA also found that Mr Smith demonstrated a “serious lack of competence and capability”. Despite repeated warnings from the SBUK’s internal auditors, Mr Smith reassured SBUK’s board and senior management that AML controls were working well when they were not. Mr Smith failed to:

  • put in place appropriate AML monitoring arrangements;
  • identify serious weaknesses in operational controls and a lack of appropriate knowledge among staff;
  • appropriately report concerns from SBUK internal auditors and the results of internal testing; and
  • impress upon senior management the need for more resources in the MLRO function.

Whilst the FCA did acknowledge Mr Smith’s lack of senior management support and that he was faced with “significant challenges” at work, the FCA noted that he failed to take potential steps open to an MLRO in such a position. These options included escalating concerns, appropriate reporting in annual MLRO reports, or reporting concerns to the FCA. This guidance resembles that of the FCA in its final notice issued to Peter Johnson, former compliance officer of Keydata Investment Services Ltd, which is discussed below.

Mr Smith’s fine of £17,900 was subject to an increase of 10% which was applied as an aggravating factor given that he was aware of the FSA’s feedback after its visit to SBUK in 2010 and that the FSA and FCA have issued guidance in this area.

This decision is a reminder that action against firms without robust and risk-focused AML systems remains high on the FCA’s agenda. The penalties show that the FCA had an appetite to take enforcement action against both firms and the senior individuals who do not meet the FCA’s standards. This is wholly in line with the FCA’s new regime, and its increasing focus on personable accountability.

The decision is also a reminder that enforcement action by the FCA may include exercising its powers to restrict a firm’s continuing business. This approach by the FCA is likely to continue. In its Business Plan for 2016/17, the FCA indicated that it would specifically consider imposing business restrictions on firms that are found to have weaknesses in their financial crime controls. It may be that financial penalties alone are not considered to be a sufficient deterrent in certain cases.

Prohibition order in connection with unauthorised collective investment scheme

The FCA has published Final Notices in respect of six individuals in connection with their role in operating an unauthorised collective investment scheme through three companies: Plott Investments, European Property Investments and Stirling Alexander. The scheme involved over 100 investors, with losses of around £4.3 million. The individuals were also convicted of offences including conspiracy to defraud, and possession of criminal property, and between them sentenced to over 30 years’ imprisonment.

Charges in connection with alleged boiler room fraud

In November 2016, following an investigation by the FCA, Charanjit Sandhu was charged with conspiracy to defraud in connection with the promotion and sale of shares in Atlantic Equity LLC.

Mr Sandhu is the sixth individual to be charged with conspiracy to defraud in connection with Atlantic Equity LLC. In June 2016, five other individuals were also charged. The offences, in each of the six cases, relate to a series of four boiler room companies, through which the defendants promoted investment schemes offering investors interests in a purported commercial development in Madeira. In total, 175 investors lost in the region of £2.75 million as a result of the fraud.

Two plead guilty to insider dealing in relation to takeover of Logica Plc

On 30 November 2016, the FCA confirmed that it had been successful in bringing a case against two individuals who pleaded guilty to three counts of insider dealing in connection with the proposed takeover of Logica Plc (Logica) by CGI Holdings (Europe) Ltd (CGI). Manjeet Mohal, a long-standing member of the management reporting team at Logica, came into possession of inside information during takeover negotiations between the firms. He pleaded guilty to two counts of the illegal disclosure of that information. Reshim Birk, a neighbour of Mr Mohal, also pleaded guilty in respect of one count of insider dealing. He admitted that his purchase of shares and options in Logica, just two days before the public announcement regarding the takeover, was informed by information provided by Mr Mohal. The FCA’s investigation previously resulted in the prosecution of two others for insider dealing in connection with the same takeover.

Complaints

PPI Complaints: Further FCA Consultation Paper and Policy Statement

Consultation Paper 16/20, 2 August 2016

The FCA has published a further consultation paper concerning changes to its rules in relation to complaints in connection with PPI. The FCA has confirmed that it believes the overall package of proposals set out in its earlier Consultation Paper (CP15/39) should be taken forward, including the launch of a consumer communications campaign in order to raise awareness of issues around PPI complaints.

However, the FCA has changed the deadline for new PPI complaints which was proposed in CP15/39. In CP 16/20, the FCA maintained its view that a deadline should be imposed by which consumers would need to make their PPI complaints, or lose their right to have the complaint assessed by firms or the Financial Ombudsman Service. CP15/39 proposed a deadline of December 2018, which was extended in CP16/20 until approximately June 2019 – two years after the new rules come into force, which is expected to take place in June 2017.

This proposed timeline is likely to be subject to further change. The FCA set out in CP16/20 that this timing was dependent on publication of its proposed rule changes in December 2016 and, on 9 December 2016, announced that it would be unable to meet that deadline in light of the volume of feedback received to CP16/20.

Various stakeholders, including perhaps unsurprisingly a number of claims management companies, have indicated that they will seek judicial review of any decision by the FCA to proceed with the rules proposed in CP15/39. If that challenge goes ahead, any potential rule changes could be substantially delayed.

In addition to the proposed deadline for PPI complaints, in CP15/39 the FCA explained that it considered that the decision in Plevin v. Paragon Personal Finance Ltd [2014] UKSC 61 had created uncertainty for firms about how the judgment should be taken into account in the context of PPI complaints, bringing about a risk of inconsistent, and potentially unfair, outcomes for complainants. As such, the FCA decided to intervene with rules and guidance about how firms should handle PPI complaints in light of Plevin. The main changes are that the FCA now proposes to:

  • include profit share sums in the FCA’s approach, in addition to commission;
  • clarify how the FCA’s approach will work where commission, and now profit share rates, vary during the life of the PPI policy; and
  • provide that sums rebated to a consumer when they cancelled a single premium PPI policy early can be partly included in, and so reduce, any redress due.

The FCA considers that these changes and clarifications will lead to significantly more redress being paid by firms, relative to its original proposals, for complaints concerning undisclosed commission along the lines of Plevin. However, these changes should not increasethe total PPI redress to the same degree, since most complaints will still concern mis-selling and be redressed on that basis under the FCA’s existing rules.

The consultation closed on 11 October 2016. A further announcement will be made by the FCA in Q1 2017.

Benchmarks

The FCA has published its Final Notice in respect of Peter Johnson, former USD LIBOR submitter at Barclays, following Mr Johnson’s withdrawal of his reference to the Upper Tribunal. In July 2016 Mr Johnson, following a guilty plea, was sentenced to four years in prison for conspiracy to defraud.

European Commission decision on yen interest rate derivatives

On 23 September, the European Commission published its decision on the yen interest rate derivatives cartel case. The Commission found that traders from UBS, JP Morgan, CitiGroup, Deutsche Bank and RBS had engaged in various anti-competitive practices, the object of which was the restriction and/ or distortion of competition. In particular, certain traders had colluded on submissions for JPY LIBOR, and had exchanged commercially sensitive information. Further, the Commission determined that broker RP Martin had facilitated one of the competition infringements. A total fine of €680 million has been imposed.

On 7 December, the European Commission confirmed its decision to fine Credit Agricole, JP Morgan Chase and HSBC a total of €485 million for participating in a cartel concerning the pricing of interest rate derivatives. The commission accused the banks of exchanging sensitive information and colluding on Euro interest rate derivative pricing elements – that is, the manipulation of EURIBOR and/or EONIA. Four other banks reached a settlement with the commission concerning the same issues in 2013. Credit Agricole has indicated that it will appeal the decision.

FMLC response to ESMA consultation on technical standards under Benchmark Regulation

In our previous edition of this Update, we summarised the Consultation Paper published by ESMA on 27 May 2016 on a compromise text for the Benchmarks Regulation. The Financial Markets Law Committee (FMLC) has now published its response, dated 1 December 2016. The FMLC has raised a number of concerns, including in relation to the positioning of the oversight function. The Consultation Paper refers to the importance of ensuring effective challenge of the management body which is, in essence, the board of the administrator of the benchmark. In some circumstances, that board may delegate management to operational and executive staff. The FMLC, therefore, has recommended that the draft regulatory technical standards reflect this possibility, such that the oversight function shall be in a position to challenge not only the decisions of the management body but also of any staff of the administrator to whom the management body has delegated responsibility.

FCA publishes Enforcement Annual Performance Account for 2015/16

Continued focus on individual accountability

On 12 July 2016, the FCA published its annual report for 2015, including its annual enforcement performance account. Interestingly, the report reveals a decline in the value of financial penalties imposed by the FCA, which, in the period ending 31 March 2016, fell to £884.6 million, as compared with £1.4 billion in the previous period. This may represent a slightly softer approach to enforcement or, as is more likely, the resources absorbed during this period in large-scale investigations into issues such as FX manipulation.

It remains to be seen whether financial penalties will rise in the next period once these internal resources have been redirected.

The account also reflects the FCA’s increasing focus on individual accountability; 17 fines were issued in this period, totalling £4.2 million, prohibition orders were imposed on 24 people and there were also eight criminal convictions for unauthorised business.

Other developments

Identification of individuals in final notices: Grout

In July 2016, the Upper Tribunal published its decision in respect of the reference made by Mr Grout, in which he alleged that he had been identified in a final notice issued by the FCA in September 2013 in connection with the London Whale trades. Mr Grout alleged that he had not been given the opportunity to contest the prejudicial statements made in the final notice which effectively identified him.

It was common ground that the question of whether Grout had been “identified” in the final notice should be answered in accordance with the construction of s.393 FSMA which the Court of Appeal set out in its judgment in FCA v. Macris [2015] EWCA Civ 490.

Here, the Tribunal found that, although Grout had not been named in the final notice, he had nonetheless been identified and the Macris test had been satisfied. Further, some of the relevant sections of the final notice were prejudicial to Grout.

The decision provides a helpful summary by the Tribunal of the relevant test in Macris. That is, there must be a separate reference to a specific person in relation to the matters identified in the notice, a “key or pointer” to a particular person other than the recipient of the notice. This is a two-stage test, which requires:

  • firstly, the identification of a specific “pointer” involves considering whether the relevant statements in the notice which are said to identify the third party do refer to “a person” other than the recipient of the notice. That test should be carried out without reference to external material; and
  • secondly, whether the “pointer” identified is a pointer to the third party (in this case, Grout). This can be determined by reference to external material but, as set out in Macris, such material must be limited to that which objectively would be known by persons acquainted with the third party or persons operating in the relevant area of the financial services market.

In this case, it was determined that the description “traders on the SCP” (Synthetic Credit Portfolio) was sufficiently specific to identify Grout.

The FCA has been given permission to appeal the Grout decision to the Court of Appeal. The proceedings themselves have been stayed until the release of the Supreme Court’s judgment in Macris, which was heard on 13 October 2016, and judgment is awaited.

Correspondence between FCA and PRA on disclosure of supervisory information

The UK’s Treasury Select Committee (TSC) has published correspondence in which it calls for the PRA to make public the information provided to it by firms in its supervisory capacity – or explain why it should be kept secret. The correspondence forms part of a wider exchange between Andrew Tyrie MP and Andrew Bailey, then Chief Executive Officer of the PRA, following Mr Tyrie’s request, in December 2015, that the PRA provide an average of the required capital ratios of the incumbent banks in contrast to new entrants.

In a letter dated 6 June 2016 the TSC raised concerns regarding issues including resolution and bail-in as well as the increasing intrusiveness of the PRA’s regulation, which raised the potential danger that the PRA could be regarded as a shadow director. In its response, dated 30 June 2016, the PRA explained why it did not consider that the actions it takes in the proper discharge of its statutory duties could result in it being regarded by the court as a shadow director, within the meaning of the Companies Act 2006.

Also in its letter of 6 June 2016, the TSC has set out its concerns regarding what it refers to as the “doctrine of supervisory confidentiality”. That is, the fact that a significant volume of information is provided by banks to their regulatory supervisors which remains confidential. The information is available to certain board members and employees within the bank, and staff within the regulatory body, but shareholders, holders of debt securities and depositors have no such access. Restricting the ability of these groups to obtain information relevant to investment decisions inevitably makes it more difficult for them to make good decisions in that respect.

A key concern is likely to be that bondholders, in particular, have access to as much information as possible. The TSC has stated the level of market discipline imposed by shareholders before the crisis was found to be deficient and that it is hoped that after the development of bail-in debt, bondholders will do better.

The TSC considers that “regulatory convenience allies with the commercial advantages of non-disclosure, to the dis-benefit of investors, consumers and taxpayers”, and a measure of “secrecy” by the regulator where, as set out in the press release accompanying the publication of the correspondence, a “presumption of disclosure” (albeit with some, clearly defined, exemptions) would be more appropriate. The TSC proposed that if more supervisory information was made public then the market mechanism for imposing good behaviour on banks might work more efficiently. The wider context of the increased intrusiveness and complexity of the supervisory process has, in the view of the TSC, merely served to strengthen the case for greater disclosure.

The PRA responded, in its letter of 30 June 2016, to explain why it was confident that there is currently an appropriate balance between regulatory confidentiality and public disclosure. The PRA has taken steps to increase transparency, including by the disclosure of stress scenarios, methodologies and the results of annual stress tests of the large UK banks. Nevertheless, in the press release which accompanied the release of this correspondence, Mr Tyrie mantained that the PRA should consider setting out a disclosure policy to enable the merits of supervisory confidentiality to be judged on a consistent and transparent basis.

On 20 September 2016, HM Treasury (HMT) published a consultation paper in which it proposed amending the definition of “financial advice”, set out in article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order (RAO).

We summarised in our previous edition of this Update the final report of the Financial Advice Market Review (FAMR), which provoked considerable interest in highlighting the difficulties faced by consumers in seeking to access good quality advice. The FAMR report set out a number of recommendations, one of which was to amend the definition of “regulated advice” to correspond with the provision of a personal recommendation as set out in MiFID.

The definition of “investment advice” under MiFID is narrower in scope than “advising on investments” under article 53 RAO, since the MiFID definition requires the advice to be of a personal nature, while article 53 does not.

This Consultation Paper sets out HMT’s proposed approach to that issue, and text for the amended article 53. HMT acknowledges the potential risk to consumers of moving the regulatory boundary, which would enable some firms to provide guidance services, for which they currently require authorisation, without being authorised. However, HMT highlighted that where a guidance activity is related to a regulated product, there are already restrictions in place to prevent consumer detriment. These include, for example, the rules limiting inducements that a regulated firm can make to a third party, including unregulated firms, and restrictions around financial promotions.

HMT also considers that the proposed amendment may be beneficial in providing greater certainty, enabling firms to better understand their regulatory requirements. The FAMR consultation indicated that some firms had deliberately avoided providing information to support customer decision-making, for example around the merits and risks associated with particular investments, due to a lack of clarity around what constitutes regulated advice and what is perceived to be the blurred boundary between providing consumers with helpful guidance and unintentionally straying into an implicit personal recommendation. To avoid inadvertently straying into the provision of regulatory advice, firms have stepped back from providing support to consumers – which itself increases the risk that consumers will make uninformed, and almost inevitably poor, investment decisions.

Article 53 RAO applies to insurance as well as investments. As such, any change to the definition of “advising on investments” is likely to have a significant impact on any financial services firm which provides advice to consumers.

The Consultation closed on 15 November 2016 and a summary of responses is awaited. HMT and the FCA have agreed that further guidance will be required as to firms’ responsibilities in designing and delivering guidance services; that is, providing helpful guidance to consumers which does not constitute regulated advice.

FCA’s partial ban upheld for fund manager’s failure to spot market manipulation

On 20 October 2016, the Upper Tribunal upheld the FCA’s decision to ban Tariq Carrimjee of Somerset Asset Management from carrying out the compliance oversight and money laundering reporting significant influence functions.

Mr Carrimjee was an investment and fund manager responsible for the firm’s compliance oversight. The FCA determined that Mr Carrimjee had failed to act with due skill, care and diligence in failing to escalate the risk that a particular client of his might have been intending to engage in market manipulation. The FCA considered that Mr Carrimjee had suspected that market manipulation was the client’s goal, but had turned a blind eye to the risk of market abuse and recklessly assisted his client in attempting to achieve that goal.

FCA interim report on the asset management market published

On 18 November 2016, the FCA published its interim report on the asset management market study, which was launched in November 2015.

The FCA’s findings suggest that there is weak price competition in a number of areas of the asset management industry, which has a material impact on the investment returns of investors through their payments for asset management services.

The FCA’s analysis shows that mainstream, actively managed fund charges have stayed broadly the same over the past 10 years; few firms lower charges in order to attract investment, particularly in the retail sphere. Firms appear reluctant to undercut one another by offering lower charges, and prices do not appear to fall as fund size increases – which suggests that the economies of scale are captured by the fund manager, without being passed onto the investor.

Charges for passive funds, however, have fallen over the past five years. The FCA considers that this, combined with the overall growth of passive investing, suggests price awareness and competitive pressure on prices is building among certain groups of investors.

The FCA’s analysis also indicated that actively managed investments do not outperform their benchmark after costs. Funds which are available to retail investors underperform their benchmarks after costs, while products available to larger, institutional investors achieve returns that are not significantly above the benchmark.

Further, there does not appear to be a clear correlation between price and performance; the most expensive funds do not necessarily do better than less expensive funds, after costs, and many active funds offer similar exposure to passive funds, while charging significantly more.

The FCA also concluded that there are persistent issues around transparency of pricing, particularly around transaction costs, about which investors are not given information in advance, as a result of which they cannot take into account the full cost of investing when making their initial decision.

Accordingly, the FCA has set out a number of proposals to boost competitive pricing, for both retail and institutional investors. The FCA is provisionally proposing changes including, most notably, an all-in fee approach to quoting charges, so that fund investors can see more easily what is being taken from the fund and more easily compare potential investments. The FCA has set out four ways in which such a charge could work, including:

  • the current ongoing charges figure (OCF) becomes the actual charge taken from the fund, with any variation between the OCF, which is an estimate, and the actual ongoing charges, covered by asset managers;
  • the current OCF becomes the actual charge, with managers providing an estimate of any implicit and explicit costs. This would, in essence, be the same as the above approach, but would require asset managers to estimate transaction costs, which are not currently included in the OCF, which would enable easier comparison of the likely charges across different funds;
  • a single charge including all charges and transaction costs, with an option for overspend. That is, the single charge would cover all costs, but the asset manager would have discretion to take additional transactional charges from the fund in exceptional circumstances, which would then be explained to investors in the annual statement; and
  • a single charge including all charges and transaction costs, with no option for overspend. This would bind the asset manager to a single figure, including transaction costs. This approach would result in the asset manager bearing the risk of a difference between forecast and actual trading costs.

The FCA has acknowledged that some asset managers would respond to such proposals by simply increasing the single charge to cover the increased risk which they would bear under the proposals outlined above. The FCA considers that competition may, to a certain extent, provide sufficient pressure such that a single charge approach would not result in an increase in charges paid by investors.

However, the introduction of a single, all-in fee is likely to increase the risk that asset managers will indeed increase overall fees. Estimating transaction fees in advance is likely to be costly and complex, and may require firms to allow for a margin to cover costs which are higher than expected, to avoid covering that cost themselves. Whilst the FCA’s focus on increased transparency is likely to prove uncontroversial, it will be interesting to see how the asset management market responds to the FCA’s proposed approach and the criticism of current funding structures.

The FCA is currently seeking views about its interim findings, which should be submitted by 20 February 2017.

The FCA has published CP16/40, which addresses conduct of business rules for firms providing contracts for difference (CFDs) to retail clients. The Consultation Paper highlights the FCA’s concern that CFDs are complex, leveraged derivative financial instruments, currently offered to retail clients through online platforms, in relation to which the FCA’s supervisory work and thematic reviews have found increasing instances of poor conduct and risk of consumer detriment. The FCA’s sample of client data suggests that 80% of clients lost money on CFDs over the past 12 months, with the average loss amounting to £2,200.

Perhaps unsurprisingly, the FCA is proposing a range of policy measures to improve investor protection and limit the risks posed to retail investors by CFDs. This includes enhanced disclosure requirements, as part of which all retail CFD firms will be required to provide a standardised risk warning, and mandatory profit-loss disclosures, to better illustrate the risks which CFDs entail.

Further, the FCA has proposed leverage limits, including lower leverage limits for retail clients with less than 12 months’ active trading experience in similar products, with higher limits for more experienced clients. CP16/40 refers to a leverage maximum of 25:1 for inexperienced retail clients, and 50:1 for more experienced clients. The FCA cites current practice of offering retail clients leverage in excess of 200:1, which requires the client to post only 0.5% of their notional exposure; in this context, the FCA’s proposals are likely to have a substantial impact on spread-betting firms.

The deadline for responses to the Consultation Paper is 7 March 2017.

The FCA has confirmed that it intends to publish a consultation paper regarding FSCS funding by the end of December 2016.

In correspondence with the Treasury Select Committee, released on 31 October 2016, the FCA confirmed that it has consulted a range of stakeholders, including consumer groups and industry associations, and intends to review the FSCS funding model, with a view to improving affordability for firms without reducing consumer protections. This may involve merging particular funding sub¬classes, and potentially introducing risk-based levies in relation to the products or services offered by a firm, its capital reserves or reported complaints against it. The FCA has also indicated that it will review the relationship between FSCS funding and professional indemnity insurance, and in particular the FCA will consider whether a separate review is required of the professional indemnity insurance market.

PRA’s functions transfer to Bank of England

On 7 December 2016, HM Treasury confirmed that it intends to transfer the PRA’s functions to the Bank of England on 1 March 2017. Pursuant to the Bank of England and Financial Services Act 2016, a new committee, the Prudential Regulation Committee, will be established with the purpose of exercising the functions of the Bank of England in its role as the PRA.