Proposed guidance on statements of responsibilities for FCA firms
On 11 October 2018, the FCA published draft guidance, GC18/4: Senior Managers and Certification Regime – Proposed guidance on statements of responsibilities and responsibilities maps for FCA firms.
The aim of the guidance is to give FCA solo-regulated firms practical assistance and information on preparing statements of responsibilities (SoRs) and responsibilities maps. The guidance may also be of interest to dual-regulated firms already subject to the SMCR, when preparing new SoRs and responsibilities maps, or reviewing existing ones.
Comments are requested by 10 December 2018.
FCA confirms greater access for SMEs to the Financial Ombudsman Service
On 16 October 2018 the FCA released its policy statement (PS18/21) on SME access to the Financial Ombudsman Service (FOS), setting out its near-final rules for amending the compulsory jurisdiction to include new definitions for "small businesses" and "guarantors".
The service will now be available to SMEs which have an annual turnover below £6.5m and fewer than 50 employees or an annual balance sheet below £5m. This should account for around 210,000 additional SMEs, which will now be able to refer unresolved complaints to the ombudsman service.
The FCA also published consultation paper 18/31 (CP18/31), in which it proposed raising the maximum amount of compensation the FOS can require firms to pay if a complaint is upheld.
FCA Feedback Statement FS18/2: Digital Regulatory Reporting
On 17 October 2018, the FCA published a feedback statement on digital regulatory reporting (DRR) (FS18/2), which follows the FCA's February 2018 call for input on smarter regulatory reporting.
FS18/2 summarises the feedback received on the FCA’s DRR ‘proof of concept’, which the FCA hopes will make it easier for firms to meet their regulatory reporting requirements and improve the quality of data they provide. Based on the feedback received, and positive industry participation in the pilot, the FCA’s current position is that implementing DRR is a concept that the financial services industry considers to be worth regulators investigating further.
Following the conclusion of the pilot work in November 2018, the pilot participants will publish a technical paper in early 2019.
FCA consults on Brexit approach in consultation papers 18/28 (CP18/28) and 18/29 (CP18/29)
The FCA published two consultation papers setting out its proposals in the event the UK leaves the EU on 29 March 2019 without an implementation period. It also set out its approach to the regulation of credit rating agencies, trade repositories and data reporting services providers.
The two consultation papers focus on:
- Amendments to the FCA Handbook and Binding Technical Standards (detailed EU rules which the FCA will have responsibility for after exit) resulting from leaving the EU, and the FCA’s approach after Brexit to EU non-legislative material; and
- the Temporary Permissions Regime, which will allow EEA firms and funds passporting into the UK to continue operating here for a limited period after Brexit while seeking full UK authorisation.
FPC states that the UK banking system strong enough to cope with cliff-edge Brexit
The Financial Policy Committee (FPC) of the Bank of England has published a statement following its 3 October 2018 policy meeting.
Highlights from the statement include the following:
- The FPC continues to judge that the UK banking system would be strong enough to serve UK households and businesses through a disorderly, cliff-edge Brexit.
- Reflecting the substantial increase in its resilience over the past decade, the UK banking system now has the capacity to absorb, in addition to a disorderly, cliff-edge Brexit, further misconduct costs and stresses that could arise from intensifying trade tensions and a further sharp tightening of financing conditions for emerging markets.
- An implementation period would reduce the risks of disruption to the supply of financial services to UK and EU households and businesses as the UK exits the EU. Whilst there has been considerable progress in the UK to address the risk of disruption that could arise in the absence of an implementation period, limited progress has been made in the EU.
The FPC also continues to judge that, apart from those related to Brexit, domestic risks remain at a standard level overall. The Committee notes its concern at the rapid growth of leveraged lending, including to UK businesses, and will assess any implications for banks in the 2018 stress test.
FCA statement on super-complaint from Citizens Advice to the CMA on excessive prices for disengaged consumers
Citizens Advice submitted a super-complaint on 28 September 2018 to the Competition and Markets Authority calling on it to identify remedies and recommendations to put an end to the penalty paid by loyal and disengaged consumers.
The FCA has been concerned about the issue of long-standing customers being charged more for some financial products than new customers for some time. In its 2018/2019 Business Plan, the FCA announced that it would be reviewing the pricing practices of general insurance firms. The FCA also announced that it will launch a market study looking at how general insurance firms charge their customers for home and motor insurance.
The super-complaint also raises concerns about competition in the mortgages and cash savings markets. The FCA has already undertaken work in both these areas looking at the treatment of long-standing customers. This includes a cash savings market study which reported in 2015, a discussion paper in July 2018 on price discrimination in the cash savings market, and a mortgages market study launched in December 2016 which published its interim report in May 2018.
FCA 'Dear CEO' letter sets out the regulator's expectations for debt packager firms providing debt advice and counselling services
On 5 October 2018, the FCA published a Dear CEO letter setting out its expectations for debt packager firms. Debt packager firms provide services which include: gathering customer information; providing debt counselling advice on the debt solutions available; recommending a debt solution for the customer; and referring the customer on to a third party provider. For each customer referred, the firm will be paid a referral fee by the third party provider which differs according to the solution recommended.
The FCA understands that debt packager firms may be receiving higher fees for a specific debt solution, and is concerned that incentive to increase revenue streams could be a driver for a poor conduct culture. The FCA also notes that customers who are struggling to repay their debts can be among the most vulnerable in society, and expects debt packager firms to have established policies and procedures that enable staff to appropriately identify and support vulnerable customers.
Whilst not exhaustive, the Dear CEO letter highlights a number of key rules alongside some associated guidance, contained in the FCA Handbook, that it expects firms to consider. Debt packager firms are not required to respond to the Dear CEO letter but failure to comply with the FCA’s regulatory requirements could lead to enforcement action.
FCA Dear CEO letter on the affordability of high-cost short-term credit loans
On 15 October 2018, the FCA published a Dear CEO letter regarding an increase in complaints about unaffordable lending. The letter sets out how the regulator expects high-cost short-term credit (HCSTC) firms to manage the impact and states that:
- firms should take account of relevant FOS determinations in establishing effective complaints-handling procedures and ensure these procedures allow improvements to the handling of complaints;
- where firms identify recurring or systemic problems in their provision of financial services, which may include the carrying out of affordability assessments, they should identify the scope and severity of the consumer detriment and consider whether redress or remediation should be undertaken;
- where the FOS makes an award or direction firms must comply with it promptly;
- firms should make appropriate provision for potential remediation; and
- firms should review their current lending practices to ensure these are fully compliant with the rules set out in the FCA Handbook’s Consumer Credit Sourcebook (CONC) and, if not, take steps to address this.
The letter also reminds firms of the need to review their policies and procedures ahead of the amended rules and guidance on assessing creditworthiness, as set out in the FCA’s Policy Statement 18/19 published in July 2018.
Self-Invested Personal Pensions
PS18/20: Improving the quality of pension transfer advice
The FCA has published new rules and guidance on improving the quality of pension transfer advice. This policy statement confirms that the FCA is taking forward most of the proposals put forward for consultation in March 2018, which mainly related to transfers from defined benefit (DB) to defined contribution (DC) pension schemes.
The changes include a requirement for all pension transfer specialists to hold a specific qualification for providing advice on investment by October 2020, which enables advisers to identify whether a proposed pension scheme and investment solution is consistent with the client’s needs and objectives. Furthermore, the FCA expects advisers to consider their client’s attitude to, and understanding of, the risks of giving up safeguarded benefits for flexible benefits.
FCA and TPR publish joint pensions strategy
On 18 October 2018, the FCA and the Pensions Regulator (TPR) launched a joint regulatory strategy to identify key issues which contribute to the prospect of people not having adequate income, or the income they expected, in retirement.
The aim of the strategy is to provide pensions and retirement income products:
- that support people and increase financial provision for later life;
- that are well funded, well governed and deliver value for money; and
- which provide the tools to enable people to make well informed decisions.
The joint strategy outlines the ways the FCA and TPR will work together in future, and highlights two new priorities for joint action. The first is a strategic review of the entire consumer pensions journey and will involve an in-depth look at what tools are needed to enable people to make considered decisions about their pensions. The two regulators will also, as a second priority for joint action, use their powers to drive value for money for members of pension schemes.
FCA Thematic Review: Money Laundering and Terrorist Financing Risks in the E-Money Sector
The FCA has published the findings of its Thematic Review (TR18/3) into money laundering and terrorist financing risks in the e-money sector.
The FCA visited 13 electronic money institutions (EMIs) to assess their anti-money laundering and counter-terrorist control framework. The review was focused on e-money products, including prepaid cards and digital wallets.
Overall, the FCA found that the majority of EMIs had:
- reasonably effective anti-money laundering and counter-terrorist financing systems and controls;
- revised and updated policies and procedures to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs); and
- effective transaction monitoring largely based on automated systems.
However, the review highlights potential weaknesses which firms should be aware of, including narrow staff training, too generic business-wide risk assessments, and risk scoring methodologies which omit retail customers.
NCA successfully resists challenge to unexplained wealth order
The High Court has handed down judgment in an appeal of the first Unexplained Wealth Order (UWO) in National Crime Agency v A  EWHC 2534 (Admin).
The National Crime Agency (NCA) had obtained the first UWO, in February 2018, against Mrs A, the wife of a suspected politically exposed person (PEP) located outside the European Economic Area. Such orders allow enforcement agencies to challenge owners of assets worth more than £50,000 to explain how they afforded those assets.
The UWO was issued in connection with a property worth £22m. It was challenged on a number of grounds including Mrs A's status as a PEP, on the basis that the bank her husband worked for was not a state-owned enterprise and his role did not constitute a prominent public function for an international organisation or a state.
Mrs A also challenged the UWO on the grounds that the NCA had failed to prove the income requirement under section 362B(3) of the Proceeds of Crime Act 2002, and that Mrs A should be protected under the doctrine of privilege against self-incrimination.
This application provided a robust test of the first successfully obtained UWO. The court essentially rejected the following three key grounds of challenge:
- that the income requirement must be proven to the criminal standard;
- that persons with a beneficial and apparent genuine interest in a property are immune from such an order; and
- that spouses (against whom many orders are likely to be made) are exempt.
The judgment will be of particular interest to anti-money laundering compliance practitioners for its analysis of the definition of “state-owned enterprises” in relation to PEPs.
Office of Financial Sanctions Implementation publishes annual review for 2017-2018
HM Treasury’s Office of Financial Sanctions Implementation (OFSI) published its annual review, which provides an overview of OFSI’s activities in 2017-2018, as well as looking to the future. OFSI was set up in March 2016 to be a "centre of excellence" for financial sanctions. Its objectives are to raise awareness of financial sanctions, to assess and address suspected breaches and provide a professional service to the public and industry.
The review includes sections on:
- UN and EU financial sanctions regimes;
- UK counter-terrorism asset freezes;
- frozen funds review;
- compliance and enforcement;
- licensing; and
- raising awareness.
Fines and enforcement
FCA fines Tesco Bank £16.4m for failures in 2016 cyber attack
The FCA has fined Tesco Personal Finance plc (Tesco Bank) £16,400,000 for failing to exercise due skill, care and diligence in protecting its personal current account holders against a cyber-attack which took place in November 2016.
The attackers exploited deficiencies in Tesco Bank’s design of its debit card, its financial crime controls and in its Financial Crime Operations Team. These deficiencies ultimately netted the cyber attackers £2.26m in a largely avoidable incident.
Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said:
'The fine the FCA imposed on Tesco Bank today reflects the fact that the FCA has no tolerance for banks that fail to protect customers from foreseeable risks. In this case, the attack was the subject of a very specific warning that Tesco Bank did not properly address until after the attack started. This was too little, too late. Customers should not have been exposed to the risk at all.'
SFO charges Andreas Hauschild with EURIBOR manipulation
The Serious Fraud Office has charged Andreas Hauschild, a former trader at Deutsche Bank, with conspiracy to defraud as part of an investigation into the manipulation of the Euro Interbank Offered Rate (Euribor).
Mr Hauschild was extradited to the UK after his arrest in Italy in August 2018, and appeared before Westminster Magistrates’ Court on 20 October 2018. The next hearing will take place at Southwark Crown Court on 24 October 2018.
Financial Conduct Authority publishes Decision Notice concerning Linear Investments Limited
On 27 September 2018, the FCA published a Decision Notice concerning Linear Investments Limited (Linear).
From 14 January 2013 to 9 August 2015, Linear failed to take reasonable care to organise and control its affairs responsibly and effectively to ensure potential instances of market abuse could be detected and reported. Linear has agreed the facts set out in the Notice, as well as liability for the breaches identified. It disputes the penalty imposed and has referred the issue of penalty to the Upper Tribunal.
This is the first case to be completed under a new process introduced for partly contested cases. It allows firms or individuals under investigation to agree to certain elements of the case and contest others. This means they are still eligible for a discount of up to 30% on any penalty imposed. In this case, Linear agreed facts and liability, but contest the level of penalty set out in the Decision Notice. Without this discount, the fine would have been £584,700.
Prisoners, wellness programmes and the rats of Hanoi: why the FCA tests its interventions
The FCA published a speech by its executive director of strategy and competition, Christopher Woolard, on the FCA’s use of interventions and its understanding of consumer behaviour. In addition to more formal consultation, Mr Woolard said testing reduces uncertainty about what will work and gives regulators insight about how markets might respond.
Rolling the rock: The cycle of deregulation, crisis and regulation
The chair of the FCA, Charles Randell, gave a speech on the cycle of deregulation, crisis and regulation, in which he said the most important way to avoid a damaging cycle is to keep an open mind about the shortcomings of existing rules.
Mr Randall also said the FCA does not see Brexit as an opportunity to join a race to the bottom in regulatory standards, but "quite the contrary". Mr Randall said strong global standards in fact "reinforce the competitiveness of the UK financial services sector".
Trust and ethics – a regulator’s perspective
The CEO of the FCA, Andrew Bailey, gave a speech on trust and ethics from a regulator’s perspective at the launch of the St Mary’s University School of Business and Society in London.
He explained that the financial crisis of a decade ago, and the subsequent revealing of serious conduct problems in too many areas of financial services, has without doubt severely damaged any sense of trust. Mr Bailey considers that trust in finance has changed over time. The FCA is trying to restore trust in the financial system by, amongst other things, introducing the SMCR and encouraging a good culture in firms.