FCA seeks views on MiFID 2 implementation: FCA has published a Discussion Paper to gauge views on how it might implement certain conduct of business (COB) and operational requirements of MiFID 2. The paper looks at:

  • applying MiFID 2 rules to insurance-based investment products and pensions: FCA already applies many of its rules to these products, although they are not subject to the current MiFID. It thinks these products are "substitutable" for MiFID 2 products and, bearing in mind the current rules, and the fact that MiFID 2 makes it clear there should be consistent consumer protections between all products, it would propose to apply its COB rules to them. It may have to change its proposals when the Insurance Distribution Directive (IDD) is finalised but at the moment is working on the assumption it will apply only minor changes when reading across MiFID 2 obligations on suitability and client reporting to non-MiFID products. It seeks views, however, on whether it should consider applying MiFID 2's appropriateness test to these products and, if so, what factors would make the products complex for these purposes. It also seeks views on how it should apply the product governance and remuneration rules to the products. It does not, however, think it should apply the MiFID 2 costs and charges requirements to them at this stage;
  • treatment of structured products: FCA urges firms to understand the relevant definitions in MiFID 2, and is seeking views on whether (a) to copy out the relevant MiFID 2 rules into the Banking: Conduct of Business Sourcebook (BCOBS) so they apply to firms that advise on and sell structured deposits. But this would significantly expand and complicate BCOBS and FCA is not keen on this option, (b) to apply the relevant provisions to these products through Conduct of Business Soucebook (COBS), disapplying other parts of COBS to the products and retaining the relevant BCOBS provisions; or (c) incorporating the products fully into COBS;
  • receipt of commissions and other benefits for discretionary investment managers: FCA notes MiFID 2 will effectively apply requirements similar to the Retail Distribution Review (RDR) adviser charging rules to discretionary investment management (DIM). It asks whether it should include the MiFID 2 concession to DIM of allowing firms to accept commissions and benefits, provided they rebate them back to the client, or apply the RDR restrictions and ban it. It suspects many DIM firms already apply RDR standards and wants to ensure regulatory consistency;
  • client categorisation: FCA seeks views on the way in which local authorities can opt up to professional client status following MiFID 2. It could (a) not change the current rules but provide further guidance; (b) introduce new rules with a better quantitative element to ensure firms do not opt up local authorities purely on the basis of their business models; or (c) change its rules so the alternative quantitative opt-up criteria for local authorities mirror the MiFID large undertakings test. This would give the best level of protection. It also seeks views on whether local authorities should in principle also be retail clients for the purposes of non-MiFID business;
  • adviser independence: FCA seeks views on how different the MIFID 2 standard is from its current standard. It looks at the overlap between its "retail investment products" (RIPs) to which the RDR rules apply and the set of products to which the MiFID independence standard will apply. It seeks views on (a) how it should apply the standard in respect of advice on shares, bonds and derivatives, (b) whether it should continue to include insurance-based investments and pensions within its definition of RIP and (c) whether it should include structured deposits within the definition of RIP;
  • applying remuneration requirements to non-MiFID firms: FCA considers its current rules that aim to ensure a firm's remuneration policies do not encourage individuals to act in a way that is not in the customer's interests. It also looks at approaches under various Directives. It thinks the best way forward is to introduce common and consistent provisions and in principle would favour applying MiFID 2 requirements to non-MiFID firms. But it recognises some of these firms will be subject to different, but similar rules under other parts of the rulebook. It asks for views on whether it should consider extending its rules, or whether it should wait for further clarity on the EU landscape before consulting further;
  • recording of communications: FCA proposes to introduce a regime on recording of telephone conversations and electronic communications that is the same for firms that benefit from the "article 3" option as for those that do not. It also thinks it should remove the current exemptions for investment managers;
  • costs and charges disclosures: FCA seeks views on what technical challenges firms may meet in implementing these requirements, with which FCA might help (although it hopes the Commission will address many of them) and on whether it might develop a standardised format for certain disclosures;
  • inducement standards: FCA proposes to apply MiFID 2 inducement standards to both independent and restricted advice, as well as to DIM and to both retail and professional clients. In principle it would apply these standards also to insurance-based investments and pension products and seeks views on whether it should; and
  • complex and non-complex products and application of the appropriateness test: FCA's understanding the Commission is taking a strict interpretation of the criteria for establishing whether a product is complex or non-complex, which will significantly reduce what is considered non-complex. It is aware of firms' concerns, and wants to work with firms to assess how to apply the necessary tests in different product contexts.

Alongside the paper, FCA has published an indicative timeline for MiFID 2 implementation. Its main consultation in implementation is due in December this year. FCA asks for comments by 26 May. (Source: FCA Seeks Views on MiFID 2 Implementation)

FCA publishes Business Plan: FCA has published its Business Plan for 2015/16, which includes a description of its two new divisions it announced at the end of 2014 would take responsibility for its supervisory and authorisation work. Key elements of the plan are:

  • Tracey McDermott will lead the Supervision, Investment, Wholesale and Specialists, and Linda Woodall the Retail and Authorisations division;
  • key priorities of a strategic and markets-led approach to regulation, involving a market-focused work programme, wholesale market integrity and competition;
  • protecting consumers with a focus on consumer credit and pensions and the ageing population;
  • individual accountability, in particular culture changes, senior managers and certified persons, remuneration, enforcement against individuals and whistleblowing;
  • international issues, in particular engaging internationally, implementing EU policy and financial crime - financial crime will also continue to be a focus domestically;
  • the use of big data and access, and the role of appointed representatives in general insurance and protection;
  • inducements and conflicts in retail investments, and emerging distribution models in non-advised sales;
  • retail lending - specifically responsible lending and the post-mortgage market review regime, and staff remuneration and incentives in consumer credit;
  • a cross-sector culture review;
  • retirement sales practices and consumer outcomes from advised and non-advised retirement sales;
  • a post-authorisation review of funds and asset management; and
  • investment and corporate banking.

The paper looks at how FCA assesses risk and how it will work to mitigate the risks it has identified. It also looks at how its new strategy, placing more emphasis on sector and market-wide analysis, will operate. (Source: FCA Business Plan 2015/16)

FCA creates UCITS V page: FCA's website has a page devoted to UCITS V which explains the purpose of the Directive and the changes for depositaries and management companies. It reminds firms of the implementation date of UCITS V, which is 18 March 2016, and says it is working with Treasury on implementation and expects to consult on changes to its Handbook during the third quarter of 2015. (Source: FCA Creates UCITS V Page)

FCA consults on Pension Wise recommendations: FCA has published a consultation paper on its policy on monitoring Pension Wise designated guidance providers’ compliance with FCA's standards and, where providers have breached them, making recommendations to the designated guidance providers and Treasury where appropriate. It asks for comments by 8 May. (Source: Pension Wise - Recommendation Policy)

FCA confirms former CEO fine and ban: FCA has confirmed its fine of £2,700,000 and ban on Alberto Micalizzi, former CEO of Dynamic Decisions Capital Management Limited. FCA had found, and the Tribunal had confirmed, Mr Micalizzi was not fit and proper to be an approved person. The Tribunal had reduced the penalty from £3 million. Mr Micalizzi had indicated he would appeal, but the deadline for doing so has passed. So FCA confirmed the fine and ban. (Source: FCA Confirms Former CEO Fine and Ban)

FCA publishes mortgage lending review: FCA has published a thematic review on governance over mortgage lending strategies. It wanted to see how firms were dealing with the increased focus on conduct and customer focus at every governance stage. It saw a variety of processes in the firms it reviewed, and agrees it is important to achieve a method appropriate to the relevant business. However, it found some areas in which firms could improve:

  • while all firms are aware of the importance of conduct on customer outcomes, it is not always culturally embedded and therefore firms do not consider it at all stages of strategy, as they should;
  • firms could do more to show customer focus in their structure and process, and should ensure they keep an audit trail of why key decisions are made;
  • some firms relied on certain individuals as "conduct champions" but this cannot work properly as the individuals will not be involved in all stages of the process, and there were rarely plans for retaining their knowledge when they moved jobs;
  • firms are making good use of customer research and engagement, which FCA found promising; and
  • firms should consider whether any decisions made when setting or amending lending strategies are in the best interests of customers.

FCA wants firms to consider the results of the review and be preventative in their approach by considering the customer at all stages of the mortgage-lending strategy process. It has produced a list of questions for firms to consider when assessing how they put consumer outcomes at the heart of each stage of business. (Source: FCA Publishes Mortgage Lending Review)

FCA consults on add-on ban: FCA is consulting on rules and guidance that would:

  • ban opt-out selling (where a customer has to override a box that pre-selects a setting) for all add-ons, not just general insurance. It wants to make sure customers make informed and active decisions when considering add-ons, regardless of the financial product. However, it would not extend the ban to circumstances when it thinks the practice is convenient for customers or where it thinks a ban would be inappropriate. It gives examples of what might fall within this category; and
  • improve product information for general insurance add-ons. This would include introducing add-ons to customers at an early stage in the sales process, helping customers to compare options, and ensuring customers can easily understand the price of add-ons.

The consultation includes proposed changes to each of the Conduct of Business modules in FCA's rules. FCA asks for comment by 25 June (Source: FCA Consults on Add-on Ban)

FCA wins Capital Alternatives appeal: The Court of Appeal upheld the decision in the case FCA brought against Capital Alternatives and others that all four schemes operated by the defendants were collective investment schemes that the defendants promoted and operated without authorisation. FCA has explained to investors in each of the schemes that they do not need to take any action at this stage. (Source: FCA Wins Appeal Case Against Capital Alternatives)

FCA bans individuals for poor pensions advice: FCA has banned Lloyd Pope and Peter Legerton, former directors of advisory firm TailorMade Independent Ltd (TMI), from senior positions in financial services. It also fined Mr Pope £93,800 and would have fined Mr Legerton £84,000, but for financial hardship. It found the directors failed to ensure TMI properly considered whether investments they recommended to customers were suitable. It also found a failure to identify and manage conflicts of interest, and a further failure to take action when external consultants noted the issues. The firm is in liquidation and FSCS is investigating claims. (Source: FCA Bans Individuals for Poor Pensions Advice)