Investment and corporate banking: prohibition of restrictive contractual clauses

Policy Statement 17/13, June 2017

The FCA published final rules (in COBS 11A.2) to prohibit UK firms from including restrictive clauses in written agreements with their clients (whether based in the UK or overseas). The prohibition extends to clauses which give firms a: "right to act", i.e. the right to provide any future primary capital market or M&A services to the client, or; "right of first refusal", i.e. the firm has the right choose to provide such services before anyone else can.

The following features of the FCA's final rules are also worth noting:

  • the ban only applies to written agreements containing clauses relating to unspecified and uncertain future services – there is no restriction on firms agreeing terms for specific and known future work;
  • "right to match" clauses are acceptable – this covers clauses that allow firms the chance to match an offer made to a client by another firm, so long as the client retains the right to choose either firm to provide the service;
  • the ban applies to clients of all sizes;
  • the ban only affects primary market services;
  • restrictive clauses contained in bridging loan agreements or agreements for warehouse facilities are excluded from the ban because there are legitimate commercial reasons for their inclusion;
  • the FCA rejected the argument that the ban (and its geographic scope in particular) would prejudice UK firms at the expense of their international counterparts (who, it was said, would be able to price initial work more cheaply because of the use of restrictive clauses ensuring income from future work).

The ban will take effect from January 3, 2018.

Staff incentives, remuneration and performance management in consumer credit – findings from the FCA's thematic review and proposed new rule and guidance

Consultation Paper 17/20 and Guidance Consultation 17/6, July 2017

The FCA has consulted on the introduction of new rules and guidance in CONC, in order to try to improve on incentives, remuneration and performance management in consumer credit firms following a thematic review. The new rules would not apply to firms already subject to any of the remuneration codes in SYSC 19A to SYSC 19F inclusive, or to remuneration provisions made by an EEA regulator pursuant to specific EU legislation.

For those firms affected by the Consultation Paper and Guidance Consultation, the key points are:

  • a rule requiring firms to put in place adequate arrangements to detect and manage any risk of non-compliance with their regulatory obligations arising from their remuneration or performance management practices;
  • a requirement that firms take account of the nature, scale and complexity of their businesses, and the range of financial services and activities undertaken in the course of that business, when deciding how to comply;
  • guidance on the purpose of the new provisions, including their relationship with existing requirements; and
  • specific examples of good and poor practice.

The outcome of this consultation should be to focus the minds of consumer credit firms on an area that was subject to considerable scrutiny and reform in banks in particular, in the wake of the financial crisis. Given that scrutiny, it is perhaps surprising that the FCA found some of the higher risk incentives that it identified among consumer credit firms. Final rules are expected in early 2018.

Markets in Financial Instruments Directive II Implementation – Consultation Paper VI

FCA CP17/19, 03 July 2017

In July, the FCA published a Consultation Paper on its sixth set of implementation proposals for MiFID II and proposed changes to the FCA Handbook. In this Consultation Paper, the FCA published proposals:

  • to bring recognised investment exchanges operating multilateral trading facilities and organised trading facilities within the scope of the Financial Services Compensation Scheme (as required by Article 5 of MiFID II);
  • to amend the changes proposed to DEPP and the Enforcement Guide (as described in CP17/8), in order to comply with the final legislation introduced by the Treasury to implement MiFID II; and
  • to make consequential changes to the Prospectus Rules and Glossary in the Handbook, to comply with legislative changes introduced by the Treasury to implement MiFID II. 

The Consultation Paper once more reflects the significant amount of regulatory change currently underway, not least as a result of the imminent introduction of MiFID II. The necessary rule changes were due to be finalised by November 2017, but had not yet been published by the time this update was finalised.

FCA issues Policy Statement on implementation of the revised Payment Services Directive (PSD2)

PS17/19 – Implementation of the revised Payment Services Directive, September 2017

The FCA issued a Policy Statement setting out its approach to implementation of PSD2 and the changes which will consequently need to be made to the FCA Handbook. The FCA plans to implement the changes to the FCA Handbook and the Approach documents as consulted on in CP17/11 and CP17/22 earlier in the year.

The FCA considers the changes to be of particular interest to payment services providers, banks, e-money issuers, money remitters, non-bank card issuers and merchant acquirers among others.

The Policy Statement covers changes in the following areas:

  • Perimeter Guidance;
  • authorisation and registration;
  • complaints handling and reporting;
  • conduct of business;
  • regulatory reporting, notifications and record keeping;
  • account information services, payment initiation services and confirmation of availability of funds; and
  • payment providers' access to payment account services.

The Policy Statement also sets out the specific changes to be made to the Approach document and the approach that will be taken to regulation and enforcement by the Payment Services Regulator post-implementation.

The appendices contain the text of the changes which will be made to the FCA Handbook and non-Handbook directions for excluded providers.

FCA's Annual Report and Accounts 2016/2017

Annual Report and Accounts

The body of the FCA's Annual Report focused on how the FCA furthered its three key objectives over the course of the past year, highlighting notable achievements as follows:

Securing protection for consumers

The FCA's work in this area included:

  • investigating the markets in packaged bank accounts and contracts for difference;
  • new rules requiring insurers to encourage consumers to shop around when policies expire;
  • taking measures to ensure mortgage and consumer credit customers in arrears are treated fairly;
  • capping pension exit charges;
  • helping firms prepare for the impact of an interest rate rise on vulnerable customers;
  • continuing to seek redress for consumers mis-sold PPI while bringing in a deadline for complaints of 29 August 2019; and
  • investigating unfair treatment of small business customers.

Protecting and enhancing the integrity of the UK financial system

The FCA referred to ongoing supervision work, including:

  • consulting on a range of measures designed to improve the access to information for investors on an IPO;
  • undertaking a range of preparations for MiFID II implementation including publishing four consultation papers and holding a number of workshops;
  • taking action against market abuse;
  • conducting an ongoing review of rules relating to crowdfunding;
  • addressing concerns in relation to "dark pools"; and
  • implementing measures to support and encourage whistleblowing.

This section of the report also contained more in-depth analysis of the FCA's work in relation to wholesale financial markets; financial crime and anti-money laundering and firms' culture and governance.

Promoting competition for consumers

The FCA also reported on the following work related to its competition remit:

  • market studies into the investment and corporate banking, credit card, asset management, insurance add-on and mortgage markets;
  • the New bank Start-up Unit in conjunction with the PRA; and
  • support for an effective implementation of the Second Payment Services Directive.

The FCA also noted that it is providing impartial technical advice to the government in relation to Brexit, and is working with firms to plan for the future.

FCA Mission – Our Future Approach to Consumers

FCA Mission Paper, 6 November 2017

In April 2017 the FCA published "Our Mission 2017", which provides a framework for the FCA's framework choices. As part of that Mission, the "Future Approach to Consumers" paper has been published to explain the approach to regulating for retail consumers in greater depth.

In this paper, the FCA offers its insight into "who are consumers in 2017" and lays out its vision for a well-functioning market that works for consumers. In all markets it wants to see:

  • that consumers are enabled to buy the products and services they need because the environment in which they are sold is clear, fair and not misleading, with a good choice architecture; and
  • high-quality, good-value products and services that meet consumers' needs.

Additionally, the FCA states that, where markets work well for consumers, it should be possible to observe:

  • inclusion – everyone is able to access the financial products they need and the needs of vulnerable consumers are taken into account; and
  • protection – consumers are appropriately protected from harm.

This approach has been developed using a wide range of research, including the results of the Financial Lives Survey (published on 18 October 2017). It is based around five core ideas: consumer and firm responsibility; keeping pace with a changing environment; regulating for vulnerable consumers; having regard to access and tackling exclusion; and delivering better outcomes for all consumers.

The FCA states that its approach will be based on an appropriate balance of its existing range of tools and convening powers, used to diagnose and remedy harm. The intention is to prioritise the needs of all types of retail consumers in the FCA's interventions and other decisions.

One additional point firms should note is that the paper mentions that a number of stakeholders have identified a potential need to introduce a new duty of care. This would impose an obligation on firms to exercise reasonable skill and care in the provision of services to customers. However, the FCA has stated that this will require detailed consideration, best done following Brexit. At that time, a Discussion Paper will be published to explore the issue separately. It is questionable, however, what such a duty would add to the obligations already on firms.

It is worthwhile noting that the FCA has stated that this paper is not its final and definitive approach – in addition to setting out the general approach, the paper contains six consultation questions. The FCA will consider responses to this consultation, with a final Approach to Consumers due to be published in 2018. Responses to the consultation should be submitted by 5 February 2018.

PRA Policy Statement in relation to regulatory references

Policy Statement 19/17, 20 July 2017

In February 2017 the PRA published the Occasional Consultation Paper (CP2/17), setting out proposed changes to PRA rules and existing Supervisory Statements (SS). The consultation was relevant to all PRA authorised firms. In this Policy Statement, the PRA has published feedback to CP2/17. PS19/7 includes the final rules and updated SS34/15 "Guideline for completing regulatory reports" and SS9/13 "Securitisation".

The PRA has given feedback and set out its final policy decisions as follows:

  • Regulatory references – minor amendments are to be made to the language relating to the regulatory references rules in the Fitness and Propriety, Insurance – Fitness and Propriety and Large Non-Solvency II Firms – Fitness and Propriety parts.
  • Non-Solvency II firms – external audit reporting and supplementary notes. Rule 2.5 of the Insurance Company – Reporting Part is to be amended to exclude from the scope of external audit the reporting that is required under Insurance Company – Reporting 4.24 to 4.25.
  • Remuneration – committees and deferral periods. Minor amendments are to be made to Remuneration 7.4, as proposed in the CP. However, the PRA has decided to leave Remuneration 15.17(1)(b) as it is currently drafted. This is because a response was received indicating that the proposed amendment would not clarify the provision.
  • Ring-fencing – residual reporting requirements for ring-fenced bodies (RFBs). Amendments and additions are to be made to the reporting requirements for RFBs, and amendments are to be made to the reporting requirements set out in the Regulatory Reporting Part of the PRA Rulebook. In addition to the changes which are to be made, the PRA confirmed that there will be no need to submit duplicate data to meet IFRS 9 reporting requirements where an RFB sub-group already reports the same data under FINREP reporting requirements.
  • Securitisations – implicit support and external credit assessment institution mapping. Changes are to be made to SS9/13 to align the Implicit Support and SRT chapter (5) with the EBA guidelines on implicit support for securitisation transactions. Chapter 7 "Mapping of ECAI credit assessments to credit quality steps" is to be deleted.

The PRA is also considering the responses received to Chapter 2 "Credit risk mitigation – secured guarantees" and has said that feedback is to be provided in a separate PRA document.

Bank of England seeks views on details of the procedure for the Enforcement Decision Making Committee (EDMC)

Bank of England Consultation Paper – Procedure for the Enforcement Decision Making Committee, November 2017

The Bank of England (the Bank) has published a consultation paper on the procedure for the EDMC, which has been set up following the outcome of an earlier consultation paper issued in July 2016.

The Bank now proposes that:

  • the remit of the EDMC will be to make decisions (which can be appealed to the Upper Tribunal) on behalf of the Bank in contested enforcement cases with respect to Prudential Regulation, Financial Market Infrastructure and Resolution as defined in the draft statutory provisions annexed to the Consultation Paper;
  • members of the EDMC will be independent of the current Bank executive (and not employees of the Bank), appointed for fixed three-year periods by the Court of Directors of the Bank (the Court) with a term limit of two consecutive terms, removable prior to the expiry of their fixed term by the Court only where they are unable or unfit to discharge their function; 
  • the EDMC will eventually consist of nine members, of whom three will be legally qualified, but the Court will appoint an initial five, of whom two will be legally qualified, it will be chaired by one of its legally qualified members and all members will receive reasonable remuneration and expenses; and
  • a panel of at least three EDMC members, of whom one must be legally qualified, should be convened to hear and resolve each contested enforcement case by majority vote, with a nominated "Panel Lead" (chosen from the legally qualified members) having a casting vote in the event of a split vote.

The Bank invites feedback until 2 February 2018. The structure and procedure proposed by the Bank will not be entirely alien to those familiar with the Regulatory Decisions Committee of the FCA, but these proposals mark an interesting further step in the development of the Bank's enforcement procedures.

Consultation Paper on Industry Codes of Conduct and Discussion Paper on FCA Principle 5

Consultation Paper 17/37, November 2017

The proposals in this consultation paper are closely related to the Fair and Effective Markets Review (FEMR) in relation to fixed income, currency and commodities (FICC) markets. One of the main recommendations of FEMR was the development of new industry codes of conduct, including in relation to the global spot FX market.

The FCA is now consulting on industry codes in relation to unregulated activities. Its proposals are, in summary:

  • to recognise certain industry codes in relation to unregulated activities, with the effect that compliance with such codes would tend to indicate compliance with applicable FCA rules that reference "proper standards of market conduct"; and
  • to set out the criteria and outline process it would apply to deciding whether or not to recognise a particular code.

The FCA also seeks views on whether its approach to enforcement in the context of the Senior Managers and Certification Regimes (SMCR), including the conduct rules, is sufficiently clear in relation to the relevance of industry codes.

Finally, the FCA has started a discussion as to whether Principle 5 (requiring a firm to observe proper standards of market conduct) should be extended to unregulated activities. This is clearly a possibility that the FCA favours.