The regular monthly update on UK regulation relating to securities laws, is provided by Emma Radmore, Legal Director, Womble Bond Dickinson (UK) LLP, and covers UK regulatory developments during February 2020.
Laws, Regulatory Requirements and Consultations
FCA writes to CEOs on end of LIBOR. The Financial Conduct Authority (FCA) has written to the CEOs of asset management firms on preparing for the end of the London Interbank Offered Rate (LIBOR). It expects firms to take all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or consumers harmed. The letter stresses the importance of industry-led transition to alternative risk-free rates and says firms should not await instructions from clients but should be proactive now. Firms should assume LIBOR will cease after December 2021 and should consider very carefully whether their products and services will meet client needs and perform as expected after 2021. In particular:
- Firms should now consider switching from LIBOR swaps to Sterling Overnight Interbank Average (SONIA) swaps for new positions where possible;
- Firms should consider not making any new investments in GBP LIBOR based cash products maturing beyond 2021 by end Q3 2020, and the target of end Q3 2020 is also sensible for firms to consider when planning to cease launching new products with benchmarks or performance fees linked to LIBOR; and
- Firms must act now if they do not already have in place a plan to manage transition of legacy LIBOR products.
The letter also urges firms to ensure their operational processes are prepared for the transition, and have a proportionate transition plan if the firm has material exposures to dependencies on LIBOR. The Board should have oversight of the transition process, with appropriate support and challenge. Statements of Responsibility should include responsibilities arising from LIBOR transition plans. Where firms operate products that reference LIBOR they will need to consider what obligations may be triggered when making changes to product documents. Where firms invest on behalf of clients in relevant instruments they may need to engage with issues to convert outstanding instruments to alternative rates or add fall-back provisions, or engage with managers of relevant funds or mandates to do so. In all planning, firms must be alert to how to manage any conflicts of interest that may arise, ensuring that all clients are treated fairly and not exposed to unpredictable or unreasonable costs, losses or risks. The letter finishes by urging firms to contact FCA immediately should their Boards consider a barrier to transition is insurmountable.
APP Scams Interim Funding Extension. UK Finance confirmed on 27 February that the payment service providers who have provided the interim funding arrangement since May last year, have agreed to extend their funding to the end of the year (31/12/20). This will ensure the funding remains to compensate victims of authorised push payment (APP) fraud.
Mental Health: Practical Guide. The Money and Mental Health Policy Institute and the Money Advice Trust have jointly created a practical guide to understanding and evidencing customers’ mental health problems. The guide is aimed primarily at those on the front line in debt collection teams. It aims to equip these staff with the tools to be able to understand the impact of mental health on a customer’s ability to manage their money and communicate with creditors. The guide is split into the following sections:
- Section 1 – guides staff in the best way to have conversations with customers about mental health problems;
- Section 2 – discusses the pros and cons of requesting additional supporting evidence from customers. It looks at cost and inconvenience amongst other things;
- Section 3 – is an aide memoire for staff. It informs the user about the most common types of mental health problems together with the impact it can have on the customer’s ability to manage and earn money; and
- Section 4 – offers advice around crisis situations e.g. how to identify and react to a customer presenting as suicidal.
Treasury updates AML advisory. Treasury has updated its anti-money laundering (AML) advisory in the light of the most recent Financial Action Task Force (FATF) plenary. The notice confirms that counter measures and enhanced due diligence should be applied in respect of North Korea and Iran, and appropriate risk-based measures taken in respect of Albania, the Bahamas, Barbados, Botswana, Cambodia, Ghana, Iceland, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Panama, Syria, Uganda, Yemen and Zimbabwe.
Lawyers and industry call for more TRS exclusions. The Institute of Chartered Accountants in England and Wales (ICAEW) has responded to the Treasury/HMRC consultation on the extension to the Trust Registration Service (TRS) in the wake of the Fifth Money Laundering Directive (MLD5). While it welcomes the efforts to narrow the scope of express trusts that will be required to register, it notes several additional trusts that it thinks would warrant exclusion – such as those set up under wills, small charities and insurance policies that pay out other than on death or critical illness. It also calls for consideration to the risks inherent in different kinds of bare trust to ensure regulation is proportionate and wants clarity on which employment related trusts and trusts used for the joint holding of property will be exempt. ICAEW is also concerned about the proposal that all non-UK trusts that enter into a business relationship with UK entities that fall within the regulated sector should register, as it says this would damage competition and could have a detrimental effect on correct tax compliance.
The Personal Investment Management and Financial Advice Association (PIMFA) has also responded. It notes that:
- bare trusts that hold collectively pooled client assets should be excluded as these trusts, operated by regulated firms providing custodial services would normally hold assets in a nominee company, acting as a bare trust. These are markedly distinct from trusts set up to protect and segregate assets for a more limited set of beneficiaries, as there will be vast numbers of clients who are beneficial owners to holdings in an account, and thousands of trades will take place daily for clients using a custody service. If these companies were included, there would be continuous TRS updates, the need for continuous customer due diligence (CDD) checks and the need for HMRC to continuously update the register. This would give cause of many risks of mistake and delay, and the use of significant resource would increase costs to clients;
- parents should not be forced to register in order to informally hold money on behalf of their minor children;
- there should be a de minimis level;
- confirmation is needed on the duty of trustees to provide information to firms asking for it, and on whether there will be mechanism in place for reporting discrepancies between the TRS information and other information available to firms; and
- that a pure due diligence investigation would not be “legitimate interest” grounds to allow a TRS query – but PIMFA suggests that making a query in the course of a pre-suspicious activity report (SAR) investigation should be.
The Financial Markets Law Committee response also urges further exemptions, citing examples in the clearing, settlement and payment systems sectors where express trusts are used as efficient legitimate risk-reduction devices. The response also notes the consultation has not considered the role and importance of legal entity identifiers (LEIs), especially in the initial coin offering (ICO) parts of the crypto-asset markets. The City of London Law Society also noted several types of trust it thinks should be out of scope, including:
- trust arrangements that are incidental to a corporate transaction, such as a buyer of a business holding on trust sums it receives that are rightfully due to the seller. These trusts are all ancillary to the main transaction and would often be mutual. CLLS feels that requiring these to register would be disproportionate;
- “type B” trusts: CLLS comments that it would be odd if a type B trust in a transaction were required to register when a party that was a type A trust would not. Additionally, failure to include exemptions for these and ancillary trusts could lead to significant disclosure requirements relating to third country entities, which would again be disproportionate; and
- beneficial ownership of shares.
Dormant Assets Scheme Consultation. HM Treasury has published a consultation document setting out its proposals for expanding the dormant assets scheme. The consultation discusses the background to the current scheme and then sets out proposals to expand it beyond banks and building society accounts. Treasury believes that expanding the scheme presents an opportunity to unlock an estimated £1 – 2 billion of unclaimed assets for good causes. It acknowledges that the expansion will require amendments to many industry rules and the implementation of new primary legislation to:
- define the transferrable assets;
- define dormancy in respect of each of those assets;
- define eligible participants;
- set out the operational structure; and
- ensure there are relevant consumer protections.
In addition to that, firms offering the types of products covers will require to update their company documentation, terms and conditions, policy wordings, articles and association, scheme rules etc. to take account of the dormant assets framework if implemented. The government expects that the implementation of the expansion will be on a phased basis and the principle of voluntary participation will be maintained. Responses to the consultation are due by 16 April.
MPs debate Consumer Rights Act 2015 and Consumer Ombudsman Scheme. MPs have debated the Consumer Rights Act 2015 and the Consumer Ombudsman Scheme (COS) in the House of Commons. Sir Roger Gale chaired the 30 minute debate brought by Martyn Day (SNP) who previously raised the Act in a public petition in 2017, highlighting that it does not do enough to protect consumers against rogue traders who do not comply with its terms. Mr Day’s petition urged the government of the time to review the Act to ensure better protection for consumers. In the debate Mr Day criticised the Act for not containing any provision to enforce consumers’ rights to reject goods within 30 days and to receive a refund when the goods received are faulty or not as described, labelling this a ‘failing’. Drawing on one of his constituent’s experiences, he further highlighted that consumers cannot act against companies which do not participate in the COS, meaning their only option for redress is bringing legal action in the small claims court (or via a simple procedure in Scotland). Mr Day commented that it would benefit both consumers and traders if membership of ombudsman schemes were made mandatory for all organisations (currently membership is voluntary). The MPs also discussed the use of alternative dispute resolution (ADR) to resolve disputes. Consumers have a right to take a dispute to ADR in the finance, energy, telecoms, estate agents and legal services sectors. However, in other sectors no such mandatory requirement exists and whilst is it available for businesses to use, they can also refuse to participate in an ADR process. Following Mr Day’s 2017 petition, the government produced a Green Paper in 2018 which consulted on how to improve the ADR system and how to support local and national enforcers to work together to protect consumers. Mr Day noted that, despite the Green Paper consultation closing in July 2018, no amendments have been made to the Act to tackle the situation. He also called for the consultation feedback to be published. Kelly Tolhurst, the Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy, responded by confirming that the government intends to launch a consumer and competition Command Paper, in which it will examine the areas of the dispute resolution landscape that are not working for consumers and set out proposals for reform. The government intends to consult on the proposals before taking any final decisions on the scope and nature of reform. Respondents will be able to present evidence in relation to the effectiveness of consumer redress mechanisms, including the role of ombudsmen and ADR provision. The Command Paper will be published in spring 2020.
PSR makes policy statement on Confirmation of Payee and Specific Direction 10. On 20 January 2020, the Payment Systems Regulator (PSR) consulted on varying specific direction 10 (SD10) on confirmation of payee (CoP). SD10 was given to the six largest banks in August 2019, requiring them to implement CoP from 31 March 2020. In the consultation it proposed:
- to introduce an additional basis for payment system providers to ask for an exemption from an obligation under the direction (the only current basis related to exceptional circumstances); and
- to exempt HSBC UK Bank Plc from the obligations of the direction in respect of accounts that form part of HSBC Group’s Private Banking brand.
It received 12 responses in total. On 14 February 2020, the PSR set out its decision on varying SD10 which is to give SD10 the form set out in their original proposal but with one change. That is to make clear that it will also impose a new date for compliance with SD10 if they approve an exemption under the additional basis. The varied SD10 (dated February 2020) has been published alongside the policy statement.
FCA recognises Standards of Lending Practice for business customers. The FCA has published a feedback statement (FS20/1) on the recognition of the Lending Standards Board’s (LSB) Standards of Lending Practice for business customers and updated its webpage on recognised industry codes with a link to the Standards. The FCA can recognise industry codes for unregulated financial markets and activities, known as ‘FCA recognition’. They also recognise the FX Global Code and the UK Money Markets Code. The current Standards (last revised July 2019) will be recognised for a three year period but may be extended if the FCA thinks that the content of the Standards remain relevant and suitable. The LSB’s separate Information for Practitioners for business customers is not included in the recognition.
Goods Mortgages Bill: First Reading. The Goods Mortgages Bill has now had its first reading in the House of Lords. If it becomes law it will:
- create a new form of non-possessory security that can be created over qualifying goods owned by individuals(essentially England and Wales based tangible moveable goods (other than aircraft registered in the UK and s313(1) of the Merchant Shipping Act 1995 ships); and
- repeal the Bills of Sales Acts 1878 and 1882.
A register of such mortgages would then be kept by the Secretary of State. The required second reading of the Bill is yet to be scheduled.
Pay.uk calls for views on retail payment standards. Pay.uk is seeking views on the recommended approach of how global standard ISO 20022 should be used as part of the standards for the New Payments Architecture (NPA). Its consultation builds on previous agreements and the direction it has previously consulted on. It includes a recommended direction on the adoption of ISO 20022 for the clearing and settlement capability to be enabled by the NPA infrastructure, foundational technical details and future direction on concepts that have emerged from previous consultations and merit further consideration. Consultation closes on 31 March and Pay.uk plans to publish the findings in the second half of the year.
Open Banking Implementation Entity (OBIE) proposes changes to the Agreed Timetable and Project Plan. Following a two-month consultation with stakeholders interested in Open Banking, on 3 February, the Implementation Trustee of the OBIE presented his proposed revised Agreed Timetable and Project Plan to the Competition and Markets Authority (CMA). The proposals include:
- no new implementation items for the CMA9;
- the removal of several activities to improve focus. These include Account Comparison and Trustmark which the Implementation Trustee considers should not be standalone activities. By removing these activities (amongst others), the Trustee hopes to ensure that priority is on those activities which specifically address poor API performance, missing payments functionality and low user adoption;
- a significant extension of implementation periods to provide more time for the CMA9 to work through backlogs, fix outstanding performance issues and focus on operational resilience;
- no major implementations for delivery in H1 2020. The only two delivery items due in the first half of 2020 (A2(a)(i) Two Way Notification of Revocation (formerly P2) and A2(a)(iii) Reverse Payments (formerly P7)) are already in progress and are not significant implementation-wise;
- Reverse Payments is to remain a mandatory implementation requirement;
- Sweeping and Variable Recurring Payments (VRPs) are to be treated as separate items. The Implementation Trustee believes that Sweeping is a priority use case for the Open Banking remedy;
- clarifying the nature of the Root Cause Analysis and potential Evaluation; and
- refocusing the scope of the Benchmark (A5) activity, which has been renamed as “Improvement of API Performance”.
The Implementation Trustee is optimistic that Open Banking can deliver on the CMA’s objectives under the proposed revised plan and considers that the proposals will help tackle the existing issues of poor application programming interface (API) performance, missing payments functionality and low customer adoption. The CMA is now considering whether to approve the proposed changes. Any interested parties should make representations to the CMA by 26 February 2020.
JMLSG consults on guidance update. The Joint Money Laundering Steering Group (JMLSG) is consulting on updates to its guidance to take account of implementation of MLD5 and also make various other clarifications. The changes (consulted on in marked up form) will affect chapters 4,5,7 and 8 and the Glossary in Part 1, changes to the e-money chapter, and revisions to the equivalent markets chapter in part 3. There will also be a new chapter in Part 2 for cryptoasset exchanges and custodian wallet providers, on which JMLSG hopes to consult by the end of February. JMLSG asks for comment by 3 April.
FCA feeds back on Patient Capital: FCA has published feedback on its discussion paper on Patient Capital and authorised funds. The paper had asked whether there are any unnecessary barriers to investing in long term (patient) assets through authorised funds. The Patient Capital Review had shown enthusiasm from entrepreneurs for start-ups but that investment to scale up was not as strong. The Government had looked at why funds might not provide this longer-term finance. One key problem was the possibility of investors wanting to redeem in significant volumes within a short period – which resulted in suspension of dealings in several non-UCITS retail scheme (NURS) property funds in the wake of the referendum. As a result, FCA started to look at liquidity management tools available to fund managers and made new rules and guidance that will take effect on 30 September aimed at better educating investors, reducing the potential for some to gain at the expense of others and improving the quality of liquidity risk management. Then, following the suspension of dealings in the Woodford fund, which was a UCITS, and the subsequent decision of its ACD to close it, it became clear the problem was not confined to NURS. In response to FCA’s discussion paper, though, no inappropriate barriers to investing in long term assets were apparent, at least where the investors were professional and sophisticated retail investors. For broad retail funds there is a limit to the range of available options, but FCA does not see these barriers as inappropriate, nor does it see how to relax them without introducing an inappropriate degree of risk. It will look later in the year at any potential further measures it could introduce. The Investment Association had proposed a new type of authorised fund designed to invest in long term assets, which FCA will consider.
FCA makes new travel insurance and other rules: FCA has made 3 sets of new rules.
- changes to the Conduct of Business Sourcebook to ensure that pension scheme members can properly find the information they need about costs and charges to ensure they get good value for money from their pension scheme and that it will meet their future needs. These rules take effect from 1 April;
- changes to the Insurance: Conduct of Business Sourcebook to help customers with pre-existing medical conditions find travel insurance providers who will cover them. These rules take effect from 1 June and 1 November; and
- changes to the Fees Manual to help FCA recover its costs for its increasing responsibilities, and improve the clarity of the rules and the operational processes of FCA. These take effect mainly from 1 April.
Regulatory Speeches, Reviews and Enforcement Action
Newsletters, speeches and reviews
New FCA webpage on PSPs. The FCA has today published a new page on its website on payment service providers (PSPs). The page is aimed at consumers and explains the different kinds of PSPs, and the protections afforded to consumers when using them.
Climate Change and Financial Services: COP26 Private Finance Agenda launched. On 27 February, Mark Carney launched the ‘COP26 Private Finance Agenda’ at the Guildhall in London. The overarching goal of the Agenda is that every professional financial decision will need to take climate change into account. There will be a framework for reporting, risk management and returns which will embed these considerations and help finance a whole economy transition. To achieve net zero, every company, bank, insurer and investor will need to adjust their business models for a low carbon world. The UK will host the 26th UN Climate Change Conference of the Parties (COP26) at the SEC in Glasgow on 9 – 20 November 2020. The climate talks will be the biggest international summit the UK has ever hosted.
Bank of England speech: turbo-charging LIBOR transition. Andrew Hauser of the Bank of England (BoE) has announced two new initiatives to encourage Sterling LIBOR transition in a speech on 26 February 2020. Firstly, the Bank is going to publish a daily SONIA Compounded Index from July 2020. This will enable market participants to construct compounded SONIA rates in an easy and consistent way. The Bank has also opened a consultation on whether there is sufficient market consensus on the conventions for calculating compounded SONIA for them to produce daily screen rates for specific period averages. Secondly, from October 2020 the Bank will increase haircuts on LIBOR-linked collateral it lends against such that by the end of 2021 the haircuts will reach 100%. LIBOR linked loans issued from October 2020 will be ineligible for use at the Bank. The Bank had previously indicated that it would consider using its regulatory powers to speed up the pace of LIBOR transition in 2020. Hauser commented that “we need to see another decisive acceleration effort in 2020 to ensure risk-free rates are adopted across the full range of sterling business, and LIBOR is left behind for good.”
LSB: Access to Banking Standard Summary Report. The LSB published its Access to Banking Standard Summary Report on 24 February 2020. The report sets out the LSB’s findings following its latest review of relevant firms’ compliance with the Access To Banking Standard (ABS). The review checks whether firms have adequate policies, processes, controls and governance arrangements in place to ensure operational compliance with the ABS. The reports highlights areas where they have witnessed improvement since the last report in September 2018:
- the way firms have supported customers and engaged with the wider community has been improved;
- the new definition of “impacted customer” (any customer who undertakes 3 monetary transactions within the branch on 3 separate occasions in the previous 6 months) means those customers received notice if a decision is made to close or reduce hours at a branch;
- by spring 2020, the LSB will create and publish a defined set out key metrics (together with guidance) which will help customers understand firms impact assessments;
- an agreement has been reached with LINK so that firms will also keep LINK updated (at the same time as customers are informed) where a decision has been made to close a branch that has an ATM attached to it; and
- closure notice communications are more reflective of information pertaining to the branch that is being closed.
Areas where firms should focus their attentions on was summarised as:
- an improvement in internal oversight processes and controls to ensure the ABS is being met;
- pro-activity needs to be encouraged to identify and deal with vulnerable customers more effectively;
- continuing to engage with customers following a branch closure to ensure relevant support is offered.
Latest current account data released. The FCA has published the latest table of data provided to it by current account providers (both business and personal). The data allows consumers and small businesses to compare the services provided by each of the different brands. The data shows various metrics on speed of service of opening accounts (and provision of debit cards and overdrafts) and details major incidents between 31 October 2019 and 31 December 2019 for each brand.
FCA publishes annual “Sector Views”. FCA has published its annual sector views report which comprises a state of the nation in terms of the financial services industry. The report sets out the drivers for change in each financial services sector together with the international backdrop against which it operates. The report then goes onto discuss the harm identified in each of the sectors (being retail banking and payments, retail lending, general insurance and protection, pensions savings and retirement income, retail investments, investment management and wholesale financial markets). Amongst other concerns, the report highlights the following:
- Retail Banking – poor value remains an issue in the overdrafts and cash savings markets. Switching is still not prevalent enough in the personal current account (PCA) and mortgage sectors.
- Debt – 7.4 million adults remain over indebted and firms are not identifying this soon enough.
- Consumer Credit – this can often offer poor value to consumers and some alternative providers exploit the reality or perception of limited choices to charge high prices.
- Insurance – the loyalty penalty in the insurance market is still costing customers money (estimated to be 6 million longstanding customers paying an extra £1.2 billion in 2018). There is also a lack of clarity around terms and conditions of insurance policies and many categories of consumer are still being excluded from certain insurance products.
- High-risk retail investment products – these products can expose consumers to more risk, particularly where the products are marketed direct with inadequate communication of the risks. Scams and financial crime in this sector remains high.
- Payment Firms – there is a worry that some new services are being promoted without giving all of the required information to customers. This results in customers being unaware that protections such as the Financial Services Compensation Scheme (FSCS) and S75 do not apply to those products. FCA is also keen to ensure that all customers funds in this area is properly safeguarded.
- Pensions savings and retirement income – some people aren’t saving enough to maintain living standards in retirement, this is worsened by unsuitable financial advice, poor value products and scams.
- Investment Management – pricing and quality remain a concern. Operational resilience in this sector should be improved.
- Wholesale Financial Markets – a key focus remains on operational resilience as well as the LIBOR transition.
- Financial Crime – the scale of financial crime in retail banking is growing, in particular in relation to APP fraud – this position will be monitored on an ongoing basis.
- Interdependency on technology providers – many firms use similar providers of IT which can have a widespread impact on customers when there is technological disruption or data breaches.
- Cashless Society – the move towards digital banking can increase financial exclusion and is a worry in terms of operational resilience (since cash is seen as a backup for digital currency).
Some of the interesting statistics set out in the report include:
- global investment by retail banks in fintechs more than doubled in 2018, reaching £85.6 billion through 2,196 deals
- consumers lost £168.2 million to APP fraud in H1 2019
- 1,493 new Financial Ombudsman Service (FOS) cases in respect of e-money in FY18/19
- in 2016, 1.5% of customers paid 50% of unarranged overdraft fees
- 1.9 million customers continue to use cash predominantly
- in June 2019, 85% of PCAs were held with the big 6
- 5.1 million customers are in persistent debt
- 3,312 bank branches closes between January 2015 and August 2019
- in June 2019, outstanding credit card lending was at £72,854m
- 39 million people in the UK owe £1.66 trillion
- there are now 287 lifetime mortgage products available (which shows the growth in popularity of this product)
- first-time buyers are having to spend on average 5x their earnings
- all UK CMC turnover totalled £762.6 million in 2018 (of which £600.3 million related to financial services)
- 90% of consumers believe the loyalty penalty is unfair
- the insurance sector attracts the lowest level of consumer trust in financial services at 30% (causes mostly by misleading terms and conditions.
FCA appoints Interim Executive Director of Strategy and Competition. FCA has appointed Sheldon Mills as the Interim Executive Director of Strategy and Competition. Sheldon will begin the role on 16 March 2020 and replaces Christopher Woolard as he steps into the role of Interim Chief Executive.
FCA updates authorisation application fee. FCA has increased the application fee for moderately complex applications to £5,500 – so the fee tranches for standard financial services applications (excluding asset managers and consumer credit firms) are £1,500, £5,500 and £25,000.
FCA Update: Basic Bank Accounts. FCA has published its findings following a review of how 5 of the 9 banks, who provide Basic Bank Accounts (BBAs), give information about them to their customers. The object was to understand how firms approach granting access to BBAs on the backdrop of the importance of financial inclusion. The payment Account Regulations 2015 (PARs) set out the requirements for firms who offer BBAs. As a reminder these are that providers must:
- offer a BBA to any customer who applies and meets the eligibility criteria;
- open or refuse to open a BBA no later than 10 days from application; and
- provide information about the features and fees and conditions of the BBA to customers free of charge.
Whilst the eligibility criteria are relaxed, firms must comply with AML and Financial Crime prevention requirements. The review brought to light some good and bad practices and highlighted the following areas for improvement:
- Information received by eligible customers – a consistent approach to the provision of information should be adopted to ensure that all customers get the relevant information;
- Treatment of a customer showing potential traits of vulnerability – staff should be able to identify vulnerability more consistently; and
- Applying the bank’s identification and verification policy – all available forms of identification for AML purposes should be notified to customers (not just passports and utility bills).
- FCA has encouraged all firms to create customer journeys which are inclusive of all customers and their needs. It has noted that basic bank accounts will remain a key area of focus for the FCA.
- Up next from FCA. The latest Policy Development Update highlights the following publications before the end of Q1 2020:
- policy statement on fees and levies;
- consultation on exit fees in investment platforms and comparable firms;
- consultation on proposals to facilitate standard listing for OEICs;
- policy statement on permitted links in relation to Patient Capital; and
- potential policy statement on general insurance value measures reporting.
New appointments to the FCA Board. HM Treasury has confirmed the appointments of Jeannette Lichner and Bernadette Conroy to the FCA Board. The new non-executive directors (NEDs) will each serve three-year terms beginning on 1 April and 1 August 2020 respectively.
CMA writes to Nationwide. The CMA has written to Nationwide setting out the CMA’s understanding of the action that has been taken by Nationwide since they breached Part 6 of the Retail Banking Market Investigation Order 2017. Nationwide had failed to send out text alerts to customers confirming that they would be charged for entering an unarranged overdraft. Nationwide will repay around £900,000 in charges to the 70,000 customers affected.
FCA writes strategy letter to platforms. FCA’s latest portfolio strategy letter to CEOs has been sent to platforms. It starts by making the point that it expects firms will have used the Senior Managers and Certification Regime (SMCR) to ensure clear accountability within senior management and for individuals to clearly understand their roles and responsibilities. FCA sees that the sector has grown rapidly in terms of assets under administration and customers in each of the advised, direct to customer and workplace channels. So it will focus on addressing:
- technology and operational resilience, not only for ensuring that operational resilience takes into account the interests of customers and importance to market participants of the firm being able to ensure continuity of service but also that the firm understands when it may incur reporting obligations whether in relation to cyber-attacks or otherwise;
- third party outsourcing, so that firms have clear contractual arrangements with third parties, and review the performance of service providers regularly; and
- conflicts of interest, to ensure these are properly identified and managed.
FCA also notes firms should be considering whether they need to make any changes to implement the Investment Platforms Market Study findings and recommendations. It particularly points firms towards the recommendations on transfers, best execution and costs and charges information.
FCA writes to credit brokers. FCA wrote to credit brokers on 13 February 2020 identifying the key drivers of harm within the credit broking portfolio. These include:
- failure to understand regulatory requirements;
- poor oversight of staff and appointed representatives (ARs);
- misleading or inaccurate financial promotions;
- inadequate product information;
- lack of explanation of service levels; and
- failure to manage the risk created by technology.
FCA expects credit brokers to have risk management frameworks that demonstrate clear governance and oversight, to ensure that customers are treated fairly. These should be proportionate to the size of the broking business. The FCA’s supervision strategy for credit brokers runs to March 2022. Over the next two years, FCA will prioritise supervisory work in a number of areas. FCA will write to credit broker portfolio firms after March 2022 with an update on key risks and its plans for supervising credit brokers going forward.
Breathing space to help millions in debt crisis. The government has published its impact assessment for “breathing space”, a scheme designed to help millions of people in debt crisis, including those suffering with mental health problems, get their finances under control. The impact assessment explains why the government believes that putting in place a regulatory solution would be better in terms of social value than the other options of doing nothing or creating a voluntary breathing space, where creditors would be encouraged, but not required, to offer protections. Under the scheme, those struggling with problem debt will be given a 60-day respite, during which interest and charges on their debt will be frozen and enforcement action from creditors will be halted. Those individuals who also receive mental health crisis treatment will benefit from the same protections until that treatment is complete. Throughout the respite period, individuals will also receive professional debt advice to help them find a long-term solution to their financial struggles. Breathing space will cover debts like credit cards and loans but also a wide range of government debts. Creditors are also set to benefit from the policy; over £400m in extra repayment is expected in the first year, as individuals get the help they need to get their payments back on track. The impact assessment estimates that the breathing space will help over 700,000 people in the UK get professional help in the first twelve months following implementation, increasing up to 1.2 million a year by the tenth year of operation. Between 25,000 and 50,000 of those helped each year will be people receiving mental health crisis treatment. The government intends to implement the breathing space scheme in early 2021.
FCA updates on skilled persons figures. FCA has published its latest figures on the numbers of skilled persons reports it has commissioned. During Q3 of 2019/2020 it commissioned 10 – of which 5 related to wholesale financial markets, 2 each to retail banking and retail investments and 1 to retail lending. 3 related to dedicated supervision firms and the rest to portfolio supervision firms. 3 related to each of client assets and conduct of business, 2 to controls and risk management frameworks and one each on governance and individual accountability and financial crime.
FCA writes Dear CEO letter on persistent debt customers. FCA has written to credit card firms telling them to review their approach to borrowers who have been stuck in a persistent debt cycle for three years. The regulator requires firms to propose and agree plans with customers to address and resolve the situation and has outlined a number of key areas firms must review to ensure their approach is in line with FCA expectations. These include:
- a concern that customers may not respond if credit card providers write to them advising that they have been in persistent debt for three years. Firms must encourage customers to discuss repayment options with them however, if customers cannot afford the options proposed by the firm, they must be treated with due consideration, e.g. by reducing, waiving or cancelling any interest or charges.
- a concern that firms may suspend or cancel credit cards for those in persistent debt, including those willing to engage and come to an agreement. Firms are not allowed to suspend a credit card without having an objectively justifiable reason.
FCA estimates that this could, if done right, lead to consumer savings of up to £1.3bn a year in lower interest charges.
Regulators update further on post-Brexit issues. FCA has further updated its website with information on Brexit and Temporary Directions. It explains how:
- It will not need to use the Temporary Transitional Power it had previously made directions under, as the implementation period has now stated, during which time EU law will continue to apply; and
- UK firms do need to consider whether they carry on business in or into the EEA so they can prepare for the end of the implementation period. Firms should be anticipating a number of potential scenarios at the end of the implementation period, in relation to customers, outsourcing arrangements and payments between the UK and EEA.
The BoE has also published new webpages on transitioning to post-EU rules and standards that would apply after the end of the implementation period – but which may be subject to change. The European Commission has recommended that negotiations should start at Council level towards a new partnership with the UK. Finally, the Government has stated that the future agreement with the EU should, for financial services, require both sides to provide a predictable, transparent and business-friendly environment for financial services firms, with enhanced regulatory and supervisory cooperation agreements and a structured withdrawal of equivalence findings.
Government still “considering” economic crime offence: In response to a written question in Parliament, the Government said it is still considering its response on introducing a corporate offence for economic crime – on which consultation closed in 2017.
FCA bans motor finance ads. FCA has banned a range of adverts for motor finance issued by Rix Motor Company Limited. The ads, variously:
- did not include representative examples of the costs of credit, or included them in a way that made them unlikely to be seen;
- did not make clear whether consumers would be dealing with the firms in its capacity as a broker or a lender; and
- did not specify the name of the firm as it appeared on the FS Register.
FCA had previously identified similar failings in different advertisements.
HMRC investigating 30 for CFA breach. In response to several Freedom of Information Act 2000 (FOIA) requests, HMRC has published statistics on what it is doing to police the Conditional Fee Agreement (CFA) offence of failure to prevent facilitation of tax evasion. As at the end of 2019, it had 9 live investigations underway with another 21 possibilities under review. The investigations cover many business sectors, including financial services, oil and construction.
Unfair Treatment lands Moneybarn big fine. FCA announced that it was imposing a £2.77 million fine on Moneybarn Limited for not treating customers fairly between 1 April 2014 and 4 October 2017. The car finance provider had failed to provide adequate information to their customers at two stages (1) in advance of entry into the loan – they did not communicate the consequences of failing to keep up with their repayments and (2) when customers fell into arrears – they did not provide them with the opportunity to clear the arrears in a realistic and sustainable period. Moneybarn agreed to pay voluntary redress of more than £30 million to all 5,933 customers this affected. This treatment was taken into account by the FCA and resulted in them discounting their fine by 30%.
Court dismisses UWO appeal. The Court of Appeal has dismissed an appeal against the first Unexplained Wealth Order (UWO) imposed under the powers the Criminal Finances Act 2017 (CFA) gave to the National Crime Agency (NCA). The UWO had been imposed in relation to the Azeri wife of an Azeri banker. A property had been purchased by a British Virgin Islands (BVI) registered company for £11.5m. The appellant stated in her application for indefinite leave to remain in the UK that she owned the company but it transpired it was owned by her husband, who had, for 14 years, including the time the property was purchased, been the chairman of an Azeri bank in which the State had a majority shareholding He had resigned a couple of months before his wife’s application for leave to remain, and was subsequently arrested in Azerbaijan and charged with various offences in connection with his employment at the bank, for which he was later convicted. The State authorities had also “arrested” the appellant in her absence in relation to avoiding an investigation into the bank. A court had found that the appellant’s extradition to Azerbaijan would not be compatible with her human rights. The NCA had succeeded in its application for UWOs on properties and a Freezing Order. The appellant applied to discharge the UWO on eight grounds, all of which were rejected and leave to appeal was refused, as was an appeal against a decision to revoke an anonymity order. However, permission was then granted to appeal on five of the grounds, mainly on the basis it would be good to have guidance from the Court of Appeal.
On appeal, Counsel for the appellant submitted that:
- there had been an error in the interpretation of what a politically exposed person (PEP) was. He said that the appellant’s husband had indeed been above middle or junior rank, but that there was no evidence he was entrusted with prominent public functions “by the State” – and that this meant he was not a PEP. The court, and the Court of Appeal, disagreed, saying the wording in the legislation was intended to exclude UK or EEA state officials, but did not mean that the “prominent public function” had otherwise to be entrusted by the State. So the bank was a State owned enterprise, and the appellant’s husband was a PEP;
- the bank was not a State-owned enterprise, but was a commercial enterprise whose shares were partly owned by a government body. This too was rejected. As a matter of fact a Government of a non-EEA country had the majority shareholding and ultimate control of the bank;
- the “income requirement” had not been met – in other words, the court should not have been satisfied that there were reasonable grounds for suspecting the known sources of the lawfully obtained income available to the PEP would have been insufficient to obtain the property. While the judge accepted that it may in some cases be fair to say that a foreign conviction did not present these reasonable grounds, the facts of this case (including that the conviction was only one of the grounds NCA relied on) meant the judge was fully entitled to reach the view that the requirement had been met;
- the judge should not have held that the UWO did not offend the rule against self-incrimination and/or spousal privilege. On appeal, the court found the judgement correct not least because the risk of the husband being prosecuted in the UK was negligible as was the risk of the responses to the request being used in Azerbaijan against the couple; and
- it was a wrong and disproportionate exercise of discretion to make the UWO. It was not necessary for the court to consider this point given that Counsel for the appellant had conceded it would fall away if the other grounds for appeal failed.
PRA issues bans following failure of Enterprise the Business Credit Union Ltd (EBCU). The Prudential Regulation Authority (PRA) has banned two former EBCU directors from the financial services industry for their part in the failure of the company, which held £7m in savings for its 1,900 members. EBCU entered into administration in 2015 for failing to meet the necessary capital requirement. PRA has banned Mr Michael Grimsdale and Mr Richard Nichols on grounds of lack of integrity (and dishonesty on the part of Mr Grimsdale). The PRA has also issued public censures to Mr Nichols and two other former directors, Ms Gillian Birkett and Mr Phil Neale. This enforcement action represents PRA’s first against individuals involved in a credit union. Before its liquidation, the individuals’ misconduct contributed to EBCU breaching a PRA requirement not to accept deposits, issue new loans or vary the terms of existing loans, a requirement which was imposed to stabilise EBCU’s deteriorating capital position. In breach of this requirement, Mr Grimsdale paid out c.£650,000 of loans and concealed his actions from EBCU. He also improperly paid fees to EBCU’s outsourced third-party service provider on materially higher terms than those agreed by the EBCU Board. PRA has also issued public censures to Mr Nichols, Ms Birkett and Mr Neale for their failure to act with due skill, care and diligence in performing their roles as directors at the company. Mr Nichols has also been banned for acting recklessly in relation to the accuracy of information he provided to the company’s auditors and PRA concerning EBCU’s financial position. Mr Nichols failed to oversee and monitor the activities of the outsourced service provider and, were it not for his financial circumstances, PRA noted it would have also imposed a £20,000 fine. As a result of EBCU’s failure, the FSCS has paid out over £7m to EBCU’s members, of which it has recovered just under £3m to date.
SFO publishes Airbus DPA. Dame Victoria Sharp, President of the Queen’s Bench Division, approved a Deferred Prosecution Agreement between the Serious Fraud Office and Airbus SE. Under the terms of the DPA, Airbus SE agreed to pay a fine and costs totalling €991m as part of a €3.6bn global resolution for bribery offences. The conduct involved Airbus’ Commercial and Defence & Space divisions and took place across five jurisdictions – Sri Lanka, Malaysia, Indonesia, Taiwan and Ghana between 2011 and 2015. Dame Sharp noted in her judgment that Airbus SE could have moved more quickly in reporting concerns to the SFO. However, she remarked that once the SFO was engaged, Airbus SE cooperated with the investigation to the fullest possible extent and its new leadership put in place a programme of corporate reform and compliance. Particular regard was given to the co-operation of Airbus SE by Dame Sharp when considering the public interest factors against prosecution: "…public interest factors against prosecution clearly outweigh those tending in favour of prosecution…Airbus has … truly turned out its pockets and is now a changed company.” The SFO did not recommend the appointment of a monitor as part of the DPA due to the remedial steps taken by the Board and the appointment of the Agence Française Anticorruption as a term under the French Judicial Public Interest Agreement.
TI writes to SFO on DPA regime. In the light of the Airbus Deferred Prosecution Agreement (DPA), Transparency International (TI) and Spotlight on Corruption have written to Lisa Osofsky asking that the Serious Fraud Office (SFO) evaluates how DPAs are used to ensure the regime is fair and consistent and provides a real deterrence to corporate criminality. The letter points out that the DPA regime has been in place for nearly 6 years and the SFO has used DPAs 7 times. It calls on SFO specifically to look at:
- whether the regime is genuinely encouraging self-reporting, or whether in fact it creates perverse incentives for companies to wait until wrongdoing has been uncovered before they cooperate. It notes the clear shift away from self-reporting being a pre-condition for a DPA, and urges the UK to follow the US in ensuring that companies that do not self-report but do provide exemplary cooperation cannot receive a discount in penalty of more than 25%;
- whether there is effective senior level accountability for corporate wrongdoing – and to explore a civil law means of bringing individuals to account if a criminal prosecution is not possible;
- whether the penalties applied reflect the full wrong-doing;
- whether the compensation principles are being effectively applied in DPAs;
- whether the DPA regime is transparent enough to engender public confidence – especially given the SFO has not taken a consistent line in publication of DPAs and related Statements of Facts. The letter urges that final approval hearings should always be in open court, with full reasoning open to the public, and that there should be full transparency on whether the full terms of a DPA have been met by the company; and
- whether the condition of the Organisation for Economic Co-operation and Development (OECD) Convention on “national economic interest” is being sufficiently respected – and suggests SFO might consider removing consideration of the impact of a conviction on the ability of a company to get public contracts from its Code of Practice.
FCA speech on penalties, remediation and General Principles. On 12 February, Mark Steward, Executive Director of Enforcement and Market Oversight made a speech at an event on Investigations and Enforcement: A Guide to Managing Regulatory Action. Key takeaways from the speech include:
The point of financial penalties is deterrence but this is not the point of enforcement which is about just outcomes. In 2019 the FCA imposed financial penalties of over £310 million on firms that also paid or are paying over £231 million in restitution. Addressing both serious misconduct as well as its consequences ensures just outcomes.
The FCA will evaluate firms’ behaviours when things do go wrong, as well as looking at systems and controls to detect wrong at the earliest opportunity.
The FCA may reduce sanctions or give credit for proactive, quick, co-operative behaviour and thorough remediation, especially consumer redress. However, it could impose tougher sanctions where firms do not make good consumer losses and correct deficiencies.
Most of the cases involving financial penalties have involved serious breaches of the General Principles. In these cases, there was no evidence that the Principles had been used to test or measure conduct, to measure systems and controls that were being put in place or to identify or address the inadequacies of the misconduct that occurred.
Firms need to be fully engaged with the General Principles.
Emma Radmore (legal director) is a member of Womble Bond Dickinson (UK) LLP's financial services team.
Contact her at email@example.com
© Womble Bond Dickinson (UK) LLP 2020. This publication is not designed to provide legal, financial or other professional advice and nothing in it should be construed as such. Please see www.womblebonddickinson.com for legal notices.