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Financial services regulation monthly update - January 2017

This month in summary

Financial Services Regulation

Speeches and communications

Enforcement

Financial Conduct Authority publishes general insurance value measures scorecard

The FCA published its first set of data from the general insurance (GI) value measures pilot on 25 January 2017, which covers the year ending 31 August 2016.

This release follows the FCA’s findings of poor value in both add-on and stand-alone products sold by firms in its general insurance add-ons market study in 2014. The FCA set out to address these issues by piloting the publication of value measures data, which includes claims frequencies, claims acceptance rates and average claims pay-out by insurers for the following products:

  • home insurance (combined buildings and contents);
  • home emergency insurance;
  • personal accident insurance sold as an add-on to motor or home insurance; and
  • key cover sold as an add-on to motor.

The FCA expects the data to be assessed and published by consumer groups and market commentators to improve transparency in the GI market. This should in turn influence both consumer and firm behaviour, incentivising firms to improve the value their products offer to consumers.

GI firms should recognise that the FCA is not ruling out the possibility of further consultation in this area. The pilot data is likely to lead to further assessment by the regulator and therefore GI firms should take notice of the information the pilot reveals, ensure that products are adequately tailored to customer needs and remain competitive with the market in achieving the most valuable products for consumers in the future.

In addition to this data, the FCA will publish further pilot data for the year ending 31 August 2017 and will consider a further publication of data for the year ending 31 August 2018.

See the FCA's press release for further information.

Speeches and communications

Expectations when advising on pension transfers

The FCA has set out its expectations for those that are currently advising on pension transfers.

It is aware that some firms have been advising on pension transfers or switches without considering the assets in which their client’s funds will be invested and is therefore concerned that consumers receiving this advice are at risk of transferring into unsuitable investments or, more importantly, are being scammed.

This communication highlights that transferring pension benefits is usually irreversible and the merits or detriments of a transfer do not often become apparent for years into the future. It has therefore urged firms advising on pension transfers to ensure that their clients understand fully the implications of a proposed transfer before deciding whether or not to proceed.

The FCA has stated that it expects a firm advising on a pension transfer from a defined benefit (DB) scheme or other scheme with safeguarded benefits to consider the assets in which the client’s funds will be invested as well as the specific receiving scheme. It is the responsibility of the firm advising on the transfer to take into account the characteristics of these assets.

The FCA’s rules set out what a firm must do in preparing and providing a transfer analysis. In particular, the Conduct of Business Rules (COBS) 19.1.2R(1) require a comparison between the benefits likely (on reasonable assumptions) to be paid under a DB scheme or other scheme with safeguarded benefits and the benefits afforded by a personal pension scheme, stakeholder scheme or other pension scheme with flexible benefits.

The FCA goes on to provide a more detailed explanation of what is expected from firms in this area. In particular, it sets out how to deal with persistent customers and explains that recommendations based solely on whether or not the critical yield is below a certain rate set by the firm for assessing transfers generally does not meet its expectations .

High alert issued for pension scheme operators

The pensions transfers statement from the FCA was paired with a high alert for authorised firms carrying out appropriate due diligence on investment offering. This alert was primarily aimed at pension scheme operators but the FCA also highlighted its importance to financial advisers and those providing discretionary fund management more generally.

The FCA has warned the industry that scammers are becoming increasingly sophisticated in developing products designed to defeat firms’ due diligence. In particular, the FCA has seen scams evolve in an effort to obscure the nature of the underlying investment:

  • First-generation scams offered unregulated physical assets – such as commercial property – for direct investment.
  • Second-generation scams obscured those underlying unregulated physical assets by creating a special purpose vehicle (SPV) to acquire them using funding raised by the issue of corporate bonds.
  • Third-generation scams now use the services of a discretionary fund manager to create an investment portfolio that does not require the direct input of the investor; this portfolio then invests in SPV bonds.

If firms’ due diligence processes are not robust, there is a risk that they will become involved in an illegal scheme. Firms advising on pension transfers should therefore take notice of this specific warning from the regulator and ensure that their due diligence processes are meeting the necessary standards.

Firms should also review the FCA’s expectations when advising on pension transfers in detail to avoid being the subject of a later investigation. It can be rare for such a specific warning to be issued by the regulator and therefore, this should not be ignored.

Free trade in financial services and global regulatory standards: friends not rivals

The Chief Executive of the FCA, Andrew Bailey, spoke at the Economic Council Financial Markets Policy Conference recently to highlight the importance of the relationship between regulation and free trade.

In his speech, Andrew Bailey disputed the idea that regulation hampers growth and competitiveness and called for a more global regulatory system of standards to govern market access for financial firms.

He highlighted that the openness of economies can effect income and wealth distribution and supported the notion that the regulatory response to the financial crisis over the last 10 years has been directed towards creating conditions which aid “stability in finance, enable competition in the supply of financial services and ensure conditions where users – consumers – can reasonably expect conditions of fairness.” Andrew Bailey stated that these are “essential basic conditions not nice-to-haves” for our economy.

However, Andrew Bailey also recognised that the regulatory system could do more to support free trade and capital mobility and stated that it would be a “big mistake” to limit market access going forward, particularly at a time when the “openness of the world economy is more under threat”.

This is an important insight into the mind of the regulator at a time when the market is uncertain and firms should note that, despite the impact of Brexit, the regulator will be continuing to look to broaden the global approach to regulation, not limit its reach. 

Read more on Andrew Bailey's speech

Enforcement

Two sentenced for insider dealing

The FCA prosecuted Manjeet Mohal, a former employee of Logica Plc, to 10 months imprisonment suspended for two years in respect of two counts of insider dealing. He was also ordered to undertake 180 hours of community work.

Reshim Birk, a neighbour of Mr Mohal’s was sentenced to 16 months imprisonment suspended for two years in respect of one count of insider dealing. He was ordered to undertake 200 hours of community work and a confiscation order of £162,876.69 was made against him. Prosecution costs of £42,593.35 were also awarded to the FCA in respect of each defendant.

During his employment at Logica Plc, Mr Mohal came into possession of inside information relating to a takeover of Logica by CGI Holdings (Europe) Ltd which he disclosed to his neighbour, Reshim Birk, and another individual. Reshim Birk then traded in shares and options relating to Logica Plc while in possession of that inside information and made profits in excess of £100,000.

Firm should note once again from the actions of the regulator that those who are tempted to insider deal are more likely to be caught than ever before.

Read more on the insider dealing case

Criminal action taken against unauthorised lender

Mr Dharam Prakash Gopee was charged with offences for acting as an unauthorised lender.

These charges arose from an investigation carried out by the FCA into Mr Gopee and companies he controls, including Reddy Corporation Ltd, Speedy Bridging Finance Ltd and Barons Finance Ltd.

It was alleged that Mr Gopee operated as an unlicensed consumer credit lender and conducted regulated activity without authorisation over a number of years by entering into and administering regulated credit agreements as a lender. This type of financial service was previously licensed by the Office of Fair Trading until 1 April 2014, when it became regulated by the FCA.

Mr Gopee acted as a lender of last resort and is alleged to have engaged with consumers who were often in difficult circumstances. He regularly registered charges over the homes of borrowers to enable him to take possession of a property if the borrower failed to pay the debt and is believed to have lent in excess of £1 million over the last four years.

The case against Mr Gopee has now been sent for trial, and a Plea and Trial Preparation Hearing is provisionally listed to be heard on 14 February 2017.

This is the first time that the FCA has taken criminal action in a case related to its consumer credit powers and firms should consider this a message from the FCA that it is not afraid to take this action in the future.

Read more about the case

FCA fines Deutsche Bank £163 million for serious anti-money laundering controls failings

The FCA has fined Deutsche Bank AG (Deutsche Bank) £163,076,224 for failing to maintain an adequate anti-money laundering (AML) control framework during 2012 – 2015.

The fine represents the largest financial penalty for AML controls failings ever imposed by the FCA.

Deutsche Bank failed to properly oversee the formation of new customer relationship and the booking of global business in the UK, resulting in unidentified customers of Deutsche Bank using it to transfer roughly $10 billion from Russia to offshore bank accounts in a manner that was highly suggestive of financial crime.

The inadequacies found within Deutsche Bank’s Corporate Banking and Securities division (CB&S) in the UK were:

  • performing inadequate customer due diligence;
  • failing to ensure that its front office took responsibility for the CB&S division’s Know Your Customer obligations;
  • using flawed customer and country risk rating methodologies;
  • having deficient AML policies and procedures;
  • having an inadequate AML IT infrastructure;
  • lacking automated AML systems for detecting suspicious trades; and
  • failing to provide adequate oversight of trades booked in the UK by traders in non-UK jurisdictions.

As a result of these failings, Deutsche Bank breached Principle 3 (taking reasonable steps to organise its affairs responsibly and effectively, with adequate risk management systems) of the FCA’s Principles for Businesses. In addition, Deutsche Bank also breached Senior Management Arrangements, Systems and Controls (SYSC) rules 6.1.1 R and 6.3.1 R.

Firms should recognise the FCA’s emphasis on the importance of having a strong AML control framework through its proactive supervisory programmes on AML. Mark Steward, Director of Enforcement and Market Oversight at the FCA, has stated that Deutsche Bank’s failures are “unacceptable”, as firms are repeatedly reminded of their obligations to reduce the risk of financial crime.

Other firms should take notice of Deutsche Bank’s fine and look again at their own AML procedures to ensure that they do not face similar action from the regulator, as the FCA has issued the clear message that there is no excuse for failings in this area.

Read more about the Deutsche Bank failures.

Contributor: Sarah Hilton

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions


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