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Financial Services Regulation monthly update - March 2017

TLT's update on the Financial Services Regulation sector for March 2017

This month in summary

Financial services regulation

Speeches and communications


FCA publishes Insurance Distribution Directive consultation

Earlier this month, the FCA published the first of its two consultation papers on the implementation of the Insurance Distribution Directive (IDD). The UK Government must implement the IDD by 23 February 2018, which aims to strengthen and consolidate the existing rules on competition and consumer protection introduced by the Insurance Mediation Direction (IMD) in 2005.

The new rules will update provisions relating to the distribution of insurance and reinsurance, and for assisting in the administration and performance of an insurance contract post-sale. The IDD will apply more broadly than the IMD and bring consumer protection rules in line with those of other financial markets.

The consultation paper aims to gather feedback on the FCA's proposed application of the IDD, including in the following areas:

  • professional and organisational requirements;
  • complaints handling and out-of-court redress;
  • professional indemnity insurance (PII);
  • changes to conduct of business rules (for non-investment insurance contracts); and 
  • the regulatory regime for ancillary insurance intermediaries.

A second consultation will be published later this year, with the FCA aiming to publish a Policy Statement outlining the new rules in September 2017.

The introduction of the IDD will likely have an impact on all UK businesses that carry out insurance related activities. Relevant firms may therefore wish to give feedback on how the FCA's proposals may affect their business and the market more broadly. The IDD is likely to have a significant impact on the industry and firms should get involved in the consultation process and look to update their policies and procedures as the new rules take shape.

The deadline for those wishing to give feedback is 5 June 2017. The full IDD and information on how to do so can be found on the FCA's website here.

Draft Money Laundering Regulations published

Following a second consultation, the government published its long-awaited draft Money Laundering Regulations on 15 March 2017. These seek to bring then UK's Anti Money Laundering (AML) and Counter Financing for Terrorism (CFT) regulations in line with the latest international standards established under the 4th AML Directive and the Financial Action Task Force (FATF) standards.

The new regulations provide clarity on a number of issues and propose changes in a wide range of areas, including:

  • more information and guidance on customer due diligence requirements and reliance on third parties;
  • tightening of rules surrounding the exemptions for electronic money;
  • greater detail and clarity on the treatment of Politically Exposed Persons (PEPs);
  • the introduction of updated rules on correspondent banking; and
  • the introduction of further regulations on the recording of the beneficial ownership of companies and trusts.

More generally, the new AML regulations reflect a move to a more risk-based approach to combatting money laundering. Firms will now have to determine appropriate levels of due diligence based on analysis of various risk factors set out in the regulations.

The new regulations will come into force on 26 June 2017. This is the second consultation and it is unlikely that there will be significant changes before the AML regulations come into force. However, the government wishes to take comments on certain areas of the consultation and has set a deadline 12 April 2017 for responses to its questions to be submitted.

Affected firms should look into making necessary changes and providing training to staff in preparation for 26 June. Firms should also familiarise themselves with the new rules and carry out a review of their current policies and procedures to ensure compliance with the updated regulations.

For a link to the government's website and for more information please click here.

Speeches and communications

UK and Japanese financial regulators announce Exchange of Letters on Co-operation Framework to support innovative FinTech companies

On 9 March 2017, the Financial Services Agency of Japan (JFSA) and the FCA confirmed they have exchanged letters on a Co-operation Framework to support innovative FinTech companies. These letters will establish a regulatory referral system whereby an innovator business which is referred by the relevant authority will benefit from support by their counterpart and reduced regulatory uncertainty and time to market. The exchange of letters will also encourage the regulators to share information about financial services innovation in their respective markets, reduce barriers to entry and further encourage innovation in both countries.

The FCA hopes that this agreement will promote competition through innovation as the exchange of letters seeks to attract Japanese companies to the UK market and vice versa, encouraging start-ups to become more global.

This exchange will provide an excellent channel for UK businesses hoping to enter the Japanese market. It will also assist innovative Japanese firms interested in entering an FCA supervised market, potentially bringing benefits to established businesses.

Read the letter from the JFSA to the FCA

Read the letter from the FCA to the JFSA

Visit the FCA website and for more information.

FCA finalises plans to place a deadline on PPI complaints

On 2 March 2017, The FCA confirmed that it will introduce a deadline of 29 August 2019 for making new payment protection insurance (PPI) complaints. The FCA will launch a two-year consumer communications campaign, beginning in August 2017, to encourage customers to act on any potential PPI complaints before the deadline.

Andrew Bailey, Chief Executive of the FCA said:

“Putting in place a deadline and campaign will mean people who were potentially mis-sold PPI will be prompted to take action rather than put it off. We believe that two years is a reasonable time for consumers to decide whether they wish to make a complaint."

Firms will also be required to write to previously rejected complainants who are eligible to complain in light of the Supreme Court judgment in Plevin v Paragon Personal Finance Ltd (Plevin). This ruling means that customers may have claims if the failure to disclose the commission being paid made the relationship unfair under section 140A Consumer Credit Act 1974.

The FCA's approach includes a 50% commission 'tipping point' at which firms should presume that that the failure to disclose commission gave rise to an unfair relationship. Profit share should be included in the firm's calculation of commission. To give firms time to prepare, the rules will come into effect in August of this year.

The deadline is likely to encourage more potential claimants to seek PPI compensation and, coupled with the FCA's campaign, affected firms should prepare to see a rise in the number of claims. Accordingly, funds should be set aside to meet expected increase in claims. However, an end to claims on PPI sold before the deadline of 29 August 2019 means an end is in sight for this on-going cost and uncertainty to firms.

For a link to the FCA website and for more information please click here.

FCA publishes near final rules on MiFID II, encourages firms to submit authorisation applications

On 31 March 2017, the FCA published near final rules on the implementation of the Markets and Financial Instruments Direction (MiFID) II. These rules include changes to the trading of financial instruments including issues affecting trading venues, transparency of trading and algorithmic and high frequency trading.

The near final rules cover:

  • the new category of firms - data reporting services providers;
  • position limits and reporting for commodity derivatives; and
  • systems and controls requirements for firms providing MiFID investment services.

MiFID II introduces new processes for authorising investment firms and will have a significant impact for a range of authorised persons, recognised investment exchanges, and some businesses that currently do not have to be authorised.

Firms impacted by MiFID II need to be authorised with the relevant permissions by 3 January 2018, or risk being unable to operate in the UK after this date. The Financial Conduct Authority (FCA) has specified 3 July 2017 as the latest date for submitting completed applications for authorisation or variations of permission, but firms are strongly encouraged to submit their applications as soon as possible.

MiFID II has a very broad scope and will bring about a number of changes for regulated firms who provide services to clients related to financial instruments. Firms will need to ensure plans are in place ahead of the finalisation of the EU implementing legislation and the updates to FCA and PRA rules, as well as HM Treasury's financial services legislation.

For a link to the FCA website and for more information please click here.

More information on MiFID II can be found on the FCA's website.


Tesco to pay redress for market abuse

On 28 March 2017, Tesco plc and Tesco Stores Limited (Tesco) have agreed that they committed market abuse in relation to a trading update published on 29 August 2014. Tesco have agreed to pay compensation to investors who purchased Tesco shares and bonds on or after 29 August 2014 who still held those securities when the statement was corrected on 22 September 2014.

On 29 August 2014, Tesco plc published a trading update which gave a false or misleading impression about the value of publicly traded Tesco shares and bonds. The statement said Tesco expected trading profit for the six months ending 23 August 2014 to be in the region of £1.1 billion. However on 22 September 2014, Tesco plc published a further trading update in which it announced that this figure was an overstatement due to "accelerated recognition of commercial income and delayed accrual of costs."

As a result, the market price for Tesco shares and bonds was inflated until the corrective statement was issued. Purchasers of shares and bonds between these dates paid a higher price than they would have paid had the false impression not been given. The FCA found that Tesco knew or could reasonably have been expected to know that the information in the 29 August 2014 announcement was false or misleading, although it did not suggest that the Tesco plc board knew or could reasonably have been expected to know this.

A compensation scheme has been established under which Tesco will pay an amount to each purchaser of shares or bonds who makes a claim under the proposed scheme that is equal to the inflated amount for each share or bond. This will be open to all purchasers who acquired Tesco shares and bonds after 29 August 2014 and who still held some or all of them before the corrective statement was issued.

The FCA estimates that the total amount of compensation that may be payable under the scheme will be approximately £85 million plus interest.

This serves as a warning for firms on the consequences of issuing potentially incorrect or misleading information and highlights the need to be careful when making public communications.

For a link to the FCA website and for more information please click here.

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

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