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Financial Services Regulation Monthly Update - February 2017

This month in summary:

Financial services regulation

Speeches and communications


Financial service regulation

FCA and PRA publish final changes to enhance enforcement decision-making processes

On 1 February 2017, the FCA and the PRA published final changes aimed at strengthening the effectiveness of their enforcement decision-making process in a policy statement. This responds to comments received on Consultation Paper (CP) 16/10: Proposed Implementation of the Enforcement Review and the Green Report.

The consultation and policy recommendations made in these publications covered the full lifecycle of an investigation and the FCA and the PRA have decided to implement many of the suggested changes in the following areas:

  • how decisions are made whether to refer an issue to Enforcement and Markets Oversight or the Regulatory Action Division for investigation;
  • the provision of more information to the subject of an investigation about why they have been referred for investigation;
  • regular updates throughout an investigation, as well as ensuring there is increased engagement with the subject of the investigation;
  • effective levels of dialogue between Enforcement and Supervision during an investigation; and
  • producing more detailed guidance on the process for joint FCA/PRA investigations.

Changes specific to the FCA:

The FCA is also introducing a process for partly contested cases, which will allow a person under investigation to agree certain elements of a case (e.g. penalty, facts, liability or a combination of these issues) and contest the other elements before the Regulatory Decisions Committee.

The ability to obtain a discount on the penalty will still reflect the extent to which issues have been agreed and the FCA is providing a mechanism for those under investigation to proceed more directly and quickly to the Upper Tribunal for an independent assessment of the case. The FCA is also abolishing penalty discounts at Stage 2 and 3 of settlement, and retaining the same panel that gave the warning notice to hear representations and decide whether to give a decision notice.

Changes specific to the PRA:

Further work is planned for 2017 to ensure that the recommendations in relation to the PRA are implemented, including work to follow-up on the 2016 consultation on:

  • an Enforcement Decision-Making Committee;
  • production of a short guide to PRA enforcement procedures, including referral criteria; and
  • a review of the PRA’s approach to settlement.

As a result of the Policy Statement, firms currently in the Enforcement process with either the FCA and the PRA should review the changes that are being implemented to ensure that they are fully aware of all of their options going forward.

Read more on the FCA website

FCA opens discussion on regulatory approach to open-ended funds investing in illiquid assets

On 8 February 2017, the FCA published a discussion paper , which seeks stakeholder views on the practice of investing in illiquid assets (e.g. land and buildings, infrastructure and financial assets such as unlisted securities) through open-ended funds. The discussion paper highlights the challenges that these investments can pose to managers and investors and the difficulties around the balancing of interests between investors who want to withdraw their money and those who want to remain within the investment.

Investing in illiquid assets provides investors with a number of benefits such as the potential to earn strong investment returns in the medium to long term and diversification of portfolio risk. However, open-ended funds that invest in illiquid assets can encounter difficulties if investors expect to be able to withdraw their money at short notice.

The difficulties of investing in illiquid assets through open-ended funds can be intensified if an event in the market triggers an upsurge in redemption demand, or conditions change in the market for the underlying assets. This recently occurred when Britain voted to leave the EU in June 2016. 

If the market for the underlying assets is affected by sudden, severe changes in conditions, leading to price falls that are not fully reflected in fund valuations, some investors might be able to sell their holding for more than it is worth, disadvantaging the remaining investors in the fund.

The FCA has therefore issued the discussion paper in an effort to decide whether changes to the regulatory approach can be used to enhance market stability in this area and continue to promote competition. However, it is clear that any steps the FCA will take will put consumers at the forefront of its protection.

Members of this sector should take this opportunity to think about the management of risk if investors are looking to exit quickly and respond to the FCA on how well the current rules are suited to address these problems. The FCA has stated that it is keen to engage with fund managers, and the investors whose money they manage, to ensure that these problems are addressed.

The FCA will draw on the responses received, together with the further supervisory work it is currently undertaking, to decide whether or not it needs to propose any changes to Handbook rules and guidance.

Firms have until 8 May 2017 to provide feedback on this discussion paper.

Read more on the FCA website.

FCA review effectiveness of UK primary capital markets

On 14 February 2017, the FCA published a discussion paper seeking feedback on how the UK primary capital markets can most effectively meet the needs of issuers and investors.

In particular, the FCA is interested in the industry's view on:

  • whether the current boundary between the standard and premium listing categories is appropriate, particularly in relation to overseas issuers and exchange traded funds, and looking more broadly at the role that standard listing plays in practice;
  • the effectiveness of UK primary equity markets in providing capital for growth, particularly for early stage science and technology companies;
  • whether there is a role for a UK primary debt multilateral trading facility, and its potential structure; and
  • measures that could be introduced to support greater retail participation in debt markets.

In line with this paper, the FCA has also launched a Consultation Paper on the proposed technical enhancement to the listing rules and whether the current guidance in place services the needs of issuers and investors adequately.

These changes include:

  • clarifying the eligibility requirements for premium listing;
  • introducing a concessionary route to premium listing for property companies;
  • updating how premium listed issuers may classify transactions and changing the FCA's requirements on when they should consult with the regulator; and
  • changing the FCA's approach to the suspension of listing for reverse takeovers.

The FCA's Chief Executive, Andrew Bailey, has stated that it is the FCA's overarching strategic objective to ensure that the markets function well and a key part of that is ensuring the UK’s primary markets remain effective. This work forms part of the FCA's wider work on efficiency and effectiveness of UK primary markets, as set out in the FCA's 2016/17 Business Plan.

The FCA will also consult shortly on how to improve the information available in the UK initial public offering (IPO) process, following a discussion paper on this issue which was published in April 2016.

Firms are required to respond to the points raised in both the discussion paper and the consultation paper by 14 May 2017.

Speeches and communications

FCA and OSC sign co-operation agreement to support innovative businesses

On 22 February 2017, the FCA announced that under a new co-operation agreement (agreement), innovative FinTech businesses in Ontario and the UK will be able to seek support from their financial regulators as they seek to operate in the other's market. The agreement between the FCA and the Ontario Securities Commission (OSC) is aimed at providing support to innovative businesses to help reduce regulatory uncertainty and time to market.

The agreement follows the creation of the FCA’s Innovation Hub in 2014 and OSC LaunchPad by the OSC in October 2016. These initiatives are designed to help businesses with innovative ideas navigate the regulatory framework, support them through authorisation and facilitate their engagement with their respective regulator.

The Executive Director of Strategy and Competition at the FCA, Christopher Woolard, has stated that this Agreement marks a "positive step towards promoting financial innovation" and will provide "ready access to the regulatory support" that firms need when being initiated into the regulated market.

The Chair and CEO of the OSC, Maureen Jensen, has also stated that the OSC are hearing from many emerging businesses that offer "innovative services, products and applications of benefit to investors". She stated that "[m]any of these businesses are also seeking to expand globally", and that this agreement reflects the OSC's ongoing commitment to enhancing regulatory experience.

The FCA and OSC have also committed to share information on emerging trends and regulatory issues relating to innovation in financial services.

Read more on the FCA's website.

FCA publishes new data on trends in the retirement income market

On 23 February 2017, the FCA published its eighth data bulletin, which focuses on insights from the consumer contact centre and the latest trends in the retirement income market.

As the main point of contact for consumers of financial services firms who want to interact with the FCA, it handles more than 100,000 contacts a year concerning a wide range of financial products. The data shows that the most popular types of query dealt with by the consumer contact centre relate to:

  • firm registrations;
  • customer service issues; and
  • scams or potential scams.

The data bulletin reveals that more than one in ten consumers who approach the FCA, do so to report a financial scam and to ask what their next steps are. As such, more than 150 consumer alerts about unauthorised firms have been published on the FCA's website and, throughout February and March, the FCA are running ScamSmart radio and online video ads in an effort to help prevent consumers falling victim to investment fraud.

The FCA's data bulletin also includes the latest trends in the retirement income market. The data covers April 2016 to September 2016 and shows how consumers accessed their pension pots as well as in what circumstances a financial adviser was used.

Read more on the FCA website.


Express Gifts Ltd enters into £12.5 million redress scheme

Express Gifts Ltd, a direct mail order and online business with permission to sell general insurance products, has agreed to provide £12.5 million redress to roughly 330,000 customers who were sold insurance that offered little or no value.

The insurance products sold by Express Gifts Ltd covered against accidental damage and theft for all products purchased from their Ace or Studio brands. The insurance was called 'Property Insurance' from January 2005 to August 2008 and 'Purchase Protection Insurance' from September 2008 to May 2015.

After conducting its own quality assurance, the firm agreed with the FCA that the insurance cover it had sold did not provide adequate value to customers. Although it covered all items purchased, these were predominantly items of clothing, which customers would not generally consider insuring and therefore was of no real use to the customer.

Firms offering insurance should note from this redress programme that their products must offer adequate value to customers. The FCA's Director of Supervision– Retail and Authorisations, Jonathan Davidson, has stated that the FCA expects firms to "identify where insurance products of little or no value have been sold to customers and take appropriate action". The FCA has therefore confirmed that is it the responsibility of the firm to assess the value of their products and as such, firms should recognise the regulator's viewpoint and review all products offered to customers to ensure that this test is met.

Read more on the FCA website.

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

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