Financial services regulation round-up - August 2018
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Regulation round-up
Treasury sets out final approach on claims management regulation
On 27 July 2018, HM Treasury published a response to its April 2016 consultation on claims management secondary legislation.
The consultation response document summarises the responses received and confirms the final approach to defining the scope of claims management activities for the purposes of FCA regulation. It also sets out the government’s policy intent for transitional provisions.
View HM Treasury's response document
Read the draft statutory instrument.
FCA consultation on a Global Financial Innovation Network
On 7 August 2018, the Financial Conduct Authority (FCA) published a consultation paper on the creation of a Global Financial Innovation Network (GFIN). The network will seek to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas. It will also create a new framework for co-operation between financial services regulators on innovation related topics, sharing their different experiences and approaches.
The FCA says that the GFIN could serve three main functions:
- to act as a network of regulators to collaborate and share experience of innovation in respective markets, including emerging technologies and business models;
- to provide a forum for joint policy work and discussions; and
- to provide firms with an environment in which to trial cross-border solutions.
Read the consultation document.
Read our summary of the key points from the FCA's consultation.
FCA consults on fees for the regulation of claims management companies
On 1 April 2019 the FCA will become the regulator of claims management companies (CMCs) established or serving customers, in England, Wales and Scotland. CMCs that wish to continue trading from 1 April 2019 will have to register for temporary permission between 1 January – 31 March 2019. They will then subsequently be able to apply for full authorisation. The FCA has also developed an authorisations gateway and a new supervisory structure for CMCs.
In a consultation paper published on 20 August 2018, the FCA sets out its proposals for recovering the costs of setting up these facilities, as well as supervising CMCs going forward.
Responsibility for considering complaints about CMCs will also transfer from the Legal Ombudsman Service to the Financial Ombudsman Service. As such, the consultation paper also sets out the FCA's proposals for recovering the associated transfer costs and the Financial Ombudsman Service’s ongoing costs.
Feedback is sought by 22 October 2018.
Brexit
Draft regulations on a temporary permissions regime following Brexit published
On 24 July 2018 the UK government published a draft version of the EEA Passport Rights (Amendment, etc, and Transitional Provisions) (EU Exit) Regulations 2018 (the Regulations).
The purpose of the draft Regulations is to remove references to the passporting framework set out in the Financial Services and Markets Act 2000 (FSMA) in FSMA itself and in other UK legislation. The draft Regulations also establish a temporary permissions regime to enable EEA firms currently operating in the UK using a passport to continue their activities in the UK for a limited period after exit day.
HM Treasury states that the regime will ensure that:
- EEA firms can continue to carry out business as before, writing new contracts and servicing existing contracts entered into before exit day for a temporary period after exit day;
- EEA firms have appropriate time to prepare for and submit applications for UK authorisation and complete any necessary restructuring; and
- the Prudential Regulation Authority (PRA) and the FCA can manage the expected applications for UK authorisation from EEA firms in a smooth and orderly manner.
The FCA has provided an update setting out in more detail on how the temporary permissions regime will operate; including its initial views on the rules it proposes will apply to firms while they are in the regime. The temporary permissions regime will only apply to incoming EEA firms. It remains unclear what, if any, reciprocal arrangements will be proposed by EU regulators.
The government has also laid in Parliament a separate draft statutory instrument that will, subject to parliamentary approval, deliver a temporary recognition regime for non-UK central counterparties. The Bank of England published a webpage on its and the PRA's approach to the temporary permissions regime and the temporary recognition regime.
Read the full text of the draft Regulations and HM Treasury's explanatory information
Read the Bank of England's news story
FMLC report on the continuity of financial contracts following Brexit
On 6 August 2018, the Financial Markets Law Committee (FMLC) published a report titled U.K. Withdrawal from the EU: Issues of Legal Uncertainty Arising in the Context of the Robustness of Financial Contracts. This report considers the possible consequences of a hard Brexit on existing financial contracts and highlights the legal uncertainty which will arise if there is no clarity as to the future of the UK-EU relationship post-Brexit. It also suggests a number of ways this uncertainty could be reduced or avoided.
The report divides the possible consequences of a hard Brexit on financial contracts into three broad categories:
- consequences under the general law, for example illegality or frustration;
- consequences under the terms of the contract itself, e.g. in cases where a loss of authorisation may breach a representation and trigger a termination event; and
- consequences under criminal law or similar sanctioning regimes, for example where a firm loses its right to passport into the UK and is therefore carrying on a regulated activity without authorisation.
Three possible solutions to these consequences are considered in chapter 5 of the report.
FCA sets out stance on cross-border booking arrangements
The FCA published a “Dear CEO” letter to firms on 8 August 2018 concerning cross-border booking arrangements and advising firms of its position in relation to the use of cross-border booking models in the context of Brexit.
The FCA appreciates that the UK’s withdrawal from the EU has necessarily resulted in firms needing to put into place contingency plans which, when executed, will impact current business models, legal entity strategies and booking arrangements. In contrast with some EU supervisors, who have set out specific business model requirements, the FCA is open to a broad range of legal entity structures or booking models. This includes those making use of back-to-back and remote booking, provided their associated conduct risks are effectively controlled and managed.
The FCA expects UK boards and senior managers to ensure that effective governance is in place to identify and mitigate the potential harm that could arise from modified booking arrangements. Firms also should be able to demonstrate to the FCA (whenever requested) how the principles have been observed and implemented.
The FCA’s letter is available here.
Framework for UK-EU partnership post-Brexit in financial services
On 20 August 2018, the UK government published a presentation setting out its views on the framework for the UK-EU partnership in regard to financial services once the UK leaves the EU.
Key themes discussed in the presentation include the following:
- Principle of autonomy. Each party should retain autonomous judgement about access to their market and over legislation, and the criteria for determining if a foreign jurisdiction has equivalent standards and supervision for a given sector would also be autonomous.
- Equivalence at the outset. The UK and EU are starting with the same rulebook and entwined supervision, and there should initially be reciprocal recognition for all third country regimes.
- Expanded scope of activities permitted cross-border. The current scope of permitted cross-border activities is insufficient given the interconnectedness between the UK and EU markets. The most mutually beneficial activities for the economy should be prioritised to ensure that there are no unintended consequences or arbitrage.
- Common principles. The UK and the EU should agree a set of common objectives to manage the UK-EU relationship following Brexit such as financial stability, investor protection, market integrity and the prevention of regulatory arbitrage.
- Regulatory and supervisory co-operation. The UK proposes that the UK and the EU would commit to an overall framework that supports extensive collaboration and dialogue.
- Structured withdrawal. There should be consultation and discussion before loss of access to either market, with clear timelines and notice-periods to give time for businesses and supervisors to adapt to change on either side.
The presentation is available here.
Technical Notice on banking, insurance and other financial services in a "no-deal" Brexit
On 23 August 2018, the UK government published guidance on the effect on banking, insurance and other financial services if the UK leaves the EU without an agreement in place. A "no-deal" scenario describes the situation in which the UK and the EU fail to conclude a draft withdrawal agreement by the time of the UK's exit from the EU. This would mean no transition period and a sudden "cliff-edge" break in the application of EU rules to the UK at 11pm on 29 March 2019.
The technical notice discusses the impact of a no-deal Brexit on a variety of stakeholders, including:
- individual and business customers, including UK customers dealing with UK- and EEA-based firms, as well as EEA customers dealing with UK-based firms;
- financial services firms and fund managers, including those who currently rely on portfolio delegation; and
- financial market infrastructure, including central counterparties, central securities depositories, payment and settlement systems, trading venues, credit rating agencies and trade repositories.
Read the technical notice here.
General insurance
PRA consults on technical changes related to SMCR extension to insurers
The PRA published a consultation paper (CP18/18) on 31 July 2018 setting out its proposed rules for a technical correction to the Solvency II firms: Insurance General Application Part of the PRA Rulebook, along with some consequential changes and minor administrative amendments related to the extension of the Senior Managers and Certification Regime.
The consultation paper should be read in conjunction with the PRA's Policy Statement 15/18 Strengthening individual accountability in insurance: Extension of Senior Managers and Certification Regime to insurers, and the FCA's Policy Statement 18/15 Extending the Senior Managers and Certification Regime to insurers – Feedback to CP17/26 and CP17/41 and near final rules.
The consultation closes on 1 October 2018.
Read the full consultation paper
Payment services
Payment Systems Regulator publishes its report on the Contactless Mobile Payment sector
On 31 July 2018, the Payment Systems Regulator (PSR) published a report setting out its understanding of the Contactless Mobile Payments sector.
Contactless Mobile Payments (CMPs) are in-store payments that consumers make by using apps installed on their mobile devices. In the UK, the CMP apps that are currently available – Amex Pay, Apple Pay, Barclays Contactless Mobile, Google Pay and Samsung Pay – allow consumers to upload their card details onto the app to make payments from those devices.
To better understand the CMP sector in the UK, the PSR undertook a call for information exercise in 2016 and 2017 which focused on:
- whether competition, innovation and the interests of people and organisations that use payment systems could potentially be affected by the way CMPs operate and are being offered in the UK, and if so, how; and
- whether there were any restrictions affecting the provision of tokenisation services, which are intended to reduce the risk of the consumer’s payment details being stolen electronically during a CMP.
The report explains how CMPs work from a functional and technical perspective, outlines the main participants and their respective roles, summarises the PSR's consideration of particular issues and proposes next steps.
FCA consults on rules and guidance to improve conduct and communications in payment services and e-money firms
The FCA is consulting on proposals to apply existing rules and guidance that clarify its expectations on conduct and communication across the payment services and e-money sectors.
Consultation paper 18/21, published on 1 August 2018, proposes to extend the application of the FCA Principles for Businesses and certain specific rules about promotions and communications to cover wider categories of businesses that it regulates (including businesses authorised or registered under the Payment Services Regulations or the Electronic Money Regulations).
The FCA is also proposing new guidance to help ensure that firms do not mislead consumers when they are advertising payment services or e-money that involves a currency conversion.
The deadline to provide comments on the proposals is 1 November 2018.
Consumer Finance
FCA issues policy statement on assessing creditworthiness in consumer credit
On 30 July 2018, the FCA published a policy statement containing the final rules and guidance on assessing creditworthiness for consumer credit products. This policy statement summarises and responds to feedback on consultation paper CP17/27 and also publishes final rules and guidance in the Consumer Credit sourcebook of the FCA Handbook.
The rules and guidance come into effect in 1 November 2018.
Read our summary of the key points from the policy statement and final rules.
Chickombe and others v Financial Conduct Authority
The Upper Tribunal has published its decision in the case of Plaxedes Chickombe and 44 others v The Financial Conduct Authority (FCA) and Barclays Partner Finance as Interested Party. The decision relates to consumer credit agreements entered into through the intermediation of an unauthorised broker and whether the decision of the FCA to validate the agreements was reasonably open to the FCA.
The Upper Tribunal determined that the FCA had failed to consider the issue of potential consumer detriment in considering whether to make the validation order at issue, and as such allowed the applicants’ references. The Tribunal remitted the matter to the FCA with a direction to reconsider its decision to issue the validation order in accordance with the tribunal’s findings.
The decision is available here.
Self-Invested Personal Pensions
Upper Tribunal upholds FCA decision to fine and ban Chief Executive of TailorMade Independent Limited, Alistair Burns
The Upper Tribunal has published its decision in the case of Alistair Rae Burns v The Financial Conduct Authority: [2018] UKUT 0246 (TCC). The decision relates to an independent financial adviser firm which advised on the suitability of transferring occupational pension and personal pension benefits into a self-invested pension scheme.
In December 2016 the FCA fined Mr Burns £233,600 and banned him from performing any senior management or significant influence function in relation to regulated activity in financial services. In the FCA’s view, Mr Burns failed to ensure that his firm, TailorMade Independent Limited (TMI), provided suitable advice to its clients and failed to ensure that TMI managed fairly and clearly disclosed his own personal conflicts of interest and the conflicts of interest relating to other individuals at TMI.
Mr Burns referred the FCA's decision to the Upper Tribunal. The Upper Tribunal determined that the appropriate fine to be imposed is £60,000 and that the FCA was open to make a prohibition order against Mr Burns.
The Upper Tribunal also confirmed the FCA’s position that when a financial adviser gives advice to a customer who wishes to transfer out of their current pension arrangement to release funds to allow them to invest in an overseas property investment through a SIPP, then the financial adviser must consider not only the suitability of the SIPP itself but the suitability of the investments to be held in it.
Read the FCA's statement on the decision
Financial crime
FATF publishes report on professional money launderers
The Financial Action Task Force (FATF) published a report looking at the techniques and tools used by professional money launderers (PMLs), in order to help authorities target, prosecute and dismantle them. PMLs are individuals or entities that operate large scale schemes to assist criminals with circumventing anti-money laundering and counter-terrorism financing practices.
The report identifies the key characteristics of the individual PML, the professional money laundering organisation and the professional money laundering network of associates and contacts that work together to facilitate money laundering.
Fines and enforcement
FCA says no action will be taken against senior managers of RBS GRG
The FCA provided an update on its investigation into the treatment by the Royal Bank of Scotland (RBS) of SME customers transferred to its Global Restructuring Group (GRG).
The FCA first commissioned an independent review of GRG in 2014, the findings of which were published in September 2016. In November 2016, the FCA began its own investigation into the concerns raised by the independent review. The FCA states that this review provided a better understanding of RBS senior management’s awareness and involvement in matters highlighted.
It found, however, that there was no evidence that any member of senior management was dishonest or lacking in integrity and no credible basis to conclude that senior management sought to treat customers unfairly. The FCA says that, based on its investigation, it has concluded that bringing a prohibition case against any member of GRG senior management would not have a reasonable prospect of success.
Recognising the significant public interest in this matter the FCA will publish a fuller account of its findings in as much detail as possible and to the extent permitted by the law.
FCA launches prosecution for unauthorised investment schemes
The FCA has begun a criminal prosecution against Mark Starling in relation to unauthorised investment schemes alleged to have been operated between 1 August 2008 and 25 April 2017. The alleged offences are as follows:
- Operating, or purporting to operate, a collective investment scheme without authorisation or exemption, contrary to sections 19 and 23 of the Financial Services and Markets Act 2000
- Two counts of fraud, contrary to sections 1 and 2 of the Fraud Act 2006.
Mr Starling’s first court appearance was at City of London Magistrates’ Court on 21 August 2018. The case was passed to Southwark Crown Court with the first preliminary hearing scheduled for 18 September 2018.
Contributor: Suliat Ogunyinka
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.